The Federal Open Market Committee (FOMC), in the last meeting for the year, voted to raise the target range for the federal funds rate further by 50bps to 4.25% – 4.50% (previously: 3.75% – 4.00%) – the highest level since October 2007 (4.50%). Furthermore, the Committee highlighted that it anticipates that ongoing increases in the target range will be appropriate to attain a monetary policy stance sufficiently restrictive to return inflation to 2.0% over time. Into the bargain, the Committee stated that it would continue reducing the Federal Reserve’s balance sheet size, as described in the May meeting, which currently settles at USD8.63 trillion (as of December 07) from the USD9.00 trillion peak recorded in March. We expect the Committee to maintain its interest rate hiking cycle, albeit slowly, in the near term, given that the unemployment rate remains low even as inflationary pressures appear to be softening. Indeed, the Fed now expects the key policy rate to settle at 5.10% (equivalent to a target range of 5.00% – 5.25%) by the end of 2023, suggesting further smaller rate hikes in Q1-23 before pausing for the remainder of the year.

The Monetary Policy Committee (MPC) of the Bank of England (BOE) increased the key policy rate for the ninth consecutive time to its highest level since October 2008. The members voted by a majority of 6 – 3 to hike the bank rate by 50bps to 3.50%. According to the Committee, an increase was warranted at the meeting given the (1) elevated inflationary pressures, (2) tight labour market, although labour demand has begun to ease, and (3) evidence of inflationary pressures in the domestic prices and wages that could indicate greater persistence. Besides, the Committee stated to continue with the tight monetary policy if the outlook suggests more persistent inflationary pressures. Looking ahead, we align with the BOE’s decision to raise the interest rates further, given the tight labour market conditions and higher inflationary pressures. Indeed, the median expected path for Bank Rate in the latest Market Participants Survey (MaPS) now has a peak of 4.25% in H1-23 and will remain at that level throughout the remainder of 2023.

Global Markets

Global equities slumped in this week’s trading after major central banks hiked interest rates in their final policy meetings of the year. Precisely, US equities (DJIA: -0.8%; S&P 500: -1.0%) are on course for their worst drop in weeks as worries that the Fed’s battle against rising prices using aggressive interest rate hikes could lead to a recession intensified. In the same vein, European equities (STOXX 600: -2.1%; FTSE 100: -0.7%) tumbled as the ECB and BoE delivered rate hikes amid sustained hints of further increases to tether spiralling inflation. Asian stocks (SSE: -1.2%; Nikkei 225: -1.3%) also plunged, following the slew of hawkish central bank signals and weak economic data from both Japan (weak manufacturing activity) and China (further decline in factory output and retail sales). Performance across the MSCI indices mirrored the overall mood in the global space as the MSCI EM (-1.8%) and FM (-0.6%) indices both recorded losses, consequent upon the losses in the Chinese (-1.2%) and Moroccan (-0.3%) markets, respectively.

Nigeria

Economy

According to the National Bureau of Statistics (NBS), headline inflation maintained its uptrend for the tenth consecutive month, rising by 38bps to 21.47% y/y in November (October: 21.09% y/y) – highest print since September 2005 (24.32% y/y). The increased price pressures primarily reflect the pass-through impact of (1) higher transport costs, (2) increased food demand associated with the festive season, (3) elevated gas and other energy prices and (3) lingering FX pressures. Accordingly, food prices rose by 24.13% y/y (October: 23.72% y/y) while the core inflation (+48bps to 18.24% y/y) advanced to the highest level since November 2016 (18.24% y/y). On a month-on-month basis, the headline CPI reversed the downtrend seen in the past three months, increasing by 12bps to 1.39%. For December, we expect the headline inflation to be influenced by (1) higher food prices following the intertwining impact of the below-average harvest season and festive-induced demand amid increased transportation costs and (2) a sustained increase in energy prices. All told, we forecast the headline inflation to settle at 1.41% m/m in December, with the favourable base effect from the prior year translating to 20.98% y/y.

According to the recent data by the Debt Management Office (DMO), Nigeria’s public debt increased by 2.8% q/q to NGN44.06 trillion in Q3-22 (vs Q2-22: NGN42.85 trillion). We understand that the increase was primarily due to (1) new domestic borrowings to fund part of the deficit in the 2022 Appropriation Act and (2) additional borrowings by the state governments. Analysing the breakdown, there was a broad-based increase across the domestic (+2.6% q/q to NGN26.92 trillion) and external (+3.2% q/q to NGN17.15 trillion) debt stock outstanding. Considering the persistent increase in global interest rates in line with the global central banks’ monetary policy tightening measures, we expect the FG to continue to hold off its external borrowing plans over the short-to-medium term. Based on the preceding, we expect most of the borrowing plans over 2023E to be carried out in the domestic capital market even as the FGN increases its reliance on CBN’s Ways & Means advances. Accordingly, we maintain our expectations of yield increase in the fixed-income market over the short-to-medium term.

Capital Markets

Equities

Bullish sentiments prevailed in the domestic equities market in this week’s trading, as the All-Share index notched a 0.9% gain, closing the week at 49,316.29 points. Specifically, bargain hunting in some banking names (ZENITHBANK: +10.0%; FIDELITYBK: +2.4%; FBNH: +0.9%; STANBIC +0.8%) and WAPCO (+3.0%) caused the MTD and YTD returns to increase to +3.5% and +15.5%, respectively. However, activity levels were lower this week as trading volume and value decreased by 34.1% and 20.7% w/w, respectively. Nevertheless, sectoral performance was broadly positive, as the Banking (+2.8%), Industrial Goods (+3.4%), Insurance (+0.5%) and Oil and Gas (+0.4%) indices closed higher, while the Consumer Goods (-0.2%) index was the sole loser for the week.

In the short term, we still see scope for expansion in valuation multiples, as positioning by early birds in dividend-paying stocks ahead of 2022FY dividend declarations should outweigh profit-taking activities. Notwithstanding, we advise investors to take positions in only fundamentally justified stocks as the unimpressive macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

This week, the overnight (OVN) dipped by 363bps, w/w, to 10.5%, amid the debits for the FGN bond (NGN264.52 billion) and FX auctions. We note that the average system liquidity settled lower at a net long position of NGN108.31 billion (vs a net long position of NGN217.51 billion in the previous week).

We expect the total inflows of NGN545.00 billion from FAAC disbursements (c. NGN540.00 billion) and OMO maturities (NGN5.00 billion) to saturate the system liquidity next week. Thus, we envisage a southward trend in the OVN rate from current levels.

Treasury bills

Bullish sentiments persisted in the Nigerian Treasury Bills secondary market this week, following an increase in demand levels. This week, demand was supported by the healthy system liquidity especially at the top of the week, and market participants looking to the NTB secondary market to fill lost bids from Wednesday’s PMA. As a result, the average yield across all instruments dipped by 19bps to 8.6%. Across the market segments, the average yield contracted by 24bps and 2bps to 8.2% and 10.1% at the NTB and OMO segments, respectively. At this week’s NTB PMA , with the CBN offering bills worth NGN13.58 billion (NGN8.50 billion of the 91-day, NGN1.28 billion of the 182-day, and NGN3.80 billion of the 364-day). Demand at the auction was high, although lower than the previous auction, as the total subscription settled at NGN446.06 billion (vs NGN728.57 billion in the last auction). We highlight that investors showed more interest in the longer-dated bills (NGN399.15 billion translating to 89.5% of the total subscription). Eventually, the CBN allotted precisely what was offered at respective stop rates of 5.50% (previously: 6.49%), 7.30% (previously: 8.00%), and 9.89% (previously: 13.05%).

Next week, we envisage yields in the NTB secondary market will tilt downwards from current levels with demand expected to remain strong following next week’s liquidity influx.

Bonds

Similarly, the FGN bonds secondary market remained bullish this week, as investors looked to the secondary market to fill their lost demand from the monthly FGN bond auction that held on Monday. Thus, the average yield contracted by 62bps to 13.5%. Across the benchmark curve, the average yield contracted at the short (-85bps), mid (-58bps) and long (-46bps) segments following buying interest in the MAR-2025 (-173bps), APR-2032 (-61bps), and MAR-2050 (-72bps) bonds, respectively. At Monday’s bond PMA, the DMO offered instruments worth NGN225.00 billion to investors through re-openings of the 14.55% APR 2029 bond (Bid-to-offer: 0.7x; Stop rate: 14.60%), 12.50% APR 2032 (Bid-to-offer: 1.5x; Stop rate: 14.75%) and 16.25% FGN APR 2037 (Bid-to-offer: 5.0x; Stop rate: 15.80%) bonds. Demand was higher across the three tenors as the total subscription level settled higher at NGN532.20 billion vs (NGN344.01 billion in the previous auction) with more demand on the long-dated bond. The DMO eventually allotted instruments worth NGN264.52 billion, translating to a bid-to-cover ratio of 2.0x.

We maintain our view of an uptick in bond yields in the medium term, as the FGN’s borrowing plan for 2023FY and expected fiscal deficit point towards an elevated supply.

Foreign Exchange

This week, Nigeria’s FX reserves was flat at USD39.96 billion (09 December 2022). Meanwhile, the naira depreciated by 1.1% to NGN451.50/USD at the I&E window (IEW). At the IEW, total turnover (as of 15 December 2022) declined by 34.0% WTD to USD502.80 million, with trades consummated within the NGN426.00 – NGN468.14/USD band. In the Forwards market, the naira depreciated at the 1-month (-1.1% to NGN465.10/USD), 3-month (-0.3% to NGN471.04/USD), 6-month (-2.0% to NGN499.04/USD), and 1-year (-2.9% to NGN536.84/USD) contracts.

For our outlook, we believe the FX liquidity issues will 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.