According to the United States Department of Labor, the initial jobless claims in the US declined by 24,000 to 209,000 in the week ending 18 November (vs. the week ending 11 November: 233,000), coming in below market expectation of 225,000. For us, the jobs data print highlights that the US job market remains tight, despite reduced labour demand and recent reports of layoffs among large companies. Notably, continuing claims for unemployment insurance settled at 1.84 million in the week ending 11 November. On a 4-week moving average, the initial jobless claims declined by 750 to 220,000 (vs week ending 18 June: 220,750).While we expect the labour market to remain solid in the near term, we believe the full effect of tight financial conditions will likely pose key downside risks to the labour market over the rest of the year, especially as signs of cooling job numbers are emerging. Nonetheless, the resilient economy and still tight labour market reinforces the view that the US Fed is likely to maintain interest rates at restrictive levels. Accordingly, the CME FedWatch Tool currently indicates a 99.5% probability that the Fed will keep the key policy rate unchanged in the December policy meeting.

In the United Kingdom (UK), private sector activity rose above the 50-point threshold in November after three consecutive months in the contractionary territory. According to S&P Global /CIPS, the Composite PMI settled higher at 50.1 points in November (October: 48.7 points), driven by expansion in the Services sector, amid a softer downturn in factory activities. Consequently, the Services PMI (50.5 points vs October: 49.5 points) returned to growth, benefiting from the pause in interest rate hikes and improving business conditions. At the same time, factory activities, as measured by the Manufacturing PMI (46.7 points vs October: 44.8 points), settled at a 6-month high, though still subdued as the weak demand and unfavourable domestic economic conditions dampened production volumes. While we anticipate the Services sector will continue to support overall private sector activity in the near term, we expect the economy to remain pressured by (1) sticky inflation, (2) lingering downward pressure on demand, and (3) a  weak economic outlook.

Global Equities

Major stock market indices across the globe experienced a sluggish week, partly due to the Thanksgiving holiday observed in the US and Japan. However, hopes that the global economy will achieve a ‘soft landing’ despite elevated interest rates continued to support overall market sentiment. Despite the shortened trading week, US equities (DJIA: +0.9%; S&P 500: +0.9%) were positively influenced by (1) expectations that the Federal Reserve might conclude its interest rate hiking cycle and (2) positive reactions to Nvidia’s earnings report. Meanwhile, European equities (STOXX Europe: -0.3%; FTSE 100: +0.6%) traded with mixed sentiments, as weak GDP data from Germany which showed a contraction offset improved Eurozone factory data. Similarly, Asian markets (Nikkei 225: +0.1%; SSE: -0.5%) posted mixed performances, tracking Wall Street’s gains amid profit-taking activities on major Chinese property developers’ shares. In Emerging (MSCI EM: +1.2%) and Frontier (MSCI FM: +0.2%) markets, positive sentiments in India (+0.4%) and Morocco (+0.2%) contributed to gains, respectively.

Nigeria

Domestic Economy

According to the recently released data from the National Bureau of Statistics (NBS), the domestic economy maintained its growth trajectory, as real GDP grew by 2.54% y/y in Q3-23 (Q2-23: +2.51% y/y). Analyzing the breakdown provided, we highlight that the decline in the oil sector (-0.85% y/y vs Q2-23: -13.43% y/y) moderated given higher crude oil production volumes (1.43mb/d vs Q2-23: 1.39mb/d | Q-22: 1.21mb/d). Simultaneously, the non-oil sector (+2.75% y/y vs Q2-23: +2.75% y/y) maintained its positive trend, albeit at a moderated pace due to ongoing challenges related to the government’s reform initiatives. Thus, growth slowed across the Trade (+1.53% y/y vs Q2-23: +2.41% y/y), Agriculture (+1.30% y/y vs Q2-23: +1.50% y/y) and Manufacturing (+0.48% y/y vs Q2-23: +2.20% y/y) sub-sectors, while the Finance & insurance sub-sector (+28.21% y/y vs Q2-23: +26.84% y/y) recorded a relative expansion. We expect crude oil production to settle at 1.41 mb/d in Q4-23 (prior estimate: 1.53mb/d), translating to an oil GDP increase of 14.93% y/y. Likewise, we expect the non-oil sector growth to settle at 2.21% y/y in Q4-23, in line with our growth expectations across the Services, Manufacturing and Agriculture sectors. Overall, we expect growth to print 2.76% y/y in Q4-23 and revise downwards our 2023E growth forecast to 2.62% y/y (Previously: 2.92% y/y).

The amount disbursed by the Federation Accounts Allocation Committee (FAAC) to the three tiers of government in November (from the total revenue generated in October) increased marginally by 0.4% m/m to NGN906.96 billion (October: NGN903.48 billion). From the breakdown provided, we understand that this represents 67.4% of the total revenue (NGN1.35 trillion) generated in the month, with the remaining balance spread across (1) NGN53.48 billion cost of collection and (2) NGN386.08 billion allocated to transfers and refunds. We understand that the increased pay-out during the review period was due to a significant increase in receipts from import Duty, Petroleum Profit Tax (PPT), Value Added Tax (VAT), CET Levies, and Electronic Money Transfer Levy (EMTL) while collections from Excise Duties, Companies Income Tax (CIT) and Oil & Gas royalties declined. In the near term, we believe the currency depreciation accompanying the FX market liberalisation will continue supporting oil revenue in naira terms, although low crude oil production may likely ensure oil revenue remains underwhelming relative to pre-pandemic levels. At the same time, we maintain our expectation that the non-oil revenue will continue to support aggregate revenue, given the sustained improvement in economic activities and the impact of the provisions of the 2022 Finance Act.

Capital Markets

Equities

Like the global stock market, the local bourse faced subdued momentum as investors traded cautiously. However, despite concerns about the inconsistencies in the Monetary Policy Committee (MPC) meetings, especially with the postponement of this week’s meeting, the market closed in the green, overcoming pressure from profit-taking activities during the week. Notably, the All-Share Index rose by 0.2% w/w to 71,230.48 points, driven by buying interest in GTCO (+5.4%) and ZENITHBANK (+3.9%), which outweighed profit-taking activities in STANBIC (-7.1%). As a result, the Month-to-Date and Year-to-Date returns settled at +2.9% and +39.0%, respectively. In terms of trading activity, the total traded volume rose by 20.0% w/w while the total value traded declined by 18.0% w/w. From a sectoral viewpoint, the Insurance (+4.1%) and Banking (+1.9%) indices advanced while the Consumer Goods (-0.5%) index declined. Conversely, the Oil and Gas and Industrial Goods closed flat.

We anticipate cautious trading in the local stock market in the coming week due to the absence of significant positive catalysts to boost sentiments. Overall, we reiterate the need for positioning in only fundamentally sound stocks as the unimpressive macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

This week, the overnight (OVN) rate expanded by 238bps to 24.6%, as debits for net NTB issuances (NGN350.00 billion) offset the inflows from FGN bond coupon payments (NGN17.87 billion). However, the average system liquidity settled at a net long position of NGN341.67 billion (vs a net long position of NGN17.31 billion in the prior week), highlighting the impact of banks’ lending from the CBN’s Standing Lending Facility (SLF).

Next week, we expect the inflows from FAAC allocation (NGN583.60 billion) and FGN bond coupon payments (NGN5.63 billion) to support system liquidity. Hence, barring any significant outflows, we anticipate the OVN rate will likely trend downwards, albeit still at double-digit levels.

Treasury bills

Proceedings in the Nigerian Treasury bills secondary market remained bullish this week, as the average yield contracted by 206bps to 10.9%. Notably, this week’s performance is attributable to the combined impact of (1) the improved system liquidity and (2) market participants moving to the secondary market to compensate for lost bids at Wednesday’s NTB PMA. Across the market segments, the average yield declined by 225bps to 10.5% in the T-bills secondary market and contracted by 4bps to 14.7% in the OMO segment. At this week’s NTB auction, the DMO offered bills worth NGN211.71 billion – NGN9.96 billion of the 91-day, NGN1.82 billion of the 182-day, and NGN199.93 billion of the 364-day – to market participants. Demand at the auction settled higher at NGN1.23 trillion (previously: NGN875.79 billion | bid-to-offer: 5.8x), especially for the 364-day bill (NGN1.21 trillion | 98.2% of the total subscription). Eventually, the DMO over-allotted across all tenors with total sales of NGN561.71 billion – NGN11.96 billion for the 91-day, NGN9.30 billion for the 182-day, and NGN540.45 billion for the 364-day – at respective stop rates of 8.00% (previously: 7.00%), 12.00% (previously: 11.00%), and 16.75% (previously: 16.75%).

We envisage sustained demand in the NTB secondary market next week, supported by our expectation of a buoyant system liquidity. Thus, we expect yields to maintain the current downward trend.

Bonds

This week, sentiments in the FGN bonds secondary market were bearish, as the average yield across all instruments expanded by 18bps to 15.9%. Across the benchmark curve, the average yield contracted at the short end (-38bps) due to demand for the MAR-2024 (-193bps) bond but advanced at the mid (+54bps) and long (+22bps) segments, following the profit-taking activities on the APR-2029 (+57bps) and JUL-2035 (+58bps) bonds, respectively.

Over the short term, we expect higher yields in the FGN bonds secondary market, driven by the sustained imbalance in the demand and supply dynamics.

Foreign Exchange

Nigeria’s FX reserve maintained its downward trend as the gross reserves declined by USD98.78 million w/w to close at USD33.20 billion (23 November). Elsewhere, the naira depreciated by 0.4% to NGN794.89/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM), with the total turnover (23 November 2023) at the market decreasing by 27.4% WTD to USD610.99 million, as trades were consummated within the NGN600.00 – NGN1136.00/USD band. In the Forwards market, the naira recorded depreciation across the 1-month (-5.1% to NGN911.07/USD), 3-month (-5.5% to NGN941.38/USD), 6-month (-6.9% to NGN984.57/USD) and 1-year (-5.0% to NGN1,028.36/USD) contracts.

Looking ahead, we expect FX liquidity conditions to remain tight, pending on the receipt of the expected FX inflows. Thus, we expect the pressure on local currency to persist in the near term. Nonetheless, we expect foreign investors to keenly watch the development in the FX space with regards to the (1) expected FX inflows as guided by the authorities, (2) CBN’s recent actions in clearing its FX backlogs, and (3) firm direction of short-term interest rates.