In line with market expectations, the Federal Open Market Committee (FOMC) voted to increase the target range for the federal funds rate by 25bps to 4.75% – 5.00% (previously: 4.50% – 4.75%), representing the ninth consecutive rate hike, and the highest level since August 2007 (5.25%). Notably, the committee expressed caution about the recent banking crisis, acknowledging that the crisis will constrain bank lending and weaken the economy. Whilst the committee indicated that hikes were nearing an end, they noted that some policy firming may be appropriate to attain a stance of monetary policy that is sufficient to return inflation to the 2.0% medium-term inflation target. The preceding is a deviation from its language of “ongoing increases in rates will be appropriate” in past meetings, suggesting that the end to the Fed’s interest rate hiking cycle is in sight. Based on the Committee’s tone, we think the Fed is likely to increase the policy rate further by 25bps at the May policy meeting and keep the rates unchanged at subsequent meetings over the rest of the year. Indeed, the Fed’s median terminal rate expectation remains unchanged at 5.10% by the end of 2023. Hence, the preceding suggests that a pivot is not in the Fed’s baseline expectation this year, unlike the current market expectations of a 25bps cut by July.

Similarly, the Monetary Policy Committee (MPC) of the Bank of England (BOE) increased the key policy rate to a 15-year high, after increasing the bank rate by 25bps to 4.25%. In terms of voting pattern, seven members voted for a 25bps increase, while two members voted to maintain the rate at 4.0%. On the recent banking crisis, the committee highlighted that the banking system maintains robust capital and strong liquidity positions and is well placed to continue supporting the economy in a wide range of economic scenarios. Accordingly, the committee noted to closely monitor the banking woes and market volatility in determining the extent of future rate increases. We understand that despite the past hikes in the bank rate, the labour market remains tight. Simultaneously, the BOE noted that near-term paths of GDP and employment are likely to be somewhat stronger than expected previously. Consequently, on a balance of factors, we expect the MPC to maintain moderate increases in the bank rate over the short term. Indeed, the Committee stated that if there were to be evidence of more persistent pressures, further monetary policy tightening would be required.

Global Markets

Global stocks edged higher as investors welcomed dovish remarks from US Treasury Secretary, Janet Yellen who reassured investors that regulators would be prepared to take additional steps to keep deposits safe. Accordingly, US equities (DJIA: +0.8%; S&P 500: +0.8%) were on track to close the week positively. Similarly, European equities (STOXX Europe: +2.3%; FTSE 100: +2.2%) edged higher on easing fears of a fresh financial crisis. In Asia, the Japanese equities (Nikkei 225: +0.2%) mirrored the positive sentiments on Wall Street. Meanwhile, Chinese equities (SSE: +0.5%) advanced as stronger-than-expected results from Tencent Holdings boosted investors’ confidence about the outlook for corporate earnings. The Emerging (MSCI EM: +2.8%) and Frontier (MSCI FM: +1.3%) market indices mirrored the bullish sentiments across global stocks consequent upon gains in China (+0.5%) and Vietnam (+0.1%), respectively.

Nigeria

Domestic Economy

In line with our expectations, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to further increase the Monetary Policy Rate (MPR) by 50bps to 18.0% – the sixth consecutive rate hike and the highest rate since November 2002 (18.5%). In addition, the Committee voted to maintain other policy parameters at current levels – the asymmetric corridor around the MPR at +100bps/-700bps, Cash Reserve Requirement (CRR) at 32.5%, and Liquidity ratio at 30.0%. In terms of voting pattern, ten members voted to raise the MPR by 50bps, one member voted for a 25bps hike, while the remaining one member voted to hold all key parameters constant. Given that global central banks are on course to end aggressive rate hikes, in line with the current guidance amid sustained inflationary pressures, we expect that the Monetary Policy Committee (MPC) will adopt a strategy of smaller rate hikes going forward to narrow the negative real returns amid the risks of overtightening.

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in March (from the total revenue generated in February) declined by 3.7% m/m to NGN722.68 billion (February: NGN750.17 billion). A breakdown of the distributable amount comprises distributable statutory revenue (NGN366.80 billion), revenue from Valued-Added Tax (NGN244.23 billion), inflow from Electronic Money Transfer Levy (NGN11.65 billion), and an NGN120.00 billion augmentation from Forex Equalisation Account. We understand that the decline was due to significant shortfalls in inflows from the Petroleum Profit Tax (PPT), Companies Income Tax (CIT), Oil & Gas Royalties, and Excise duties, amid a marginal drop in the Value Added Tax (VAT) and Electronic Money Transfer Levies (EMTL) revenues. 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

Negative sentiments persisted on the domestic bourse for the second consecutive week as the All-Share Index dipped by 0.1% to close at 54,892.53 points. Pertinently, losses on BUACEMENT (-1.6%) and STANBIC (-5.8%) undermined the market’s performance. Thus, the MTD and YTD returns settled at -1.6% and +7.1%, respectively. Activity levels were mixed, as trading volumes increased by 97.8% w/w, while value traded declined by 6.5% w/w. Also, sector performances were mixed, as the Consumer Goods (-0.7%), Industrial Goods (-0.5%), and Insurance (-0.5%) indices declined while the Banking (+0.9%) index advanced. The Oil and Gas index closed flat.

We expect the cautious trading that played out this week to persist in the week ahead, as investors continue will likely be swayed by corporate actions as more companies release results. Nonetheless, we advise investors to seek trading opportunities in only fundamentally justified stocks as the weak macro story remains a significant headwind that could result in persistently weak sentiments.

Money market and fixed income

Money market

This week, the overnight (OVN) rate expanded by 508bps w/w to 18.9%, following the lower liquidity in the financial system. For context, the settlements for the FGN bond (NGN563.36 billion) and FX auctions outweighed the inflow from FGN bond coupon payments (NGN80.56 billion) this week. As a result, the average system liquidity closed lower at a net short position of NGN40.72 billion (vs a net long position of NGN379.15 billion in the previous week). 

The OVN rate is expected to trend lower next week, as we believe the anticipated inflows from FAAC allocation (NGN453.61 billion), FGN bond coupon payments (NGN70.45 billion), and OMO maturities (NGN35.00 billion) will keep the system afloat with liquidity.

Treasury bills

Activities in the Treasury bills secondary market continued on a bearish note this week, driven by the tight system liquidity. As a result, the average yield across the market expanded by 47bps to 5.7%. Across the market segments, the average yield inched higher by 101bps to 4.0% in the OMO secondary market and increased by 44bps to 5.8% in the NTB segment.

Next week, we envisage higher yields in the Treasury bills secondary market as we believe anticipated inflows into the financial system will drive demand for bills. Nonetheless, we expect market focus to be shifted to the NTB PMA holding on Wednesday (29 March), where the CBN is scheduled to roll over NGN145.47 billion worth of maturities.

Bonds

The Treasury bonds secondary market traded with bullish sentiments, as the average yield contracted by 8bps to 13.2%. We attribute this market performance to the dual impact of increased liquidity from coupon payments, and investors’ compensating for lost bids from Monday’s PMA at the secondary market. Across the benchmark curve, the average yield contracted across the short (-5bps), mid (-8bps), and long (-15bps) segments due to the demand on the APR-2023 (-36bps), APR-2032 (-15bps), and APR-2037 (-57bps) bonds, respectively. At this month’s bond PMA, the DMO offered instruments worth NGN360.00 billion to investors through re-openings of the 13.98% FGN FEB 2028 (Bid-to-offer: 0.8x; Stop rate: 14.00%), 12.50% FGN APR 2032 (Bid-to-offer: 0.3x; Stop rate: 14.75%), 16.25% FGN APR 2037 (Bid-to-offer: 4.0x; Stop rate: 15.20%), and 14.80% FGN APR 2049 (Bid-to-offer: 3.9x; Stop rate: 15.75%) bonds. Demand was lower across the four instruments as the total subscription level settled at NGN808.61 billion (vs NGN993.10 billion in the previous auction), with the DMO allotting bonds worth NGN563.36 billion (translating to a bid-to-cover ratio of 1.4x).

We maintain our view that the significant borrowings expected from the 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

Nigeria’s FX reserves declined for the tenth consecutive week, as gross reserves dropped by USD163.67 million w/w to close at USD35.78 billion (23 March). Meanwhile, the naira appreciated by 0.1% to N461.33/USD at the I&E window (IEW), with total turnover at the window (as of 23 March 2023) increasing by 34.9% WTD to USD700.13 million, as trades were consummated within the NGN406.00 – NGN551.00/USD band. In the Forwards market, the naira rates recorded for the 1-month (-0.5% to NGN467.97/USD), 3-month (-0.5% to NGN484.34/USD), 6-month (-1.0% to NGN511.25/USD), and 1-year (-2.3% to NGN561.79/USD) contracts decreased.

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.