China’s manufacturing PMI bucked the government’s COVID-19 restrictions and softened export growth, increasing by 0.70 points to 50.1 points in September (August: 49.4 points), according to the Chinese National Bureau of Statistics (NBS). We highlight that the print surpassed market expectations (49.6 points) and is the first factory activity expansion in three months as the government continues to roll out measures to stabilise the economy amid the fading impact of heat waves. However, the non-manufacturing PMI fell weakened for the third consecutive month, suggesting that the world’s second-largest economy is struggling to rebound. Overall, the composite PMI moderated at 50.9 points (August: 51.7 points). In the short term, we expect the impact of intermittent COVID-19 restrictions, weakening external demand, soft consumer spending, and the lingering real estate wobbles to continue to limit the government’s policy measures to stabilise the economy. Accordingly, we expect the overall private sector activity to remain subdued in the near term.

The United State’s labour market remains resilient despite rising interest rates and weakening demand. According to the Department of Labor (DOL), the initial jobless claims in the U.S. declined by 16,000 to 193,000 in the week ending 24 September (vs the week ending 17 September: 209,000) – well below market expectations (215,000) and the lowest print since the week ending 22 April 2022 (181,000). The preceding suggests that the impact of the Fed rate hikes has been relatively mute on the tight labour market condition, despite the slow growth recorded in the broader economy. Significant declines were recorded across Michigan (-5,674), New Jersey (-1,521), and New York (-1,266), while the 4-week moving average dropped by 8,750 to 207,000. The reduced number of Americans filing new claims for unemployment benefits suggests that the unemployment rate will likely fall in the review month, sustaining the labour market on its tight path. Accordingly, we see the Fed marching on with its aggressive monetary policy tightening.

Global Markets

It was another tumultuous week for global stocks as renewed fears around (1) monetary policy tightening conditions, (2) financial dislocations in Europe, and (3) geopolitical risks stoked risk-off sentiments. Based on the preceding, US (DJIA: -1.2% and S&P 500: -1.4%) stocks plunged to new lows as investors weighed Federal Reserve policy decisions on the likely pace of further interest-rate hikes. Equally, European equities (STOXX 600: -1.3% and FTSE 100: -1.7%) extended their losing streak to another week on worries about global economic growth. Likewise, Asian markets (Nikkei 225: -4.5% and SSE: -2.1%) mirrored Wall Street’s slump, as investors dumped riskier assets on recession worries. The Emerging (MSCI EM: -3.6%) and Frontier (MSCI FM: -3.5%) markets mirrored the bearish trend across global stocks following the losses in China (-2.1%) and Vietnam (-7.7%), respectively.

Nigeria

Economy

At its penultimate meeting of the year, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to increase the Monetary Policy Rate (MPR) by 150bps to 15.5% – the third consecutive rate hike and the highest since the MPC replaced the Minimum Rediscount Rates (MRR) with MPR in 2006. In addition, the Committee also voted to increase the Cash Reserve Requirement (CRR) to a minimum of 32.5% while retaining the asymmetric corridor around the MPR and liquidity ratio at +100bps/-700bps and 30.0%, respectively. Global central banks are expected to maintain their aggressive monetary tightening cycle over the rest of the year, in line with the current guidance amid sustained inflationary pressures significantly above pre-pandemic levels. On the domestic front, consumer price pressures are expected to linger while we expect domestic growth to remain intact in the near term. Accordingly, we expect the Committee to march on with its monetary policy tightening in the short term, more so that the CBN Governor struck a more hawkish tone at the post-MPC press conference.

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in September (from the total revenue generated in August) declined by 29.4% m/m to NGN673.14 billion (August: NGN954.09 billion). We understand that the decline was due to lower inflows from Companies Income Tax (CIT), Petroleum Profit Tax (PPT), and oil & gas royalties, amid gains from Value-Added Tax (VAT) and import and excise duties receipts. Accordingly, the FGN received 38.6% or NGN259.64 billion (August: NGN406.61 billion), State Governments received NGN249.25 billion (August: NGN336.86 billion), while the Local Governments received NGN164.25 billion (August: NGN210.62 billion). We maintain our expectation that the non-oil revenue will continue to support aggregate revenue, given the sustained improvement in economic activities and the impact of the provisions of the 2021 Finance Act. However, we expect the oil revenue to remain underwhelming given low crude oil production volume and high under-recovery costs.

Capital Markets

Equities

In line with our expectations, cautious trading dominated the local bourse this week, as the All-Share Index ended the week flattish at 49,024.16 points. Notwithstanding, NESTLE (-10.0%) closing limit down and losses in Tier-1 banking stocks undermined the market’s performance. Consequently, the MTD and YTD returns were flat at -1.6% and +14.8%, respectively. However, activity levels were positive, as trading volume and value increased by 78.5% w/w and 10.3% w/w, respectively. Across sectors, the Industrial Goods (-3.0%) and Oil & Gas (+0.2%) indices advanced, while the Consumer Goods (-3.4%), Insurance (-3.2%), and Banking (-0.9%) indices declined.

Considering the outcome of the MPC meeting, we believe the CRR hike would drag the banks’ profitability, as downward pressure on net interest margins (NIM) would inhibit earnings growth and may further limit investors’ interest in banking stocks. Overall, we expect the local bourse to maintain cautious trading sentiments as electioneering activities kick off in full gear. However, we advise investors to take positions in only fundamentally justified stocks as the fragility of the macroeconomic environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate remained double-digit and expanded by 100bps w/w to 16.0%. This week’s expansion can be attributed to the debits for net NTB issuances (NGN37.98 billion) and the additional CRR debits in line with the new CRR levels, outweighing the inflow from FAAC disbursement c. (NGN400.00 billion) and bond coupon payments (NGN38.36 billion). Notwithstanding, we highlight that the average liquidity level for the week settled higher at a net long position of NGN182.97 billion (vs net short position of NGN26.87 billion in the previous week).

We expect system liquidity to be pressured in the coming week. We believe the outflows for weekly auctions (OMO & FX) will outweigh the anticipated inflows from OMO maturities (NGN60.00 billion). Thus, we expect the OVN rate to trend northwards.

Treasury bills

The Treasury bills secondary market traded with bullish sentiments this week, as market participants took positions at the short and mid spectrum to cover for lost bids at the NTB PMA. Consequently, the average yield across all instruments dipped by 17bps to 7.8%. Across the market segments, the average yield contracted by 28bps to 7.1% in the NTB segment, but increased by 88bps to 10.3% in the OMO secondary market. At this week’s NTB PMA, the CBN offered NGN141.34 billion – NGN12.28 billion of the 91-day, NGN20.35 billion of the 182-day, and NGN108.71 billion of the 364-day – in bills. Ultimately, the CBN allotted NGN179.32 billion – NGN2.16 billion of the 91-day, NGN3.34 billion of the 182-day and NGN173.81 billion of the 364-day bills – at respective stop rates of 6.49% (previously: 5.50%), 7.50% (previously: 6.00%), and 12.00% (previously: 9.75%).

With system liquidity expected to be tight in the coming week, we anticipate a further increase in the average yields on T-bills from current levels.

Bonds

This week, bearish sentiments dominated the treasury bonds secondary market, as investors’ repriced bonds upwards in reaction to the MPC’s hike in the key policy rate (15.5%). As a result, the average yield expanded by 41bps w/w to 13.3%, driven by profit-taking activities across the short (+45bps), mid (+50bps), and long (+28bps) segments of the benchmark curve. Specifically, there were sell-offs on the ARP-2023 (+132bps), NOV-2029 (+57bps), and APR-2037 (+83bps) bonds.

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

Foreign Exchange

Nigeria’s FX reserves continued its decline, falling by USD178.56 million w/w to USD38.28 billion (29 September). Across the FX window, the naira depreciated by 0.2% to NGN437.03/USD at the I&E window (IEW) and was flat at NGN712.00/USD at the parallel market. At the IEW, total turnover (as of 29 September) declined by 1.4% WTD to USD520.32 million, with trades consummated within the NGN410.00 – NGN453.15/USD band. In the Forwards market, the naira depreciated at the 1-month (-1.7% to NGN446.77/USD), 3-months (-2.0% to NGN453.14/USD), 6-months (-2.2% to NGN467.92/USD) and 1-year (-2.3% to NGN495.21/USD) contracts.

In our opinion, the CBN has enough liquidity to support the FX market over the short term. However, we highlight that foreign inflows are paramount for sustained FX liquidity over the medium term. Moreover, considering the tepid accretion to the reserves given the (1) low crude oil production level and (2) elevated PMS under-recovery costs, FPIs that 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 significantly attract foreign inflows back to the market.