According to the United States Department of Labor, initial jobless claims increased slightly by 1,000 to 220,000 in the week ending 2 December (vs. the week ending 25 November: 219,000). We highlight that the increase suggests a marginal loss of momentum in the labour market as the number of job openings decelerated further. On a non-seasonally adjusted basis, notable increases were recorded across California (+14,057), New York (+9,343), Texas (+7,698), and Pennsylvania (+5,257), while the most significant declines were recorded in Kansas (-795) and Delaware (-399). On a 4-week moving average, we highlight that the initial jobless claims increased by 500 to 220,750 (vs week ending 25 November: 220,250). At the same time, the continuing claims for unemployment insurance declined by 64,000 to 1.86 million in the week ending 25 November. We believe that the data prints reflect the influence of the Fed’s actions on the overall economy. However, it’s pertinent to note that labour market conditions remain tight compared to historical standards, reinforcing the view that the Fed may maintain interest rates at restrictive levels. Accordingly, the CME FedWatch Tool currently indicates a 97.7% probability that the Fed will keep the key policy rate unchanged at the December 13 policy meeting.

According to the flash estimates from S&P Global, the United Kingdom’s (UK) overall private sector activity, as measured by the Composite PMI, rose above the 50-point benchmark in November after three consecutive months in the contractionary territory. The Composite PMI settled higher at 50.7 points in November (October: 48.7 points), supported by a broad-based expansion across both the service sector and in factory activities. On one hand, the Services PMI (50.9 points vs October: 49.5 points) was boosted by increased demand and improvement in business optimism. On the other hand, the Manufacturing PMI (47.2 points vs October: 44.8 points) rose to the highest level in eight months although it remained in the negative region mainly due to the subdued domestic demand. We expect the UK’s private sector to remain resilient, in line with the renewed business optimism that will likely foster growth in the broader economy. At the same time, we highlight notable headwinds to factory activities in the near term which may arise from weak domestic demand and operational capacity amidst escalating job losses.

Global Equities

Mixed sentiments dominated global equities following fears over (1) a slowing US economy, (2) Chinese economic growth, (3) Japanese monetary policy, and (4) worries that the recent surge in stocks may be overdone. Accordingly, US equities (DJIA: -0.4%; S&P 500: -0.2%) traded with mixed sentiments following recent labour market data (ADP payroll) signalling a slowdown in the US economy. Simultaneously, European equities (STOXX Europe: +0.6%; FTSE 100: -0.2%) posted mixed performances mirroring the downbeat global sentiment amid prospects that declining inflation and slow economic growth should prompt central banks to lower interest rates in the medium term. Elsewhere, Asian markets (Nikkei 225: -3.4%; SSE: -2.0%) closed lower, with investors paying close attention to statements from Bank of Japan (BoJ) officials hinting a potential departure from the negative interest-rate policy sooner than anticipated. Adding to the gloom, Moody’s widespread downgrade of the outlook for several prominent Chinese companies, aligning with its slash of the outlook on the Chinese government’s credit rating and 22 local government financing vehicles (LGFVs), further contributed to the risk-off sentiments. Lastly, the Emerging (MSCI EM: -1.2%) market declined, fueled by bearish sentiments in China (-2.0%), while the Frontier (MSCI FM: +0.1%) market closed higher, buoyed by the bullish performance of Vietnam (+1.9%).

Nigeria

Domestic Economy

According to the recently released trade report by the National Bureau of Statistics (NBS), total exports increased by 74.4% y/y in Q3-23 to NGN10.35 trillion (Q3-22: NGN5.93 trillion | Q2-23: NGN6.44 trillion), supported by growth across the components of the country’s exports. Notably, crude oil exports (82.5% of total exports) grew by 83.2% y/y in line with higher crude oil production (1.43mb/d vs Q3-22: 1.21mb/d), amid volatility in oil prices in the quarter. Meanwhile, total imports grew by 33.3% y/y to NGN8.46 trillion in Q3-23 (Q2-23: 10.4% y/y) driven by increased domestic demand despite lingering FX challenges. Consequently, Nigeria’s trade balance maintained its surplus position for the fourth consecutive quarter, increasing to NGN1.89 trillion in Q3-23 (vs deficit of NGN409.39 billion in Q3-22). Looking ahead, we expect the significant FX depreciation, and improvement in crude oil production to continue to support Nigeria’s crude oil export outturn in the short term. At the same time, we anticipate the increased domestic demand to fuel total import growth. Overall, we believe the trade balance will stay in a surplus position in the near term.

According to the Central Bank of Nigeria (CBN), credit to the private sector (CPS) increased by 44.6% y/y to NGN58.60 trillion in September (September 2022: NGN40.51 trillion). Pertinently, we highlight that the CPS grew by an average of 27.1% y/y to NGN48.48 trillion as of 9M-23 (9M-22: NGN38.15 trillion). We believe the continuous increase in CPS reflects the impact of (1) CBN’s enforcement of the 65.0% loan-to-deposit ratio, and (2) improved domestic macroeconomic conditions compared to 2022FY. On a month-on-month basis, the CPS increased by 4.7% in September (August 2023: NGN55.98 trillion). That said, the broad money supply grew by 36.2% y/y to NGN67.18 trillion in line with increases recorded across narrow money supply (19.6% y/y) and quasi money (45.9% y/y). Over the short to medium term, we expect that the improvement of domestic economic activities and the re-enforcement of the CBN’s limit on the loans-to-deposits (LDR) macro-prudential ratio for deposit money banks (DMBs) will drive the willingness of commercial banks to create risky assets in the short term. Conclusively, we project that the Credit to Private Sector (CPS) will maintain a double-digit expansion in 2023FY.

Capital Markets

Equities

Despite profit-taking activities during the week, the local stock market edged slightly higher, driven by increased investors’ demand for ACCESSCORP (+12.2%), ETI (+21.4%) and FBNH (+7.7%). The week’s notable highlight was FBNH’s impressive 7.7% gain, which propelled the stock’s market cap to NGN856.10 billion. Accordingly, the All-share Index rose by 0.2% w/w to 71,541.74 points, translating to Month-to-Date and Year-to-Date returns of +0.2% and +39.6%, respectively. Despite the marginal increase in the benchmark index, total traded volume experienced a slowdown, decreasing by 5.0% w/w, while the traded value increased by 16.4% w/w. On a sectoral level, performance was mixed, with gains observed in the Banking (+6.1%) and Consumer Goods (+0.2%) indices, while the Industrial Goods (-3.0%), Insurance (-1.4%), and Oil and Gas (-0.6%) indices declined.

We expect the market to remain mixed in the coming week as investors cherry-pick counters given the absence of any significant positive catalysts. Overall, we reiterate the need for investors to seek positions in only fundamentally justified stocks as the weak macro environment remains a significant headwind for corporate earnings.

Money market and fixed income

Money market

In line with our expectations, the overnight (OVN) rate expanded by 326bps w/w to 19.6%, as the combined impact of net NTB issuances (NGN500.00 billion) and late CRR debits squeezed out the liquidity in the financial system this week. Consequently, the average system liquidity settled lower at a net short position of NGN109.30 billion (prior week: net long position of NGN217.75 billion).

Barring any significant inflows into the financial system next week, we anticipate the OVN rate will remain elevated given further pressure on system liquidity expected from the debits for the December FGN bond PMA (NGN360.00 billion).

Treasury bills

This week, proceedings in the Treasury bills secondary market turned bearish as the average yield across segments advanced by 43bps to 11.3%. We attribute this performance to the tight liquidity conditions this week as demand for bills waned. Across the market segments, the average yield expanded by 51bps to 11.0% at the T-bills segment but contracted by 4bps to 14.6% at the OMO segment. At this week’s NTB auction, the DMO offered bills worth NGN104.36 billion – NGN1.03 billion of the 91-day, NGN1.94 billion of the 182-day, and NGN101.39 billion of the 364-day – to market participants. Demand was higher, especially for the 364-day bill (bid-to-cover: 3.1x), as the total subscription settled at NGN1.76 trillion (previous auction: NGN1.23 trillion). Eventually, the DMO over-allotted across all tenors with total sales of NGN604.36 billion – NGN14.42 billion for the 91-day, NGN28.82 billion for the 182-day, and NGN563.12 billion for the 364-day – at respective stop rates of 9.00% (previously: 8.00%), 13.00% (previously: 12.00%), and 15.75% (previously: 16.75%).

Next week, we envisage yields in the Treasury bills secondary market will maintain its uptrend following our expectation of a tighter system liquidity. In addition, the DMO is scheduled to hold an NTB PMA on Wednesday (13 December), where it will roll over maturities worth NGN13.58 billion.
 
 Bonds

Activities in the FGN bonds secondary market were bullish this week as market players cherry-picked attractive bonds across the curve. Accordingly, the average yield across all instruments declined by 84bps to 14.9%. Across the benchmark curve, the average yield contracted across the short (-64bps), mid (-143bps), and long (-49bps) segments, following investors’ demand for the MAR-2025 (-138bps), APR-2029 (-160bps), and JUL-2034 (-99bps) bonds, respectively.

Next week, we expect the outcome of this month’s FGN bond auction holding on Monday (11 December) 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-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. Over the short term, we expect yields in the FGN bonds secondary market to trend higher, driven by the sustained imbalance in the demand and supply dynamics.

Foreign Exchange

Nigeria’s FX reserves remained pressured this week, declining for the fifth consecutive week by NGN93.70 million w/w to NGN32.88 billion (7 December). Meanwhile, the naira depreciated by 15.6% to NGN1099.05/USD in the Nigerian Autonomous Foreign Exchange Market (NAFEM), with total turnover at the market (as of 07 December 2023) decreasing by 19.5% WTD to USD487.45 million, as trades were consummated within the NGN700.00 – NGN1176.00/USD band. In the Forwards market, the naira depreciated across the 1-month (-3.9% to NGN911.46/USD), 3-month (-5.0% to NGN936.69/USD), 6-month (-7.5% to NGN984.35/USD) and 1-year (-7.5% to NGN1037.79/USD) contracts.

Looking ahead, we expect FX liquidity conditions to remain tight, pending receipt of expected FX inflows. Thus, we expect the pressure on the 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.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.