The United States (US) private sector activity weakened at a solid pace in July, decreasing to the lowest level since May 2020. According to the flash estimates from S&P Global, the US composite PMI contracted to 47.7 points in July (June: 52.7 points). Excluding the period of COVID-19 lockdowns, the activity downturn signals a further loss of momentum across the economy to a degree not seen since 2009. The downturn was underpinned by a steep drop in the Services PMI (47.3 points vs June: 52.7 points) and a moderate slowdown in the Manufacturing PMI (52.2 points vs July: 52.7 points). We are unsurprised by this development, given that the tailwind of pent-up demand has been overcome by the troika impact of (1) rising cost of living, (2) higher interest rates, and (3) gloomy economic outlook. We do not expect a significant revival in the near term as we anticipate a further cut in overall output in the coming months in response to stalling demand. In addition, we expect that growth would be hampered by the lingering interest rate increases and supply constraints.

The Monetary Policy Committee (MPC) of the Bank of England (BOE) increased the key policy rate for the sixth consecutive time, and the biggest rate hike since the Committee was set up in 1997. The members voted by a majority of 8 – 1 to hike the bank rate by 50bps to 1.75%. According to the Committee, an increase was warranted at the meeting given the (1) intensified inflationary pressures, (2) tight labour market, and (3) risk that a longer period of externally generated price inflation will lead to more enduring domestic price and wage pressures. In addition, the Committee judged that it would start selling the UK government bonds held in the Asset Purchase Facility (APF) shortly after its September policy meeting, subject to a confirmatory vote at that meeting. Given the improved labour market data amidst continued inflationary pressures from elevated energy prices, we expect the Committee to further hike rates in the coming months. However, we think the pace of rate increases could slow down over the rest of the year as the Committee expects inflation to peak in October amid the weakening in domestic demand.

Global Markets

Negative sentiments dominated global equities as the better-than-expected US jobs report released on Friday fueled the likelihood of more aggressive interest rate hikes by the Federal Reserve. Accordingly, US (DJIA: -0.7% and S&P 500: -0.1%) retreated from last week’s positive close, as investors traded cautiously in anticipation of further policy tightening from the Fed amid positive data showing an increase in US non-farm payrolls in July. European equities posted mixed performances as the STOXX Europe (-0.4%) was weighed down by worries that central banks’ aggressive pace of rate hikes would slow global economic growth. Conversely, the FTSE 100: (+0.2%) eked out a marginal gain supported by upbeat corporate earnings and a rally in banking stocks. Asian markets posted mixed performances – Japanese (Nikkei 225: +1.3%) stocks closed the week positively supported by upbeat corporate earnings, while the SSE (-0.8%) posted a weekly loss following tensions over US House Speaker Nancy Pelosi’s controversial visit to Taiwan. The Emerging (MSCI EM: +0.1%) and Frontier (MSCI FM: +2.3%) markets recorded gains on the back of positive sentiments in South Korea (+1.6%) and Kuwait (+0.3%), respectively.

Nigeria

Economy

According to the recently released data by the Central Bank of Nigeria (CBN), the CBN’s official interventions through the various FX windows declined by 7.7% q/q, averaging USD1.50 billion monthly in Q1-22 (Q4-21: USD1.62 billion). The FX intervention is also significantly lower than the pre-pandemic level – Q1-20: USD3.69 billion. The breakdown showed that the CBN’s FX intervention declined across the interbank (-17.0% q/q) and Investors & Exporters + SME + Invisibles (-6.5% q/q) windows, while the CBN is yet to resume FX sales to the BDCs. Accordingly, we are unsurprised that the parallel market premium widened to 38.5% during the review period (Q4-21: 36.2%). As of July, the parallel market premium widened further to an average of 49.4%, suggesting that CBN’s FX supply to the official windows has deteriorated further, with market participants patronising the unofficial markets for their dollar needs. Barring a significant increase in FX supply across the different FX windows, we expect the local currency to remain pressured against the US Dollar. Our prognosis is hinged on the persistent increase in FX demand, recently exacerbated by the FX needs for election, education and travel purposes.

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in July (based on June 2022 revenue) rose by 17.9% m/m to NGN802.41 billion (June: NGN680.78 billion). We understand that the increased pay-out during the review period was due to a significant increase in receipts from Companies Income Tax (CIT) and Petroleum Profit Tax (PPT), while inflows from Oil & Gas royalties and import duty increased marginally. Accordingly, the FGN received 40.1% or NGN321.86 billion (June: NGN229.56 billion), and State Governments received NGN298.22 billion (June: NGN275.27 billion), while the Local Governments received NGN182.33 billion (June: NGN175.94 billion). We maintain our expectations that actual oil revenue will remain below the FGN’s budget as low crude oil production and high under-recovery costs continue to undermine the gains from the rally in oil prices. However, we expect the non-oil revenue to support the aggregate revenue given our expectations of sustained positive readings in GDP. Consequently, we expect the monthly amount to be shared by the tiers of government to be between NGN650.00 billion to NGN700.00 billion over the medium term.

Capital markets

Equities

Local stocks closed in the green territory despite pressure from profit-taking activities during the week. Pertinently, the All-Share Index ended the week 0.7% higher, settling at 50,722.33 points. Gains in MTNN (+7.4%), BUAFOODS (+7.2%), ZENITHBANK (+5.8%), STANBIC (+9.2%), and WAPCO (+8.8%) spurred the weekly gain. Based on the preceding, the YTD return settled at +18.7%. However, activity levels were weaker, as trading volume and value declined by 54.3% w/w and 21.1% w/w, respectively. Sectoral performance was mixed as the Consumer Goods (+3.0%), Banking (+2.6%),, and Oil and Gas (+0.6%) indices advanced, while the Industrial Goods (-5.8%) and Insurance (-0.4%) indices declined.

In the interim, we believe the full swing of the H1-22 earnings season will dictate market sentiments and possibly drive positive performance as investors hunt for bargains in fundamentally sound stocks with a consistent history of interim dividend payments. Notwithstanding, we envisage intense selling pressures on stocks of companies that grossly underperform in H1-22. Overall, we reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate was unchanged at 15.0%, reflective of the unhealthy balance in system liquidity amid inflows from FAAC disbursement (c. NGN480 billion). We highlight that funding conditions this week averaged a net long position of NGN92.45 billion this week (vs a net short position of NGN138.48 billion in the previous week).

We expect the OVN to remain elevated in the coming week, as the expected inflow from OMO maturities (NGN5.00 billion) may not be enough to saturate the liquidity in the system.

Treasury bills

The tight liquidity in the financial system continued to drive bearish sentiments in the Treasury bills secondary market this week, as the average yield across all instruments expanded by 29bps to 8.5%. Across the segments, average yield increased by 147bps and 29bps to 10.0% and 7.6% at the OMO and NTB secondary markets, respectively. 

Following the relatively lower inflows expected in the system next week, we expect bearish sentiments to continue to pervade the T-bills market and drive yields higher. Also, we expect market focus to be shifted to the NTB PMA holding on Wednesday (10 August), with the CBN expected to roll over NGN150.62 billion worth of instruments.

Bonds

Activities in the FGN bonds secondary market remained bearish as the sell-offs of instruments across the curve persisted this week. Thus, the average yield across instruments inched higher by 29bps to close at 12.3%. Across the benchmark curve, the short (+9bps), mid (+36bps), and long (+43bps) dated instruments bore the impact of the sell-offs as investors took profits off the MAR-2024 (+18bps), FEB-2028 (+59bps), and JUL-2045 (+151bps) bonds, respectively.

We maintain our view of an upward repricing of FGN bonds in the medium term, as both the FGN’s borrowing plan for 2022FY and expected fiscal deficit point towards an elevated supply.

Foreign Exchange

Nigeria’s FX reserve declined for the second consecutive week, decreasing by USD133.52 million w/w to USD39.09 billion (04 August). Across the FX windows, the naira appreciated by 0.2% and 8.3% to NGN428.13/USD and NGN660.00/USD at the I&E window (IEW) and parallel market, respectively. At the I&E window, total turnover (as of 4 August 2022) declined by 2.2% WTD to USD452.96 million, with trades consummated within the NGN409.97 – NGN446.00/USD band. In the Forwards market, the rate weakened at the 1-month (-0.3% to NGN429.31/USD), 3-month (-0.7% to NGN438.86/USD), 6-month (-2.7% to NGN461.49/USD) and 1-year (-1.3% to NGN479.17/USD) contracts.

Although the CBN has enough liquidity to support the FX market over the short term, we highlight that foreign inflows are paramount for sustained FX liquidity over the medium term. Considering the tepid accretion to the reserves given the (1) low crude oil production level and (2) elevated PMS under-recovery costs, FPIs which have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long term. Hence, we think (1) further adjustments in the NGN/USD peg closer to its fair value and (2) flexibility in the exchange rate would be significant in attracting foreign inflows back to the market.