According to the Bureau of Economic Analysis (BEA), United States’ (US) real GDP decelerated in Q1-23, settling at 1.1% q/q relative to a growth of 2.6% q/q recorded in Q4-22. We understand that the slowdown in the review period primarily reflects a downturn in private inventory investment and a significant slowdown in non-residential fixed investments (+0.7% q/q vs Q4-22: +4.0% q/q) amid (1) rising interest rates and (2) tightening credit conditions. That said, consumer spending (+3.7% q/q vs Q4-22: +1.0% q/q) accelerated, supported by the resilient labour market and rising wages, both of which have helped offset lingering inflationary pressures. On a year-on-year basis, the economy grew by 1.6% y/y in Q1-23 (Q4-22: +0.9% y/y | Q1-22: +3.7% y/y). Over the short-to-medium term, we believe residential and non-residential investments will remain critical drags on overall growth in 2023 as interest rates are expected to remain high. Accordingly, we expect the lagging impact of elevated interest rates and recent layoffs to take a toll on consumer spending in the next few quarters. Consequently, we envisage the US economy will slow further in 2023E, relative to 2022FY levels.

According to Eurostat, the Euro Area economy grew marginally by 0.1% q/q in Q1-23 (Q4-22: 0.0% q/q). Nonetheless, the outturn was below market estimates (+0.2% q/q) as economic activities in the zone remain constrained in line with the lingering effect of (1) tight monetary policy by the ECB, (2) elevated price pressures, and (3) weakening consumer confidence. Among the regional bloc’s biggest countries, growth stagnated in Germany (0.0% q/q vs Q4-22: -0.5% q/q) but expanded in France (+0.2% q/q vs Q4-22: 0.0% q/q), Italy (+0.5% q/q vs Q4-22: -0.1% q/q) and Spain (+0.5% q/q vs Q4-22: +0.4% q/q). On a year-on-year basis, the regional bloc grew slowly by 1.3% y/y (Q4-22: +1.8% y/y). We expect economic growth in the euro area to shrink over the short-to-medium term, given the troika impact of (1) tightening financial conditions, (2) elevated inflationary pressures, and (3) weaker external demand. Accordingly, the IMF projects the region to grow by 0.8% y/y in 2023E (2022FY: 3.5% y/y).

Global Markets

Although Q1-23 corporate earnings remained the focal point in the global equities space this week, sentiments were swayed by (1) renewed bank concerns, and (2) expectations for the Fed’s meeting next week. As of the time of writing, US equities (DJIA: +0.1%; S&P 500: +0.0%) were moderately positive as a string of better-than-expected results from mega-cap tech names – Microsoft, and Google parent Alphabet, – pushed investors to look beyond signs of the weak economic outlook. Elsewhere, European equities (STOXX Europe: -1.2%; FTSE 100: -1.3%) dipped following data showing that the Eurozone GDP grew marginally by 0.1% in Q1-23, missing market expectations of a 0.2% growth. In Asia, Chinese equities (SSE: +0.7%) rebounded from early losses as Q1-23 earnings from some industry leaders bolstered confidence in the nation’s economic recovery outlook. Likewise, Japanese equities (Nikkei 225: +1.0%) closed higher as investors cheered the Bank of Japan’s decision to keep its ultra-lax monetary policy unchanged. Finally, the Emerging (MSCI EM: -0.9%) market index declined following bearish sentiments in Taiwan (-0.2%), while the Frontier (MSCI FM: +0.5%) market index closed positively driven by gains in Vietnam (+0.6%).

Nigeria

Domestic Economy

According to news flows, the Finance Minister disclosed that the National Executive Councill has agreed that the PMS subsidy should “not be removed” as earlier planned for June 2023. However, the Minister noted that despite the suspension of the PMS subsidy should “not be removed” as earlier planned for June 2023. However, the Minister noted that despite the suspension of the PMS subsidy removal, preparatory work will continue in consultation with key stakeholders, and that the subsidy would eventually be removed as remained an unsustainable expense for the Nigerian government. We are unsurprised by the decision to suspend the subsidy removal given how the present administration has delayed the decision over the past three years. Indeed, we stated in our 2023FY domestic macroeconomic outlook that our base case scenario is for the incoming administration to embark on partial subsidy removal as it is unlikely the present administration follows through with removing the PMS subsidy by June 2023. Besides, our view for partial subsidy removal by the incoming administration is premised on the lingering acute domestic price pressures amid the need to avoid public protests at the start of a new administration.

According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the domestic equities market declined for the second consecutive month, falling by 22.6% m/m to NGN146.22 billion in March (February: NGN188.91 billion). On the one hand, foreign transactions (-53.2% m/m to NGN9.19 billion | 6.3% of total transactions) declined to a new record low, primarily due to the (1) lingering FX liquidity constraints, (2) weak macro narrative, (3) heightened global uncertainties, and (4) elevated global interest rates. On the other hand, domestic transactions (93.7% of gross transactions) fell to the lowest level in four months, after declining by 19.1% m/m to NGN137.03 billion. Looking ahead, we expect domestic investors to continue to dominate the local bourse, even as higher FI yields may constrain buying activities. Also, FPIs who have exhibited a lacklustre interest in domestic equities are likely to remain on the sidelines due to elevated global uncertainties, sustained FX liquidity challenges, and tightening global financing conditions.

Capital Markets

Equities

Despite the shortened trading week, due to the public holiday on Monday to commemorate the Eid-el-Fitr celebration, the bulls returned strongly to the local bourse as the market closed positively on all four trading sessions. Notably, bargain-hunting activities in BUAFOODS (+11.6%), AIRTELAFRI (+4.3%), and MTNN (+2.1%) drove the weekly gain. Thus, the All-Share Index advanced by 2.0% w/w to close at 52,403.51 points. Accordingly, the MTD loss moderated to -3.4%, while the YTD gain increased to +2.2%. Activity levels were upbeat, as traded volume and value increased by 257.9% w/w and 277.8% w/w, respectively. On the other hand, performance across sectors was largely bullish, following gains in the Consumer Goods (+5.2%), Insurance (+2.0%), Banking (+1.7%), and Industrial Goods (+0.2%) indices amid a decline in the Oil and Gas (-0.1%) index.

Given the Q1-23 earnings season, we expect decent earnings releases across board to temper selling activities and support positive sentiments on the bourse. In the medium term, we expect investors’ sentiments to be influenced by developments in the macroeconomic landscape and the movement of yields in the fixed-income space. Overall, we reiterate the need for positioning in only fundamentally sound stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

The overnight (OVN) rate contracted by 587bps, w/w to 13.1%. We note that the rate was depressed through the week, following the inflows from the maturing APR-2023 bond (NGN735.96 billion), FAAC disbursements (NGN438.49 billion), and FGN bond coupon payments (NGN178.50 billion). Evidently, the average system liquidity closed at a net long position of NGN610.22 billion (vs a net short position of NGN338.33 billion in the previous week).

In the coming week, we expect the system to remain awash with liquidity. Barring any significant mop-up activity by the CBN, we expect the OVN rate to hover around the same level.

Treasury bills

Trading in the Treasury bills secondary market was bullish as the buoyant system liquidity spurred demand for T-bills at the last two trading sessions of the week. Thus, the average yield across instruments contracted by 149bps to 7.3%. Pertinently, we note that the aforementioned yield movement is non-inclusive of OMO instruments given the maturity of all outstanding instrument. Meanwhile, we note that participants in this space shifted focus toward the NTB PMA that was held on Wednesday. At the PMA, the CBN offered a total of NGN131.46 billion – NGN1.74 billion of the 91-day, NGN10.12 billion of the 182-day, and NGN119.61 billion of the 364-day – in bills the auction and ultimately allotted the full offer amount. The auction stop rates were 5.30% (previously 6.00%), 8.00% (previously 8.00%), and 10.17% (previously 14.70%) on the 91D, 182D, and 364D bills, respectively. The auction was oversubscribed with a subscription level of NGN819.10 billion, translating to a bid-to-cover ratio of 6.2x (previous auction: 1.9x).

We expect yields to remain low next week as local investors continue to demand instruments amidst the liquidity surfeit in the system.

Bonds

The Treasury bond secondary market remained bearish, as the average yield expanded by 46bps to 14.3%. We attribute the yield uptick to sell-offs on Thursday by fixed income dealers in anticipation of CRR debits. Notwithstanding, buying interests resurfaced particularly at the long end of the benchmark curve following the liquidity influx from the aforementioned maturing bond and coupon payments. Across the benchmark curve, the average yield contracted at the short (-125bps) and long (-12bps) ends as investors demanded the MAR-2024 (-66bps) and JUL-2034 (-26bps) bonds, respectively but expanded at the mid (+39bps) segment due to the sell-offs on the APR-2032 (+3bps) bond.

We remain resolute that the surplus liquidity in the market will support demand in the FGN bond secondary market and drive yields downwards in the interim. Over the medium term, we expect an uptick in bond yields as we believe investors will demand higher yields, which will be driven by significant borrowings expected from the FG for the year.

Foreign Exchange

This week, Nigeria’s FX reserve declined by USD47.83 million w/w to close at USD35.26 billion (26 April). Meanwhile, the naira appreciated by 0.1% to N463.00/USD at the I&E window (IEW), with total turnover at the window (as of 27 April 2023) decreasing by 26.9% WTD to USD314.73 million, as trades were consummated within the NGN415.00 – NGN478.57/USD band. In the Forwards market, the naira rates depreciated on the 1-month (+0.2% to NGN469.74/USD), 3-month (-1.3% to NGN496.22/USD), 6-month (-1.9% to NGN526.22/USD) and 1-year (-0.8% to NGN560.79/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.