The Federal Open Market Committee (FOMC) voted to increase the target range for the federal funds rate further by 25bps to 5.00% – 5.25% (previously: 4.75% – 4.00%), representing the highest level since August 2007 (5.25%). Notably, the Committee provided forward guidance, stating that in determining the extent to which additional policy firming may be appropriate to return inflation to 2.0% over time, the FOMC will take into account the (1) cumulative tightening of monetary policy, (2) lags with which monetary policy affects economic activity and inflation, and (3) economic and financial developments. In our view, the tone of the statement is broadly similar to that from 2006 when the FOMC halted its tightening cycle, in which there was no direct promise of a pause while seemingly retaining a bias for tightening. Indeed, the policy statement removed the clause “the committee anticipates that some additional policy firming may be appropriate” and replaced it with “additional policy firming may be appropriate”. Consequently, while the Fed left the door open for more tightening if conditions warrant, the market is currently pricing a pause as the most likely outcome in June.

The European Central Bank (ECB) slowed the pace of its monetary policy tightening, voting to increase the benchmark interest rates on the main refinancing operations, marginal lending, and deposit lending facilities by 25bps each to 3.75%, 4.00%, and 3.25%, respectively. The Committee highlighted that while headline inflation has declined over recent months, underlying price pressures remained strong. In particular, during the press conference, the ECB’s President stated that the ECB is not pausing the interest rate hiking cycle anytime soon as it still has more ground to cover. Elsewhere, the Bank stated that it expects to discontinue the reinvestments under the EUR3.20 trillion Asset Purchase Programme (APP) from July. Since the ECB commenced its monetary policy tightening cycle, we highlight that the 25bps increase at this meeting is the slowest, suggesting that a peak in rates is in sight, despite the Bank signalling more tightening to come. Thus, given the outcome of the meeting and in line with the ECB’s commitment to rein in inflation, we expect a further 25bps increase apiece in the key interest rates at its June and July policy meetings.

Global Markets

Sentiments turned bearish in the global equities market this week as renewed weaknesses in US regional banks overshadowed optimism that the US Fed is approaching the end of its interest rate hikes. In line with this, US equities (DJIA: -2.8%; S&P 500: -2.6%) were on track to close lower as concerns around West Coast regional banks, including PacWest and Western Alliance, dampened sentiments. Similarly, European equities (STOXX Europe: -0.9%; FTSE 100: -1.5%) slid on banking concerns and news of rising eurozone interest rates, amid uncertainty over the global economic outlook. In Asia, Chinese (SSE: +0.3%) and Japanese (Nikkei 225: +1.0%) equities recorded marginally positive performances following reactions to strong corporate earnings in the region. Elsewhere, the Emerging (MSCI EM: -0.1%) and Frontier (MSCI FM: -1.5%) market indices mirrored the selloffs across global stocks consequent upon losses in South Korea (-2bps) and Vietnam (-1.0%), respectively.

Nigeria

Domestic Economy

According to the data obtained from FMDQ, total inflows into the Investors & Exporters Window (IEW), declined to the lowest level since April 2021 (USD564.20 million), after declining by 58.9% m/m to USD613.80 million in April (March: USD1.49 billion). While inflows from local sources (-55.6% m/m to USD533.20 million) declined to a two-year low, foreign inflows (-72.4% m/m to USD80.60 million) remain underwhelming on account of (1) FX liquidity constraints, (2) an overvalued currency, and (3) absence of significant macro reforms. On local inflows, we note a broad-based decline across the inflows from Non-bank corporates (-54.3% m/m), Exporters (-34.3% m/m), CBN (-89.9% m/m), and Individuals (-85.2% m/m). Over the short-to-medium term, we expect FX liquidity conditions to remain frail in the absence of reforms to attract US dollar inflows into the economy. The low FX liquidity conditions will also be driven by lingering global uncertainties and higher global interest rates, limiting foreign inflows to the economy. Thus, foreign investors will need some convincing actions as regards flexibility and clarity in the FX framework going forward.

The Nigerian Senate has approved the President’s request to restructure the NGN22.72 trillion (as of 19 December 2022) borrowed by the FGN from the CBN through debt monetisation (otherwise known as Ways & Means Advances). Recall that the President had in December 2022, sent a request to the National Assembly, seeking approval to convert the W&M advances to 40-year bonds that will be sold to investors at a 9.0% interest rate, with a three-year moratorium. Contrary to previous expectations that the securities will be issued to the public, the DMO stated that it will be issued to the CBN by the FGN. Given that the arrangement involves the FGN issuing the securities to the CBN, it means the W&M outstanding will remain in the CBN’s balance sheet. In our view, the securities remaining in the CBN’s books, introduces a moral hazard issue. Nonetheless, this development will ensure that the public debt profile reflects its true picture, bringing debt sustainability to the forefront of policymaking and, possibly, ensuring the next administration consciously embark on fiscal consolidation.

Capital Markets

Equities

Although the local bourse kicked off the week on a sluggish note, positive sentiments resurfaced later in the week. Investors’ interest in GTCO (+9.1%), ZENITHBANK (+5.5%), and ACCESSCORP (+10.8%), supported the market and resulted in the All-Share index advancing by 0.1% w/w to close at 52,466.52 points. Thus, the YTD return for the index increased to +2.4%. Analysing activity level, the total traded volume and value declined by 78.8% w/w and 61.3% w/w, respectively. However, from a sectoral standpoint, the Banking (+5.2%), Oil and Gas (+5.1%), Insurance (+3.1%), and Industrial Goods (+0.1%) indices posted gains while the Consumer Goods index closed flat.

Looking ahead, we expect investors to rebalance their portfolios based on an assessment of corporate earnings released for Q1-23. Nevertheless, increased FI yields may continue to constrain buying activities. Thus, we expect market performance to remain mixed in the week ahead as investors rotate their portfolios towards stocks with attractive dividend yields amid intermittent profit-taking activities. Overall, we advise investors to take positions in only fundamentally justified 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 175bps w/w to 11.4%, as the system remained buoyant with the liquidity surfeit from last week coupled with this week’s inflow from OMO maturities (NGN50.00 billion). We highlight that the average system liquidity closed at a net long position of NGN313.87 billion (vs a net long position of NGN734.22 billion in the previous week).

We believe the OVN rate will head upwards, as the expected inflow from OMO maturities (NGN5.00 billion) may not be enough to support the system liquidity.

Treasury bills

Bullish sentiments persisted in the Nigerian Treasury bills secondary market this week, as the healthy liquidity in the system inspired local investors’ demand for bills. As a result, the average yield across all instruments contracted by 4bps to 7.5%.

We anticipate higher yields in the secondary market next week, following our expectation of a tightening in system liquidity conditions. Also, we expect market focus at the dawn of the week to be shifted to the NTB PMA holding on Wednesday (10 May), where the CBN is scheduled to roll over NGN143.98 billion worth of maturities.

Bonds

As we envisaged, the Treasury bonds secondary market closed on a bullish note, as demand for instruments in this space was supported by the excess liquidity in the system. As a result, the average yield dipped by 4bps to 14.1%. Across the benchmark curve, the average yield contracted at the short (-30bps) end following the interest on the MAR-2024 (-191bps) bond but expanded at the mid (+6bps) and long (+9bps) segments due to the selloff on the APR-2032 (+17bps) and MAR-2050 (+7bps) bonds, respectively. 

Over the medium term, we maintain our expectations of 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

After two consecutive weeks of decline, Nigeria’s FX reserve increased by USD25.17 million w/w to USD35.28 billion (03 May 2023). Meanwhile, the naira appreciated by 0.2% to NGN462.23/USD at the I&E window (IEW), with total turnover at the window (as of 04 May 2023) declining by 36.8% WTD to USD206.79 million, as trades were consummated within the NGN460.00 – NGN478.82/USD band. In the Forwards market, the naira was flat at the 1-month (NGN469.74/USD) contract but depreciated across the 3-month (-0.2% to NGN496.97/USD), 6-month (-2.7% to NGN540.64/USD) and 1-year (-0.5% to NGN568.29/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.