In what can be regarded as a “hawkish pause”, the Federal Open Market Committee (FOMC), at its June policy meeting, voted to maintain the target range for the federal funds rate at 5.00% – 5.25%, stating that it allows the Committee to assess additional information and its implications for monetary policy. Like the previous meeting, the FOMC highlighted that in determining the extent of additional policy firming that may be appropriate to return inflation to 2.0% over time, the Committee would 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. Although the Fed’s chair stated during the press conference that the FOMC had not yet decided whether another increase would be likely in July, the Fed’s “dot plot” indicates that members expect further rate increases. Precisely, the median forecast from the Fed suggests that the key policy rate will rise to 5.6% by year-end, implying two more 25bps hikes to a target range of 5.50% – 5.75% at subsequent meetings.

In line with market expectations, the European Central Bank (ECB) voted to increase the interest rates on the main refinancing operations, marginal lending facility, and deposit lending facility by 25bps each to 4.0%, 4.25% and, 3.50%, respectively. The Committee stated that the rate increase reflects the Governing Council’s updated assessment of the inflation outlook, the dynamics of underlying inflation, and the strength of monetary policy transmission. That said, the Governing Council highlighted that its future decisions would ensure that the key interest rates will be brought to sufficiently restrictive levels to achieve a timely return of inflation to the 2.0% medium-term target and will be kept at those levels as long as necessary. Considering that inflation is expected to remain elevated in the short term and the Governing Council’s determination to return inflation to 2.0% in the medium term, we anticipate the ECB will likely increase the key policy rates further at its next meeting. Indeed, we understand that the ECB’s President, during a news conference, stated that the ECB had more ground to cover and would likely continue raising rates in July.

Global Markets

Global stocks rallied this week as signs of easing inflationary pressures and slowing economic growth raised hope that the US Federal Reserve could end its monetary tightening campaign soon. Additionally, sentiments were buoyed by increased bets on Chinese stimulus and enthusiasm surrounding artificial intelligence firms. Accordingly, US equities (DJIA: +1.6%; S&P 500: +3.0%) were on course for weekly gains as a slew of economic data (inflation and jobless claims) fueled hopes of a shift in the Fed’s policy. Similarly, European equities (STOXX Europe: +1.2; FTSE 100: +1.3%) were on track to close higher following the gains on Wall Street. In Asia, the Nikkei 225 (+4.5%) rallied as the Bank of Japan (BOJ) kept its ultra-loose monetary policy and signaled no change to its yield curve control policies. Likewise, the Chinese market (SSE: +1.3%) advanced following optimism that Beijing will ramp up stimulus measures to bolster growth after a string of gloomy economic reports. Finally, the Emerging (MSCI EM: +2.1%) and Frontier (MSCI FM: +1.0%) market indices closed positively underpinned by bullish sentiments in China (+1.3%) and Vietnam (+0.7%), respectively.

Nigeria

Domestic Economy

According to the National Bureau of Statistics (NBS), consumer prices maintained their uptrend for the fifth consecutive month, rising by 19bps to 22.41% y/y in May (April: 22.22% y/y). On the one hand, food inflation (+21bps to 24.82% y/y) rose in line with our expectations of an extension in the food demand-supply gap in the review period due to the commencement of the planting season and higher prices on input costs. On the other hand, we highlight that the favourable base effects from last year induced a moderation in the core basket (-7bps to 20.06% y/y). On a month-on-month basis, the headline inflation rose by 3bps to 1.94% (April: 1.91% m/m) as the existing factors stoking prices remain dominant in the review period. We expect the headline inflation to settle at 3.62% m/m in June, translating to a 217bps increase in the y/y inflation rate to 24.58%. Our expectation is hinged on the effective PMS subsidy removal and liberalisation of the FX market fueling pressure on the core basket amid the below-average off-season harvest and Salah festivities intensifying food prices.

On 14 June, the Central Bank of Nigeria (CBN) announced the abolishment of its multiple FX windows, collapsing all the official FX segments into the Investors & Exporters Window (IEW). Accordingly, the CBN re-introduced the “willing buyer, willing seller” model at the IEW, with the operations guided by the extant circular on the establishment of the window, dated 21 April 2017. In our view, the preceding effectively sets the country on a unified exchange rate path, especially since the IEW is now experiencing a price discovery journey since the FX reform announcement. While the CBN’s action is positive in boosting foreign investor’s confidence, we think they may adopt a wait-and-see approach, for now, looking for signals on the CBN’s plans to start clearing the FX backlogs and boosting FX supply to support the market in the near term. Besides, we suspect that due to the previous lessons learnt from the damaging currency controls of the prior administration, investors will be on the lookout for signs that there are no counter policies to prevent them from leaving at any point in the near term before returning to the market in their droves.

Capital Markets

Equities

The domestic bourse edged higher this week as the reforms of the new administration continued to spur an unprecedented rally in the market. Precisely, the All-Share index rose by 5.5% to 59,000.96 points, supported by strong interest in MTNN (+9.6%) and AIRTELAFRI (+7.8%). Accordingly, the month-to-date and year-to-date returns for the index increased to +5.8% and +15.1%, respectively. In terms of activity levels, the trading volume and value grew by 94.7% w/w and 35.3% w/w, respectively. Sectoral performance was broadly positive, as the sectors under our coverage – Banking (+12.6%), Oil and Gas (+11.9%), Insurance (+9.0%), Consumer Goods (+4.1%), and Industrial Goods (+5.8%) indices – recorded gains.

In the week ahead, we expect profit-taking activities following the recent rally in the market. However, we expect this to be tempered by bargain-hunting activities from “early bird” investors ahead of the H1-23 earnings season. 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 closed flat at 12.1% this week, amid the absence of significant inflows into the financial system. Accordingly, the average liquidity level closed lower at a net long position of NGN233.86 billion (vs net long position of NGN543.14 billion in the previous week).

Next week, we envisage an upward shift in the OVN rate as we believe the debits for next week’s FGN bonds auction and possible CRR will mount pressure on system liquidity.

Treasury bills

Activities in the Treasury bills secondary market were bearish this week, as the lower liquidity system influenced the reduced demand for bills across the spectrum. As a result, the average yield expanded by 2bps to 6.3%. At this week’s NTB PMA, the CBN offered NGN34.54 billion – NGN1.01 billion of the 91-day, NGN1.29 billion of the 182-day, and NGN32.15 billion of the 364-day – in bills to participants. The total subscription level settled at NGN286.13 billion (vs NGN830.19 billion at the previous auction), with more demand skewed toward the longer-dated bills (NGN277.27 billion translating to 96.9% of the total subscription). As in the previous auction, the CBN allotted precisely what was offered at respective stop rates of 4.89% (previously: 4.48%), 5.12% (previously: 6.00%), and 8.24% (previously: 9.45%).

Given our expectations of a liquidity squeeze in the system next week, we anticipate higher yields in the T-bills secondary market.

Bonds

Bearish sentiments returned to the Treasury bonds secondary market as investors booked profits at the short and long ends of the naira curve. Consequently, the average yield increased by 2bps w/w to 13.8%. Across the benchmark curve, the average yield expanded at the short (+4bps) and long (+4bps) ends, following sell-off on the MAR-2027 (+20bps) and APR-2049 (+24bps) bonds, respectively. Meanwhile, the average yield contracted at the mid (-2bps) segment as investors demanded the APR-2032 (-3bps) bond.

Next week, we expect the outcome of this month’s FGN bond auction holding on Monday (19 June) to influence the direction of yields in the secondary market. At the auction, the DMO is offering instruments worth NGN360.00 billion through the re-opening of the 14.55% FGN APR 2029 bond and new issuance of the FGN JUN 2033 (10-year), FGN JUN 2038 (15-year), and FGN JUN 2053 (30-year) bonds. Nonetheless, we retain our view that frontloading of significant borrowings for the year by the FG will result in an uptick in bond yields, as investors demand higher yields in the face of elevated supply.

Foreign Exchange

Nigeria’s FX reserves remained pressured this week, declining by USD194.00 million w/w to USD34.62 billion (15 June). Likewise, the naira depreciated significantly by 28.7% to NGN663.04/USD at the I&E window (IEW), reflecting the impact of the FX market liberalisation announced during the week. At the IEW, total turnover (as of 13 June 2023) declined by 34.2% WTD to USD378.85 million, with trades consummated within the NGN460.00 – NGN791.00/USD band. In the Forwards market, the naira depreciated at the 1-month (-31.2% to NGN698.21/USD), 3-month (-31.9% to NGN743.69/USD), 6-month (-30.9% to NGN769.91/USD), and 1-year (-29.0% to NGN790.62/USD) contracts.

In the weeks ahead, we expect the re-introduction of the “willing buyer, willing seller” model at the IEW to influence the exchange rate direction. Nonetheless, while the CBN’s abolishment of its multiple FX windows is positive in boosting foreign investors’ confidence, we think they will adopt a wait-and-see approach, for now, looking for signals on the CBN’s plans to start clearing the FX backlogs and boosting FX supply to support the market in the near term.