The United States’ (US) private sector activity gathered momentum in February after seven months of decline. According to the flash estimates from S&P Global, the US Composite PMI (50.2 points vs January: 46.8 points) settled at an 8-month high in February, primarily driven by business activity, while factory activity continues to reflect a decline in production. The Services PMI rose to 50.5 points (January: 46.8 points) – its highest print since June 2022 (52.7 points). Nonetheless, survey respondents highlighted customer hesitancy following hikes in interest rates and inflation. Elsewhere, the manufacturing PMI (47.8 points vs February: 46.9 points) remained depressed, primarily due to weak customer demand as new orders fell sharply in the review period. While the factory activity remains in contraction, the accelerating business activity likely underscores how the upward driving force on inflation has now shifted to wages amid the resilient labour market. Hence, the US Fed could likely keep rates higher for longer, subduing the nascent overall expansion.

According to the flash estimates from S&P Global/CIPS, the UK’s overall private sector activity as measured by the Composite PMI rose above the 50-point no-change mark in February after six consecutive months of being in the contractionary territory. The Composite PMI settled higher at 53.0 points in February (January: 48.5 points), given the increased consumer demand and improving business confidence in line with the slowdown in inflationary pressures and lower economic uncertainty. Consequently, the Services PMI (53.3 points vs January: 48.7 points) returned to growth, in line with the more robust demand for business services amid an improving global economic outlook and reduced domestic political uncertainty. At the same time, the Manufacturing PMI (49.2 points vs January: 47.0 points) settled at a 7-month high, given the recovering demand.  While the economy continues to face headwinds from rising interest rates and labour shortages, we understand that the broader business mood has been buoyed by (1) signs of peaking inflation, (2) improving supply chain, and (3) recession risks easing. Accordingly, the resilient economy and sticky inflationary pressures could prompt the Bank of England (BOE) to tighten the policy rate further.

Global Markets

Interest rates concerns remained in the driver’s seat for the global equities markets this week as investors digested minutes of the Federal Reserve’s meeting and the Personal Consumption Expenditures Price (PCE) data for further Fed actions. Accordingly, US equities (DJIA: -2.0%; S&P 500: -1.6%) retreated as the focus remained on the Fed’s comments on interest-rate outlook. Similarly, European equities (STOXX Europe: -0.4%; FTSE 100: -1.2%) wavered as investors digested the latest Federal Reserve minutes and Eurozone inflation data (January 2023: -60bps to 8.6%). Meanwhile, mixed sentiments dominated the Asian markets. Chinese equities (SSE: +1.3%) posted gains following mixed signals in corporate earnings from Chinese big tech companies (Alibaba and Techtronic), while the Japanese equities (Nikkei 225: -0.2%) declined, taking a cue from the selloffs on Wall Street. Likewise, the Emerging (MSCI EM: -1.2%) and Frontier (MSCI FM: -1.2%) market indices mirrored the bearish sentiments across global equities consequent upon losses in South Korea (-1.1%) and Vietnam (-1.5%), respectively.

Nigeria

Domestic Economy

According to the National Bureau of Statistics (NBS), the domestic economy surprised positively, growing by 3.52% y/y in Q4-22 (Q3-22: +2.25% y/y). The growth print was primarily driven by the non-oil sector, reflecting gains associated with the (1) sturdy telecommunication sub-sectors performance, (2) seasonality effect in agriculture, albeit limited by flooding incidents, (3) manufacturing sector’s return to growth and (4) improved credit to the private sector. Accordingly, the non-oil sector grew by 4.44% in Q4-22 (Q3-22: +4.27% y/y). Meanwhile, the oil sector’s contraction moderated to 13.38% y/y (Q3-22: -22.67% y/y) as crude oil production settled higher at an average of 1.34mb/d in the review period (Q3-22: 1.20mb/d). Overall, the economy grew by 3.10% in 2022FY (2021FY: +3.40% y/y). While we expect crude oil production (including condensates) to average 1.50mb/d in Q1-23, we expect the (1) current demonetisation drive and (2) election uncertainties to constrain activities in the non-oil sector. Consequently, we have revised our estimates for Q1-23 and 2023FY growth downwards to 1.89% y/y (Previously: 2.44% y/y) and 2.70% y/y (Previously: 3.02% y/y), respectively.

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in February (from the total revenue generated in January) declined by 24.2% m/m to NGN750.17 billion (January: NGN990.19 billion). We understand that the lower pay-out was due to the shortfalls from the Petroleum Profit Tax (PPT), Oil & Gas Royalties, Value Added Tax (VAT) and Electronic Money Transfer Levy (EMTL) amid marginal gains from import and excise duties in the review period. Accordingly, the FGN received NGN277.33 billion (January: NGN375.31 billion), state governments shared NGN277.71 billion (January: NGN393.08 billion), the local governments received NGN180.14 billion (January: NGN221.81 billion), with NGN15.00 billion savings set to be shared later by 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 low crude oil production volume and high PMS under-recovery costs.

Capital Markets

Equities

Trading in the Nigerian equities market was broadly positive as investors renewed their appetite for stocks. Pertinently, bargain-hunting activities in AIRTELAFRI (+3.9%), BUAFOODS (+15.6%) and GEREGU (+13.8%) spurred the weekly gain. Accordingly, the All-Share Index advanced by 2.1% w/w to close at +7.2% YTD.  In terms of activity levels on the bourse, trading volume and value increased by 6.4% w/w and 67.2% w/w, respectively. Sectoral performance was broadly positive as the Consumer Goods (+6.3%), Oil and Gas (+2.7%), Banking (+2.2%) and Industrial Goods (+0.3%) indices recorded gains while the Insurance index closed flat.

We believe investors will be focused on the outcome of the highly anticipated 2023 Presidential elections. Thus, we see more of a “choppy theme” as cautious trading dominates the trading activities. Overall, we advise investors to seek trading opportunities in only fundamentally sound stocks as the weak macro story remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate contracted by 700bps w/w to 10.8% as the inflows for FAAC allocation (c. NGN457.84 billion), OMO maturities (NGN70.00 billion), and FGN bond coupon payments (NGN66.82 billion) saturated the financial system this week. Overall, we highlight that the average system liquidity closed this week at a net long position of NGN209.69 billion (vs a net long position of NGN218.41 billion in the previous week).

We believe the OVN rate will head northwards, as the outflows for next week’s auctions (OMO & FX) and possible CRR debits will pressure the financial system in the absence of any significant inflows into the financial system.

Treasury bills

Activities in the Treasury bills secondary market closed on a bullish note this week, as participants looked to sterilize idle cash in anticipation of CRR debits. As a result, the average yield across the market dipped by 4bps to 4.0%. Across the market segments, the average yield declined by 4bps to 3.9% in the NTB secondary market, but was flat at 3.8% in the OMO segment. At the primary auction, the CBN offered to participants instruments worth NGN263.50 billion – NGN11.68 billion of the 91-day, NGN10.21 billion of the 182-day, and NGN241.61 billion of the 364-day bills. Demand at the auction was lower than the previous PMA, as the total subscription settled at NGN296.75 billion (bid-to-offer settled at 1.1x). Eventually, the CBN allotted exactly what was offered – at respective stop rates of 3.00% (previously: 0.10%), 3.24% (previously: 0.30%), and 9.90% (previously: 2.24%).

Given the expected tight liquidity in the system next week, we anticipate increased T-bills yields from current levels. 

Bonds

The Treasury bonds secondary market traded with bullish sentiments as this week’s inflow for FGN bonds coupon payments supported investors’ demand for bonds with attractive yields. As a result, the average yield contracted by 12bps to 13.1%. Across the benchmark curve, the average yield contracted across the short (-20bps), mid (-14bps), and long (-4bps) segments due to the demand on the APR-2023 (-133bps), NOV-2029 (-18bps), APR-2049 (-9bps) bonds, respectively.

Next week, we expect cautious trading in the FGN bond market owing to the uncertainties surrounding the post-election activities. Notwithstanding, we maintain our view that the frontloading of significant borrowings by FG for the year will result in an uptick in bond yields in the medium term, as investors demand higher yields in the face of elevated supply.

Foreign Exchange

This week, Nigeria’s FX reserve declined by USD36.76 million w/w to close at USD36.72 billion (21 February 2023). Meanwhile, the naira was flat at N461.17/USD at the I&E window (IEW), with total turnover at the window (as of 23 February 2023) decreasing by 45.9% WTD to USD280.78 million, as trades were consummated within the NGN406.75 – NGN478.78/USD band. In the Forwards market, the naira rates appreciated across the 1-month (+0.3% to NGN485.47/USD), 3-month (+0.5% to NGN491.72/USD), 6-month (+1.5% to NGN525.72/USD), and 1-year (+8.2% to NGN571.95/USD) contracts.

We believe 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 who have historically supported supply levels in the IEW will be needed to sustain FX liquidity levels in the medium to long-term.