According to the flash estimates from the S&P Global/CIPS, private sector business activity in the United Kingdom (UK) remains below the expansionary region for the fourth consecutive month. The Composite PMI settled at 48.3 points in November (vs October: 48.2 points) as the higher cost of living continues to negatively impact the economy, adding to the growing signs that the UK is in an economic recession. On the one hand, the Manufacturing PMI remains unchanged at 46.2 points, in line with the non-essential client spending in response to rising costs and weaker economic conditions. On the other hand, the Service PMI (48.8 points vs October: 48.8 points) was also unchanged as the lingering challenges continued to weaken consumer demand. We expect private sector activities to remain dampened over the short term in line with the lingering elevated inflation, higher cost of borrowing, and increased energy costs. Indeed, S&P Global noted that forward-looking indicators suggest that the UK’s current downturn will deepen as we head into the new year.

In the United States (US), overall private sector activity weakened further to a three-month low as domestic demand remained depressed, with new orders falling at their fastest pace since the COVID-19 pandemic in May 2020. According to the flash estimates from S&P Global, the US Composite PMI declined further to 46.3 points in November (October: 48.2 points). Analysing the breakdown provided, we highlight that the Manufacturing PMI (47.6 points vs October: 50.4 points) declined to a 30-month low on account of (1) challenging demand conditions and (2) a sharper contraction pace of new export orders. Similarly, the Service PMI (46.1 points vs October: 47.8 points) declined for the second consecutive month, given the impact of higher inflation and interest rates on consumer disposable income and domestic demand. In the near term, we expect US business activity to continue to respond negatively to the headwinds from the rising cost of living, tightening financial conditions, and weakened domestic and external demand. Accordingly, the economy is on course to head deeper into a likely recession.

Global Markets

Global stocks posted positive performances as indications that the US Federal Reserve is likely to slow the pace of interest rate hikes fueled investors’ optimism. Based on the preceding, US equities (DJIA: +1.3%; S&P 500: +1.6) were on track to close positively despite the holiday-shortened week, as the Federal Reserve meeting minutes showed support for more moderate interest-rate increases. European stocks (STOXX Europe: +1.1% and FTSE 100: +1.7%) were boosted by signs that the US Federal Reserve could slow its pace of interest-rate hikes amid gains in retail and energy stocks. In the same vein, Asian markets posted positive performances as the Japanese (Nikkei 225: +1.4%) and Chinese (SSE: +0.1%) equities closed higher mirroring the rally on Wall Street. Elsewhere, the Emerging market (MSCI EM: +0.3%) closed positively, primarily driven by gains in China (+0.1%), while the Frontier market (MSCI FM: -0.6%) declined following losses in Bahrain (-0.1%).

Nigeria

Economy

In line with our expectations, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) unanimously voted to increase the Monetary Policy Rate (MPR) further by 100bps to 16.5% – the fourth consecutive rate hike and the highest rate since November 2002 (18.5%). The hike brings the cumulative interest rate increase in 2022 to 500bps. Justifying the increase, the Committee stated the need to consolidate further the progress made with inflation (domestic inflationary pressures moderated month-on-month for the third consecutive month as of October). Moreover, the MPC highlighted that an increase was warranted to (1) narrow the negative real interest rate margin, (2) improve market sentiments, and (3) further restore investors’ confidence. Therefore, as guided during the meeting, we expect the Committee to march on with its monetary policy tightening, albeit at a slower rate, in the short term to (1) tame inflation expectations, (2) narrow the negative real interest rate gap and (3) reduce external pressures.

According to the National Bureau of Statistics (NBS), the Nigerian economy grew slowly by 2.25% y/y (Q2-22: +3.54% y/y) amidst high production costs and unfavourable base effects from the preceding year. On the one hand, the oil sector contracted by 22.67% y/y (Q2-22: +11.77% y/y) in line with the lingering woes facing the sector. On the other hand, the non-oil sector grew at a slower pace for the second consecutive quarter, growing by 4.27% y/y (Q2-22: +4.77% y/y). The ICT (+10.53% y/y vs Q2-22: +6.55% y/y), Trade (+5.08% y/y vs Q2-22: +4.51% y/y), Real estate (+4.56% y/y vs Q2-22: +4.42% y/y) and Finance & Insurance (+12.70% y/y vs Q2-22: +18.48% y/y) sub-sectors supported the non-oil sector’s growth. Finally, the Agriculture sector grew by 1.34% y/y (Q2-22: +1.20% y/y) as higher input costs continued to weigh down the government’s fiat-led interventions. Having factored our expectations for the oil and non-oil sectors, we expect growth to settle at 2.14% y/y in Q4-22 and revise our 2022FY growth forecast to 2.72% y/y (Previously: 3.01% y/y).

Capital Markets

Equities

This week, the dominance of the bulls ensured the local bourse closed the week on a strong footing, as the benchmark index recorded gains in all trading sessions following demand for bellwether stocks.  Accordingly, the All-Share Index advanced by 6.9% w/w to close at 47,554.34 points. Notably, foreign investors’ interest in AIRTELAFRI (+14.2%) and bargain hunting in DANGCEM (+10.0%), MTNN (+6.6%), BUACEMENT (+9.7%), BUAFOODS (+11.2%) and NB (+19.7%) spurred the positive outturn. Consequently, the MTD and YTD returns advanced to +8.5% and +11.3%, respectively. Activity levels mirrored the market’s broad gauge as trading volume and value increased by 2.5% and 77.0% w/w, respectively. Sectoral performance was largely bullish following gains in the Industrial Goods (+9.4%), Insurance (+5.1%), Banking (+3.1%), and Consumer Goods (+0.1%) indices. On the flip side, the Oil and Gas (-1.3%) index was the sole loser of the week.

In the week ahead, we do not think the bulls will repeat the flawless victory that ensued this week as the bears are likely to book profit across most counters. Consequently, we see more of a “choppy theme” even as institutional investors continue to search for clues on the direction of yields in the FI market. However, we advise investors to take positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate dipped by 388bps to 12.6%. The rate started the week pressured, following debits for NTB and FX auctions at the top of the week. However, inflows from FAAC allocation (c. NGN442.83 billion) and OMO maturities (NGN40.00 billion) were enough to saturate the market and drive down the OVN rate. We note that the system liquidity closed higher at a net long position of NGN24.11 billion (vs net short position of NGN16.01 billion in the previous week).

We expect the OVN rate to move northwards in the coming week, as expected inflows from OMO maturities (NGN15.00 billion) and FGN bond coupon payments (NGN5.63 billion) will most likely be insufficient to sustain the system liquidity.

Treasury bills

The Treasury bills secondary market had a quiet run this week, as the market was relatively quiet amid a switch in focus to Wednesday’s NTB PMA. As a result, the average yield across all instruments grew marginally by 4bps to 10.6%. Across the market segments, the average yield expanded at the NTB segments by 5bps to 10.7%, while it contracted by 2bps to 10.2% at the OMO secondary market. At this week’s NTB PMA, the CBN offered NGN213.43 billion – NGN32.28 billion of the 91-day, NGN41.25 billion of the 182-day, and NGN139.90 billion of the 364-day – in bills. At the auction, demand was lower at a total subscription level of NGN360.25 billion (vs NGN520.92 billion in the previous auction). We note that demand was more on the longer-dated bills (NGN345.23 billion translating to 95.8% of the total subscription). Eventually, the CBN allotted precisely what was offered at respective stop rates of 6.50% (unchanged), 8.05% (unchanged), and 14.84% (previously: 13.99%). 

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

Bonds

The Treasury bonds secondary market closed on a mixed note, albeit with a bearish bias, as the average yield increased slightly by 1bp to 14.4%. This week’s performance was influenced by investors re-pricing bonds upwards in reaction to the 100bps hike in the MPR amid buying interests on the FGN NOV 2029 bond specifically from banks and institutional investors. Accordingly, the average yield inched upwards by 1bp w/w to 14.4%. Across the benchmark curve, the average yield increased at the short (+5bps), and long (+6bps) ends, as investors took profit off the APR-2023 (+99bps) and JAN-2042 (+9bps) bonds, respectively. Conversely, the average yield contracted at the mid (-8bps) segment following bargain hunting on the NOV-2029 (-13bps) bond.

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

Foreign Exchange

This week, Nigeria’s FX reserves declined by USD10.97 million w/w to USD37.18 billion (24 Nov) – the lowest level since 30 Sep 2021 (USD36.78 billion). The naira depreciated at the I&E window (IEW) by 0.1% to NGN446.33/USD. At the IEW, total turnover (as of 24 Nov 2022) declined by 7.1% WTD to USD 422.66 million, with trades consummated within the NGN431.00 – NGN463.05/USD band. In the Forwards market, the naira depreciated at the 1-month (-0.5% to NGN451.47/USD) and 3-month (-0.3% to NGN458.71/USD) contracts. The naira appreciated at the 6-month (+0.2% to NGN476.24/USD) and 1-year (-0.2% to NGN503.37/USD) contracts. 

We expect the FX liquidity issues to remain over the short-to-medium term in the absence of any positive signal that denotes an improvement in FX supply relative to the pre-pandemic levels. Moreover, considering the tepid accretion to the reserves given (1) low crude oil production 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 significantly attract foreign inflows back to the market.