According to the Bureau of Economic Analysis (BEA), the United States (US) economy grew by 2.1% in 2022FY (2021FY: 5.9%). On a quarter-on-quarter basis, the economy expanded by 2.9% in Q4-22 (Q3-22: +3.2% q/q), beating consensus estimates (+2.6% q/q). Although consumer spending (+2.1% q/q vs Q3-22: +2.3% q/q) moderated slightly, it remained resilient, complementing the growth in government spending (+3.7% q/q vs Q3-22: +3.7% q/q) to lift the overall growth print. However, we highlight that non-residential investments (+0.7% q/q vs Q3-22: +6.2% q/q) slowed significantly, primarily due to weaker investment in equipment. At the same time, residential investments (-26.7% q/q vs Q3-22: -27.1% q/q) contracted for the seventh consecutive quarter in line with the rising interest rates and elevated housing prices. Looking ahead, we believe residential and non-residential investments will remain critical drags on overall growth in 2023 as interest rates are expected to remain high. Additionally, we expect the lagging impact of elevated interest rates to take a toll on consumer spending over the next few quarters. Consequently, we expect the US economy to slow further in 2023E, relative to 2022FY levels.

In the United Kingdom (UK), private sector activity fell to its lowest level since the national lockdown in January 2021. According to the flash estimates from S&P Global/CIPS, the UK’s Composite PMI dropped to a two-year low of 47.8 points in January (December 2022: 49.0 points) and remained below the 50-point threshold for the sixth consecutive month. We highlight that the overall slowdown was primarily due to a significant decline in the services PMI (48.0 points vs December:49.9 points) to its lowest level in two years, as elevated interest rates and low consumer confidence remain vital factors holding back business activity. Elsewhere factory activity as measured by the manufacturing PMI (46.7 points vs December 2022: 45.3 points) remained below the 50-point no-change mark, driven by a decline in backlog of works for the third consecutive month and a fractional reduction in employment numbers. We believe the UK remains on the cusp of recession, as the short-term risks to the overall private sector activity remain biased to the upside. Notably, headwinds to overall activity include (1) staff shortages, (2) higher interest rates, (3) cost of living pressures, and (4) industrial disputes.

Global Markets

Global stocks edged higher this week as recessionary fears eased temporarily following reactions to positive International economic data. Based on the preceding, US equities (DJIA: +1.7%; S&P 500: +2.2%) were set to close the week higher as at the time of writing as investors digested (1) a fresh batch of corporate earnings releases amid a Tesla-led tech rally; and (2) positive fourth quarter GDP data, dispelling concerns about an immediate recession and giving more credibility to the Fed’s soft-landing narrative. On the other hand, European equities (STOXX Europe: +0.4%; FTSE 100: -0.1%) were mixed following the positive reaction to economic data showing improved business sentiment in Germany and an uptick in Eurozone services and manufacturing activities amid worries ahead of a slate of central banks’ decisions next week. In Asia, the Japanese equities (Nikkei 225: +3.1%) closed higher as a rally in US tech stocks and China’s reopening supported sentiments. However, the Chinese (SSE: 0.0%) market traded sideways following the observance of the Lunar New Year holiday in China. Lastly, the Emerging (MSCI EM: +1.6%) and Frontier (MSCI FM: +0.1%) markets posted gains on the back of positive sentiments in South Korea (+3.7%) and Vietnam (+0.4%), respectively.

Nigeria

Domestic 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 17.50% at its first meeting of 2023. This represented the fifth rate hike since the CBN commenced its monetary policy tightening cycle in May 2022. The Committee stated that while tightening was its preferred option, the dilemma at the meeting was whether to continue tightening aggressively or moderately. To the Committee, it felt that a moderate tightening may slow the rate of inflation deceleration without necessarily hurting output. In our opinion, we think that the MPC’s “moderate tightening” tone and voting pattern at the meeting gives a hint that the Committee is likely to embark on a 50bps increase in the MPR at its next meeting, more so that it coincides with the US Fed contemplating smaller rate hikes. Afterwards, we expect the MPC to embark on a stretch of HOLD decisions, in line with the current market expectations of when the US Fed will stop increasing its key policy rate.

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in January (from the total revenue generated in December) increased by 9.8% m/m to NGN990.19 billion (December: NGN902.10 billion). The distributed amount was composed of distributable statutory revenue (NGN707.76 billion), revenue from Valued-Added Tax (NGN233.28 billion), inflow from Electronic Money Transfer Levy (NGN24.32 billion), and Exchange gains (NGN24.84 billion). In addition, we note that a significant increase in Petroleum Profit Tax (PPT), Companies Income Tax (CIT) and Value Added Tax (VAT), and marginal growth in Oil & Gas Royalties and revenue from Excise duties were responsible for the higher disbursed amount to the three tiers of government. 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 2022 Finance Act. However, we expect the oil revenue to remain underwhelming because of the relatively low crude oil production volume and high under-recovery costs.

Capital Markets

Equities

Mixed sentiments dominated trading activities on the bourse as bargain buying in GEREGU (+15.3%) amid profit-taking activities in MTNN (-2.1%) underpinned a +0.1% increase in the All-Share index to 52,638.93 points. Consequently, the YTD gain settled at 2.7%. Activity levels were weak, as trading volume and value decreased by 43.3% w/w and 25.6% w/w, respectively. Sectoral performance was broadly positive as the Oil & Gas (+1.7%), Banking (+1.6%), Insurance (+0.8%) and Industrial Goods (+0.4%) indices recorded gains. Meanwhile, the Consumer Goods (-1.1%) index declined.

In the subsequent weeks, we expect the NGX to be flooded with corporate earnings as more companies publish audited 2022FY numbers, which will be accompanied by dividend declarations. We believe this should provide a catalyst for buying activities even as risk-averse investors are likely to remain cautious due to medium-term expectations of an uptick in FI yields. Overall, we advise investors to seek trading opportunities in only fundamentally justified stocks as the weak macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

This week, the overnight (OVN) rate contracted by 50bps, w/w, to 11.0%, as inflows from FAAC allocation (c. NGN614.88 billion), FGN bond coupon payments (NGN167.51 billion) and OMO maturities (NGN40.00 billion) were sufficient to outweigh the late debit for CRR (NGN840.billion). Accordingly, the average system liquidity closed higher at a net long position of NGN837.61 billion (vs. a net long position of NGN381.23 billion in the previous week).

We expect a tightening in the system liquidity next week, as the anticipated debits for the FGN bond, OMO & FX auctions will pressure system liquidity. Hence, we envisage an expansion in the OVN rate from current levels.

Treasury bills

The Treasury bills secondary market remained bullish this week, as the average yield across all instruments dipped by 160bps to 1.8%. The week’s performance was driven by higher demand for bills across the market, supported by (1) the ample liquidity in the financial system and (2) market participants looking to the NTB secondary market to compensate for unmet bids at Wednesday’s NTB PMA. Consequently, across the market segments, the average yield contracted by 200bps to 1.5% in the NTB secondary market and pared by 1bp to 2.9% in the OMO segment. At this week’s NTB PMA, the CBN offered instruments worth NGN220.53 billion – NGN1.74 billion of the 91-day, NGN1.26 billion of the 182-day, and NGN217.53 billion of the 364-day bills. At the auction, demand was strong as the bid-to-offer settled at 4.4x, which corresponds to a total subscription level of NGN959.39 billion and offer of NGN220.53 billion. Also, demand was skewed toward the longer-dated bills (NGN860.35 billion translating to 89.7% of the total subscription). Eventually, the CBN allotted precisely what was offered – at respective stop rates of 0.29% (previously: 2.00%), 1.80% (previously: 4.33%), and 4.78% (previously: 7.30%).

We believe the demand for bills will moderate next week, given our expectations of a tighter system liquidity. Thus, we expect a slight expansion in yields in the T-bills secondary market.

Bonds

Activities in the Treasury bonds secondary market turned bullish this week, as inflows from FGN bond coupon payments spurred investors to cherry-pick bonds with attractive yields across the curve. As a result, the average yield contracted by 31bps, w/w, to 13.1%. Based on the sentiments mentioned above, bargain-hunting was witnessed at the short (-101bps) and long (-1bp) ends of the benchmark curve, following demand for the MAR-2024 (-280bps) and MAR-2050 (-7bps) bonds, respectively. Meanwhile, the average yield was flat at the mid segment. 

In the coming week, we expect the result of this year’s first FGN bond primary auction scheduled to hold on Monday (30 January) to influence the sentiments in the secondary market. At the auction, the DMO is offering instruments worth NGN225.00 billion through re-openings of the 13.98% FGN FEB 2028, 12.50% FGN APR 2032, 16.25% FGN APR 2037, and 14.80% FGN APR 2049 bonds. Nonetheless, we expect the frontloading of significant borrowings for the year by the FG to result in an uptick in bond yields in the medium term, as investors demand higher yields in the face of elevated supply.

Foreign Exchange

Nigeria’s FX reserves declined by USD122.34 million w/w to USD37.07 billion (26 January 2023). Meanwhile, the naira appreciated by 0.1% to NGN461.75/USD at the I&E window (IEW), with total turnover at the window (as of 26 January 2023) declining by 21.4% WTD to USD399.79 million, as trades were consummated within the NGN440.00 – NGN483.38/USD band. In the Forwards market, the contract rate for the 1-month (NGN479.76/USD) was flat, however, there were depreciations recorded on the 3-month (-0.5% to NGN488.83/USD), 6-month (-1.2% to NGN506.47/USD), and 1-year (-0.2% to NGN532.70/USD) contracts.

We believe the FX liquidity issues will remain over the short-to-medium term as we do not see 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.