Global economy
 
According to the Bureau of Labor Statistics (BLS), headline inflation in the United States rose for the first time in twelve months, albeit below market expectation (3.3% y/y), as it increased by 20bps to 3.2% y/y in July (June: 3.0% y/y). We think the higher consumer prices reflect the statistical base effects from the corresponding period of last year when the headline inflation moderated from its peak. Analyzing the breakdown, the costs of clothing (3.2% y/y vs June: 3.1% y/y), and transportation services (9.0% y/y vs June: 8.2% y/y) increased, while energy (July: +12.5% y/y vs June: 16.7% y/y) and food (4.9% y/y vs June: 5.7% y/y) prices moderated in the period. On a month-on-month basis, consumer prices rose by 0.2% (June: 0.2% m/m).  Over the short term, we expect broad inflationary pressures in the US to remain intact given the resilient labour market condition and lingering real estate issues. Nonetheless, we maintain that the US Fed may skip further interest rate hikes in the near as the CME FedWatch tool indicates an 80.0% chance of a ‘HOLD’ decision at the September meeting.
 
According to the Office for National Statistics (ONS), the United Kingdom’s real GDP grew by 0.2% q/q in Q2-23 (Q1-23: +0.1% q/q) – the highest print since Q2-22 (+0.2% q/q). We highlight that the improvement in the review period primarily reflects an upturn across private consumption (+0.7% q/q vs Q1-23: +0.2% q/q) and general government expenditure (+3.1% q/q vs Q1-23: -1.8% q/q), while gross fixed capital formation (+2.4% q/q) was unchanged. On a year-on-year basis, GDP increased by 0.4% in Q2-23 (Q1-23: 0.1% y/y), driven by improvement across the manufacturing and services sectors. We expect the economy to grow moderately in 2023E  as elevated price pressures and tight financial conditions pose a downside risk to growth in the near term. Accordingly, the IMF expects the UK economy to grow by 0.4% in 2023E (2022FY: +4.1% y/y).

Global Markets
 
Global stocks posted mixed performance as investors digested cooler-than-anticipated US inflation data and looked ahead to the release of the producer price index (PPI) data for further clues on the path of rate hikes and the outlook for the global economy. Accordingly, mixed sentiments dominated trading in US equities (DJIA: +0.2%; S&P 500: -0.6%) following worries about the economy’s long-term prospects amid optimism that the Fed can create a smooth landing for the economy. Meanwhile, European equities (STOXX Europe: -0.5%; FTSE 100: -0.1%) were set to close lower as positive UK GDP data raised fears of more aggressive rate hikes from the Bank of England (BoE). Elsewhere, Asian markets (Nikkei 225: +0.9%; SSE: -3.0%) posted mixed performances, driven by expectations of positive earnings results for Japanese firms amid Chinese property market and economic growth worries. Elsewhere, the Emerging (MSCI EM: -1.0%) market index settled lower following negative sentiments in China (-3.0%), while the Frontier (MSCI FM: +0.1%) market index was marginally positive, supported by the gain in Iceland (+0.8%). 

Nigeria
 
Domestic Economy

On 10 August, the CBN auctioned its first OMO bills since 29 December 2022. Despite the high subscription level relative to the offer (Bid-offer ratio: 2.1x), the stop rates averaged 12.49% across the 96-day (10.00%), 187-day (12.98%), and 362-day (14.49%) bills – exceptionally higher than 8.50% mean level at the December 2022 auction. In our view, after previously unwinding its OMO portfolio, this auction represents one of the short-term fixes for the CBN to attract FPIs into the market amid concerns that the Treasury bills yields are too low to attract foreign investors. Whilst we are cautiously optimistic that active OMO operations with competitive interest rates will complement recent FX reforms and may be a short-term fix needed to bring FPIs back to the FX market, the preceding suggests a bifurcation of interest rates where rates are high for foreign investors (OMO bills) but low for domestic investors (Treasury bills) following the DMO’s efforts to keep borrowing costs low. Moreover, bringing back OMO as a tool for attracting foreign investors takes us back to the unorthodox monetary policy era and will come at a considerable cost to the CBN’s balance sheet.

According to the recently released data by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Nigeria’s crude oil production (including condensates) declined by 12.6% m/m to 1.29mb/d in July (June: 1.48mb/d). We highlight that the shortfall was largely due to the outage in the Forcados terminal after a leak was discovered at the facility in mid-July which led to a suspension of activities. As a result, output in the Forcados terminal (the largest terminal in the country | 16.1% of average output in H1-23) declined by 58.4% m/m in July. Meanwhile, crude oil production volume increased across the Escravos (+8.7% m/m), Qua Iboe (+8.8% m/m), Bonga (+2.5% m/m), and Agbami (+11.6% m/m) production terminals. We expect improvement in crude oil production in the absence of major shocks to the domestic economy. Our expectation of improvement is premised on the resumption of production activities in the Forcados Export Terminal amid sustained efforts by the government at curbing oil theft and pipeline vandalism. Thus, we estimate crude oil production to settle at 1.53mb/d in 2023E (FGN’s estimate: 1.69mb/d), indicating a higher oil production level relative to 2022FY production volume (1.37mb/d). Nonetheless, we think aggregate production is unlikely to reach the pre-pandemic high (c. 2.10mb/d) without investment in new production capacity. Consequently, we expect the government’s oil revenue performance to remain underwhelming over the short term.

Capital Markets

Equities
 
The local bourse witnessed a subdued performance this week, however, investors’ interest in MTNN (+1.1%) and some Tier-1 Banking stocks ensured the market closed positively. Precisely, the All-share index registered a 0.2% gain to close at 65,325.37 points. Consequently, the Month-to-Date and Year-to-Date returns were slightly higher at +1.5% and +27.5%, respectively. Elsewhere, weak activity levels persisted on the bourse, as the trading volume and value decreased by 32.4% w/w and 15.3% w/w, respectively. From a sectoral viewpoint, the Banking (+1.3%), and Insurance (+0.7%) indices recorded gains, while the Consumer Goods (-0.9%), Industrial Goods (-0.4%), and Oil and Gas (-0.3%) indices declined.

We expect market performance to remain mixed in the week ahead as investors rebalance their portfolios based on an assessment of corporate earnings released thus far for H1-23. Nevertheless, we expect earnings from the Tier-1 banks in the coming week(s) to spur positive market sentiments, especially given the anticipation of interim dividends. 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 403bps w/w to 2.8%, as the buoyant liquidity from the prior week supported the financial system amid debits for Thursday’s surprise OMO auction (NGN150.00 billion). Against the preceding, system liquidity settled at a net long position of NGN365.27 billion (vs a net long position of NGN723.80 billion in the previous week).

Barring any significant inflows into the system next week, we envisage the OVN rate trending upward as this month’s FGN bond (NGN360.00 billion) auction holding on Monday will exert pressure on system liquidity.
 
Treasury bills
 
This week, activities in the T-bills secondary market turned bearish. As a result, the average yield across all instruments expanded by 37bps to 7.3%. At this week’s NTB auction, the apex bank offered instruments worth NGN153.99 billion – NGN4.52 billion of the 91-day, NGN1.32 billion of the 182-day, and NGN148.15 billion of the 365-day bills – to participants. Total subscription at the auction settled at NGN836.29 billion (bid-to-offer: 5.4x), with more demand skewed towards the longer-dated bill (NGN807.68 billion). The auction closed with the CBN allotting precisely what was offered at respective stop rates of 5.00% (previously 6.00%), 5.90% (previously 8.00%), and 9.80% (previously 12.15%). Meanwhile, the CBN conducted its first OMO auction this year (previous auction: Dec 2022). At the auction, participants were offered instruments worth NGN150.00 billion – NGN30.00 billion for the 96-day, NGN40.00 billion for the 187-day, and NGN80.00 billion for the 362-day. The auction closed with the CBN allotting precisely what was offered at respective stop rates of 10.00% (previously 7.00%), 12.98% (previously 8.50%), and 14.49% (previously 10.10%).

Following our expectations of lower liquidity in the system next week, we anticipate participants’ demand for bills to moderate, resulting in an expansion of yields in the Treasury bills secondary market.

Bonds
 
Proceedings in the Treasury bonds secondary market sustained the bearish momentum from last week, as the average yield advanced by 21bps to 13.5%. Across the benchmark curve, the average yield expanded at the short (+32bps), mid (+22bps), and long (+15bps) segments as investors sold off the MAR-2025 (+107bps), APR-2032 (+37bps) and JAN-2042 (+47bps) bonds, respectively.

Next week, we believe the outcome of this month’s FGN bond auction holding on Monday (14 August) will influence the sentiments in the secondary market. At the auction, the DMO is set to offer instruments worth NGN360.00 billion through re-openings of the 14.55% FGN APR 2029, 14.70% FGN JUN 2033, 15.45% FGN JUN 2038 and 15.70% FGN JUN 2053 bonds. Nonetheless, we maintain that yields in the FGN bond secondary market will remain elevated in the medium term, specifically driven by our expectation of a sustained imbalance in the demand and supply dynamics. However, we highlight that deliberate actions by the DMO to keep the cost of borrowing moderate remains a downside factor.
 
Foreign Exchange

 Nigeria’s FX reserves remained under pressure this week, as the gross reserve decreased by USD44.41 million w/w to USD33.88 billion (10 August). Meanwhile, the naira appreciated by 0.3% to NGN740.60/USD at the I&E window (IEW). At the IEW, total turnover (as of 10 August 2023) decreased by 50.3% WTD to USD226.00 million, with trades consummated within the NGN700.00 – NGN800.00/USD band. In the Forwards market, the naira rates on the 1-month (-2.6% to NGN794.67/USD), 3-month (-3.5% to NGN813.25/USD), 6-month (-3.7% to NGN838.28/USD) and 1-year (-4.3% to NGN898.09/USD) contracts all declined.

We expect currency pressures to remain intact in the near term, given current demand pressures and still frail FX supply despite the CBN’s abolishment of its multiple FX windows. On FX supply, we expect foreign investors to remain on the sidelines in the near term as they continue to look for signals on market interest rates and solutions to the existing FX backlog and supply issues.