In the United States (US), overall private sector activity slowed further in August as persistent challenges dampening demand in the manufacturing sector were accompanied by slower growth in the services sector. According to the preliminary estimates from S&P Global, US Manufacturing PMI contracted to 47.0 points in August (July: 49.0 points), primarily due to a renewed drop in output and a steeper decrease in new orders. At the same time, the Services PMI (51.0 points vs. July: 52.3 points) moderated to a six-month low, given the negative impact of the lingering increase in interest rates and high inflationary pressures on consumer spending. Overall, the Composite PMI settled lower at 50.4 points (July: 52.0 points). In our view, the preceding implies that the business activity-induced growth acceleration in Q2-23 has begun to fade, accompanied by a further fall in factory activity. We think this raises doubts over the strength of US economic growth in Q3-23, more so that demand remains sluggish given rising interest rates and high prices.

According to flash estimates from the S&P Global / CIPS, private sector activity in the United Kingdom (UK), measured by the Composite PMI, settled at a 31-month low of 47.9 points in August (July: 50.8 points). We understand that the downturn was primarily due to a faster decline in new orders as sluggish domestic economic conditions and higher borrowing costs led to caution among clients. Accordingly, the Manufacturing PMI (42.5 points vs. July: 45.3 points) extended its fall, albeit at a sharper pace, while the Services PMI (48.7 points vs. July: 51.5 points) declined to a 7-month low amid worries about the broader economic outlook and the impact of higher interest rates on consumer spending. The persistent deterioration of private sector activity suggests that the economy may contract in Q3-22 as elevated interest rates continue to ensure that prospects for the private sector remain uncertain, casting a shadow over the UK economy. Nonetheless, we agree with CIPS that the reduction in activity has provided UK supply chains with much-needed respite after the instability of the last two years.

Global Markets

Mixed sentiments dominated the global equities market as investors kept their gaze on the highly anticipated speech by the US Federal Reserve chief in Jackson Hole for insights into upcoming interest rate trends. As of the time of writing, US equities (DJIA: -1.2%; S&P 500: +0.2%) were mixed as investors digested Nvidia’s better-than-expected earnings report amid fears of more hawkish signals from the Federal Reserve. On the other hand, European equities (STOXX Europe: +0.7%; FTSE 100: +1.0%) were supported by expectations that subdued economic data would prompt central banks to halt their interest rate hiking cycles. Elsewhere, in Asian markets (Nikkei 225: +0.6%; SSE: -2.0%) sentiments were shaped by mixed corporate reports and outlook for the Fed interest rate policy. Lastly, the Emerging (MSCI EM: +1.9%) and Frontier (MSCI FM: +0.1%) market indices posted gains following bullish sentiments in Taiwan (+0.7%) and Vietnam (+0.4%), respectively.

Nigeria

Domestic Economy

The National Bureau of Statistics (NBS) recently launched the new and enhanced Nigeria Labour Force Survey (NLFS). According to the NBS’ revised methodology, employed persons are those working for pay or profit and who worked for at least one hour in the last seven days. At the same time, the revised methodology considers underemployed persons as those working less than 40 hours per week and declaring themselves willing and able to work more. Finally, unemployed persons are those not in employment but actively searching and are available for work. Based on the preceding, the unemployment rate settled lower at 4.1% as of Q1-23, relative to 5.3% in Q4-22. Although the revised methodology aligns with global practices, we believe it does not consider Nigeria’s peculiarities and can be misleading for policy making. For instance, at a 4.1% unemployment rate, the data suggests that policymakers should only proffer employment solutions to 4.1% of the working-age population and track progress towards the same proportion, which can be misleading.

According to the recently released GDP report by the NBS, the domestic economy maintained its growth trajectory as the real GDP grew by 2.51% y/y in Q2-23 (Q1-23: 2.31% y/y). Analysing the breakdown provided, we highlight that the oil sector contracted further by 13.43% y/y (Q1-23: -4.21% y/y) given lower crude oil production (1.22mb/d vs Q1-23: 1.51mb/d | Q2-22: 1.43mb/d) influenced by (1) strike-action induced shutting down of oil platforms and (2) Exxon Mobil’s declaration of force majeure, particularly at the Qua Iboe oil terminal in April. Meanwhile, the non-oil sector’s growth was higher, settling at 3.58% y/y in Q2-23 (Q1-23: +2.77% y/y) as the negative impact of the cash scarcity witnessed in Q1-23 subsided. Barring any significant shock, we expect the oil sector to return to growth in Q3-23, predominantly due to the favourable base effects from the corresponding period of last year when crude oil production averaged 1.20mb/d. However, we expect the non-oil sector’s growth to settle significantly lower than Q2-23, in line with the near-term pressures arising from the government’s reforms. Overall, we anticipate that the economy will grow slower in Q3-23. Our estimates are under review.

Capital Markets

Equities

The Nigerian equities market reversed last week’s bearish performance as the All-Share index advanced by 1.3% w/w to close at 65,558.91 points, driven by investors’ interest in BUAFOODS (+7.9%), DANGSUGAR (+35.7%) and TRANSCORP (+39.4%). As a result, the Month-to-Date and Year-to-Date gains increased to +0.6% and +26.3%, respectively. Analysing activity levels, the total trading volume increased by 7.3% w/w while the trading value declined by 0.4% w/w. From a sectoral standpoint, the Consumer Goods (+11.6%) and Insurance (+1.2%) indices advanced, while the Banking (-3.6%), and Oil and Gas (-2.4) indices declined. The Industrial Goods index closed flat.

Looking ahead, we expect investors’ sentiments to be influenced by developments in the macroeconomic landscape and the movement of yields in the fixed-income market. 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

Contrary to our expectations, the overnight (OVN) rate expanded by 541bps w/w to 25.2%, as the FGN bond coupon payment (NGN112.67 billion) was insufficient to support the financial system’s liquidity. Consequently, the average system liquidity closed this week at a net short position of NGN203.48 billion (vs. a net long position of NGN187.44 billion in the previous week).

The OVN rate is expected to trend lower next week, as we believe the anticipated inflows from FAAC allocation (NGN591.62 billion) will support system liquidity.

Treasury bills

Activities in the Treasury bills secondary market closed on a bullish note this week, as the average yield across the market dipped by 20bps to 8.3%. We attribute this week’s performance to market players (1) moving to the secondary market to cover for lost bids at the NTB auction, and (2) looking to deploy their funds in the absence of an OMO auction this week. Across the market segments, the average yield declined by 21bps to 8.2% in the NTB segment and contracted by 2bps to 11.2% in the OMO secondary market. At the NTB primary auction, the CBN offered participants instruments worth NGN303.22 billion – NGN9.96 billion for the 91-day, NGN10.21 billion for the 182-day, and NGN283.04 billion for the 364-day bills. The auction was massively contested as the total subscription settled at NGN1.54 trillion (bid-to-offer: 5.1x). Eventually, the CBN allotted exactly what was offered – at respective stop rates of 5.19% (previously: 5.00%), 8.00% (previously: 5.90%), and 13.97% (previously: 9.80%).

Next week, we envisage lower yields in the Treasury bills secondary market as we believe anticipated inflows into the financial system will drive bill demand.

Bonds

The Treasury bonds secondary market traded with bearish sentiments as the average yield expanded by 27bps to 14.1%. Across the benchmark curve, the average yield advanced across the short (+6bps), mid (+61bps), and long (+19bps) segments due to sell pressures on the FEB-2028 (+41bps), APR-2032 (+76bps), MAR-2036 (+74bps) bonds, respectively.

We expect yields in the FGN bond secondary market to remain elevated in the medium term, driven explicitly 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 reserve maintained its downward trend this week as it declined by USD66.24 million w/w to close at USD33.74 billion (24 August 2023). Meanwhile, the naira also depreciated by 4.8% to N778.42/USD at the I&E window (IEW), with total turnover (as of 24 August 2023) decreasing by 44.5% WTD to USD344.09 million, as trades were consummated within the NGN700.00 – NGN799.91/USD band. In the Forwards market, naira rates depreciated across the 1-month (-0.9% to NGN790.80/USD), 3-month (-0.8% to NGN809.63/USD), 6-month (-0.8% to NGN838.09/USD), and 1-year (-0.8% to NGN897.57/USD) contracts.

We think the recent NNPCL emergency crude repayment loan from the African Export-Import (AFREXIM) bank is favourable in providing near-term FX supply to support the FX market and stabilise the local currency. Nonetheless, we acknowledge that the amount is not sufficient to significantly support the local currency, more so that the funds will come in tranches. Thus, if not adequately managed with other measures (such as higher interest rates and additional funding support from third parties or multilateral institutions), FX pressures may likely build up again, leading to another round of local currency depreciation.