Global economy

According to the United States Department of Labor, the initial jobless claims in the US declined by 4,000 to 228,000 in the week ending 26 August (vs. the week ending 19 August: 232,000) – below market expectation of 235,000. For us, the data suggests that despite recent reports of layoffs and reduced job postings, companies are still actively hiring or finding alternative cost-cutting measures to retain their employees, underscoring the still tight labour market. The data breakdown shows that significant declines were recorded across Ohio (-4,695), Missouri (-1,712), and Hawaii (-1,305). Meanwhile, on a 4-week moving average, we highlight that the initial jobless claims settled at 237,500 (vs. the week ending 19th August: 237,250). Although the job market is poised to remain solid in the near term, we think the full effect of tight financial conditions will likely pose key downside risks to the labour market further on in the year, more so that we understand that signs of looser labour markets are emerging. Accordingly, the market is currently pricing an 87.0% chance that the Fed will adopt a ‘HOLD’ stance at its 20th September policy meeting.

Based on the data obtained from the Chinese National Bureau of Statistics (NBS), China’s factory activity, as measured by the Manufacturing PMI, remained below the 50-point threshold for the fifth consecutive month, albeit settling higher at 49.7 points in August (July: 49.3 points). Notably, we highlight that new orders (50.2 points vs. July: 49.5 points) rose above the 50-point benchmark for the first time in five months, reflecting some respite for factory activity, although the recovery still needs further consolidation. Elsewhere, the Non-manufacturing PMI (51.0 points vs. July: 51.5 points) eased to its lowest level in eight months, primarily driven by insufficient market demand. Overall, the Composite PMI rose slightly to 51.3 points (July: 51.1 points). The mixed PMI result suggests an uncertain manufacturing improvement and waning services momentum. The cautious improvement and the government’s incoming stimulus measures may ensure that growth likely picks up in Q3-23. Nonetheless, we highlight the growing concerns that the Chinese government might not achieve its 5.0% 2023E growth target amid the lingering real estate pressure, weak domestic spending and faltering external demand.

Global Markets

Global stocks are poised to end the week with slight gains, as investors turned their attention to (1) the US jobs report for clues about the Federal Reserve’s policy direction and (2) Beijing’s attempts to revive the troubled real estate sector. As of the time of writing, US equities (DJIA: -0.4%; S&P 500: +0.8%) were mixed as investors digested softer jobless claims data and lower-than-expected ADP private payroll figures. On the contrary, European equities (STOXX Europe: +0.7%; FTSE 100: +1.0%) extended recent gains as investors reacted positively to indications of increased stimulus measures from Beijing and improved Euro zone Manufacturing PMI data. Meanwhile, Asian markets (Nikkei 225: +0.6%; SSE: -2.2%) were mixed as investors assessed the latest batch of economic reports from China while exercising caution ahead of US employment data that could influence potential rate hikes. Finally, the Emerging (MSCI EM: +0.7%) market index closed higher, supported by the gain in Taiwan (+0.6%), while the Frontier (MSCI FM: -0.5%) market index declined following bearish sentiments in Morocco (-0.6%).

Nigeria

Domestic Economy

According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions on the local bourse rose further by 72.8% m/m to NGN702.99 billion in July (June: NGN406.76 billion) – the highest print since at least 2013. Domestic investors primarily drove the increase in the review period, with domestic transactions (94.2% of market transactions) rising by 83.5% m/m to NGN662.45 billion (June: NGN361.02 billion). Meanwhile, foreign transactions (5.8% of gross transactions) declined by 11.4% m/m to NGN40.54 billion in July (June: NGN45.74 billion) as the government’s reform momentum slowed, dampening foreign sentiments. We expect domestic investors to continue to dominate the domestic equities market over the short-to-medium term, even as higher FI yields may constrain buying activities. Simultaneously, while foreign investors will likely continue to adopt a wait-and-see approach in the near term, we expect to see improvement in foreign participation over the medium term. Our medium-term expectation is hinged on the expectations of positive policy pronouncements and reforms by the current administration, undoing the policy mistakes of the past eight years.

According to the data obtained from FMDQ, total inflows into the Investors & Exporters Window (IEW) declined for the second consecutive month, falling by 17.0% m/m to USD679.60 million – the lowest level since October 2022 (USD676.80 million). The breakdown provided showed that inflows declined across the domestic and foreign sources. Specifically, local inflows (93.1% of total inflows) declined by 16.8% m/m to USD633.00 million, primarily due to the decline in inflows from exporters (-35.9% m/m) and non-bank corporates (-37.0% m/m). Similarly, inflows from foreign sources remained underwhelming, declining further by 19.5% m/m to USD46.60 million (June: USD57.90 million) as foreign investors remained cautious about returning in droves despite the FX market liberalisation, as FX backlogs remain uncleared. Looking ahead, we expect FX liquidity conditions to remain frail in the near term. We also anticipate weak foreign inflows in the short term, as foreign investors will likely adopt a wait-and-see approach in the near term as they await the CBN’s actions in clearing its FX backlogs and the direction of short-term interest rates amid high inflation.

Capital Markets

Equities

The local bourse extended its bullish momentum for the second consecutive week, primarily driven by the gains in BUAFOODS (+9.1%), DANGCEM (+2.7%) and DANGSUGAR (+27.4%). Thus, the All-Share index closed the week 3.0% higher at 67,527.19 points, pushing the Year-to-Date gain to +31.8%. Similarly, activity levels mirrored the market’s broad gauge, as the total trading volume and value grew by 38.5% w/w and 12.0% w/w, respectively. Likewise, sectoral performance was largely bullish following gains in the Consumer Goods (+7.6%), Oil and Gas (+5.4%), Banking (+5.1%), Industrial Goods (+2.0%) and Insurance (+0.8%) indices.

We anticipate mixed sentiments in the week ahead, as investors continue to cherry-pick fundamentally sound stocks based on recent corporate actions. However, we acknowledge the possibility of profit-taking activities on stocks that have experienced notable appreciation in recent weeks. Notwithstanding, we opine that investors should seek trading opportunities in fundamentally sound stocks as the weak macroeconomic environment remains a significant headwind to corporate earnings.

Money market and fixed income

Money market

This week, the overnight (OVN) rate declined significantly by 22.8% to 2.4% as the inflows from FAAC disbursements (NGN591.62 billion) and OMO maturities (NGN40.00 billion) were sufficient to outweigh the week’s CRR debits (c.NGN250.00 billion). Accordingly, the average system liquidity settled at a net long position of NGN286.55 billion (vs. a net short position of NGN203.48 billion in the previous week).

Barring any significant inflows into the financial system to sustain the current liquidity levels next week, we believe the OVN rate will trend upward from current levels.

Treasury bills

Activities in the T-bills secondary market this week were bullish as ample liquidity in the system drove participation. As a result, the average yield across all instruments contracted by 48bps to 7.9%. Across the market segments, the average yield declined by 63bps to 7.6% at the NTB segment, but expanded by 219bps to 13.4% in the OMO segment of the secondary market.

We envisage higher yields in the Treasury bills secondary market in the coming week, as the low inflows into the financial system will likely weaken demand for bills. Nonetheless, we expect market focus to be shifted to the NTB PMA holding on Wednesday (06 September), where the CBN is scheduled to roll over NGN214.74 billion worth of maturities.

Bonds

The FGN bonds secondary market turned bullish this week as investors cherry-picked bonds with attractive yields. As a result, the average yield dipped by 4bps to 14.1%. Across the benchmark curve, the average yield was flat at the short end, but declined at the mid (-3bps) and long (-5bps) segments following buying interests in the APR-2029 (-12bps) and JUL-2034 (-34bps) bonds, respectively.

We expect yields in the FGN bond secondary market to remain elevated in the medium term, driven by the sustained imbalance in the demand and supply dynamics. However, we highlight that deliberate actions by the DMO to keep borrowing costs moderate remains a downside factor.

Foreign Exchange

Nigeria’s FX reserves recorded its first accretion after sixteen consecutive weeks of decline, as the gross FX reserves increased by USD224.39 million w/w to close at USD33.95 billion (31 August). In the same vein, the naira appreciated by 5.1% to NGN740.38/USD at the I&E window (IEW), with total turnover at the window (as of 31 August 2023) decreasing by 12.1% WTD to USD367.47 million, as trades were consummated within the NGN701.00 – NGN800.00/USD band. In the Forwards market, the naira rates recorded for the 1-month (-0.1% to NGN791.85/USD), 3-month (-0.3% to NGN812.06/USD, 6-month (-0.6% to NGN842.73/USD), and 1-year (-1.2% to NGN907.97/USD) contracts decreased.

While we understand that the NNPC’s crude repayment facility with the African Export-Import (AFREXIM) bank may have been put on hold, we highlight that there have been no further positive news flows regarding other measures to stem the slide of the naira. The preceding, in addition to the lingering low crude oil production and foreign investors remaining on the sidelines, are expected to weigh on FX supply in the near term. Consequently, we expect FX liquidity constraints to linger in the short term, ensuring the local currency pressures remain intact.