Factory activities in the United States (US) signaled a resilient upturn at the start of the year, surpassing the 50-point psychological threshold for the first time in nine months. According to flash estimates from S&P Global, the Manufacturing PMI rose to 50.7 points in January (December 2023: 47.9 points), marking the highest level since September 2022 (52.0 points). We highlight that the improved reading was supported by the renewed expansion in new orders and a slower decline in output. At the same time, the Services PMI came in at 52.5 points (December 2023: 51.4 points) primarily facilitated by improved domestic demand conditions in the period. Overall, the Composite PMI printed 52.0 points (December 2023: 50.9 points) – its highest level in seven months, given the improvement in factory and business activities. We anticipate that overall private sector activities in the US will remain in the expansionary territory over the short term. Our view is premised on the expectation that business confidence will rise due to revitalized momentum in domestic demand and the anticipation of lower inflation in 2024.

According to the recently released data by the National Bureau of Statistics, consumer prices in China declined by 0.8% y/y in January (December: -0.3% y/y) – reflecting the fourth consecutive month of deflation and the lowest level of price decline since October 2009 (-0.81% y/y). Analyzing the breakdown, food prices (-5.9% y/y vs December 2023: -3.7% y/y) remained subdued primarily due to a 17.3% y/y contraction in pork prices. Simultaneously, core inflation moderated to 0.4% y/y (December 2023: +0.6% y/y) following weaker transport and healthcare costs. Meanwhile, on a month-on-month basis, headline inflation increased by 0.3% (January: +0.1% m/m). We highlight that the deflationary pressures remain a significant risk to China’s growth prospects amid (1) subdued domestic demand, (2) persistent property market wobbles, and (3) a local debt crisis. Despite the Chinese central bank’s commitment to intensifying macroeconomic policy adjustments to bolster the economy and stimulate a resurgence in prices, we remain cautious about the prospects for the economy.

Global Equities

Sentiments were broadly positive in the global equities market as investors digested the latest batch of earnings updates and continued to assess the potential actions of global central banks regarding interest rates, while awaiting the revised US inflation print due later today (9 February). Accordingly, US equities (DJIA: +0.2%; S&P 500: +0.8%) edged up, supported by positive earnings, most notably from entertainment giant, Walt Disney. European equities (STOXX Europe: +0.3%; FTSE 100: -0.3%) remained mixed as higher bond yields offset positive reactions to strong corporate earnings. In contrast, Asian markets (Nikkei 225: +2.0%; SSE: +5.0%) recorded positive performances, attributable to (1) the weaker yen and robust earnings in Japan and (2) reports of increased purchases of ETFs linked to Chinese stocks by a sovereign fund to support the market. These actions come in the wake of additional support measures implemented by Chinese policymakers in recent weeks, including reductions in reserve requirements for banks and stricter regulations on short sales. The Emerging market (MSCI EM: +0.9%) index closed higher, led by the positive sentiments in China (+5.0%), while the Frontier market (MSCI FM: -0.2%) index settled lower due to losses in Iceland (-1.7%).

Nigeria

Domestic Economy

In its January Global Economic Prospects report, the World Bank projected that the Nigerian economy will grow by 3.3% y/y in 2024E (2023E: +2.9% y/y). We understand that the growth expectation is hinged on the expected performances of the agriculture, construction, services and trade sectors. In its outlook for Nigeria, the World bank also noted that the consumer price levels would ease in 2024 as the effects of last year’s exchange rate reforms and PMS subsidy removal fade. Also, the World bank expects an increase in Nigeria’s fiscal revenue, influenced by last year’s structural reforms. In 2025E, Nigeria is expected to grow at a faster pace (+3.7% y/y), with the baseline forecast implying that per capita income will reach its pre-pandemic level in 2025. Our expectations for Nigeria’s growth is in line with the World Bank’s, as we project a full year growth of 3.32% y/y in 2024E predicated on (1) gradual phasing out of the current impact of PMS subsidy and FX reforms on the non-oil sector, (2) higher crude oil production relative to 2023 levels amid supportive oil prices, (3) FX supply improvement in line with the authorities’ expectations of FX inflows from arrangement with international banks, and (4) anticipated disinflationary trend in H2-24.

S&P Global has affirmed Nigeria’s long and short-term foreign and local currency sovereign credit ratings at “B-/B” with a stable outlook. Additionally, the ratings agency maintained its “ngBBB+/ngA-2” long and short-term national scale ratings for Nigeria. This decision reflects confidence in the government’s ability to sustain its reform agenda, which is expected to bolster economic growth and fiscal outcomes, despite challenges such as below-potential oil production, risks to macroeconomic stability and confidence stemming from inflationary pressures and currency volatility. However, S&P Global cautioned that the current rating could be lowered over the next 12 months if certain risks materialise, including (1) the government’s capacity to meet commercial obligations, (2) a reduction in usable foreign exchange reserves, (3) significantly higher fiscal deficits or debt-servicing needs, and (4) a lack of willingness of domestic financial markets to absorb additional local currency debt issuance. Our medium-term expectation is for Nigeria’s credit ratings to improve further given the present administration’s reforms. However, we highlight the strong risk of policy backtrack, considering the socio-economic challenges involved in reform implementation, which could trigger downgrades on the current outlook.

Capital Markets

Equities

Local stocks recorded the sharpest weekly decline (-2.5% w/w) since the beginning of the year due to increased profit-taking activities on most trading days this week, save for the last trading day, as investors shifted their focus to the fixed-income market in pursuit of higher yields. As a result, the All-Share Index closed at 101,858.37 points, with the most significant impact from sell pressures witnessed on BUACEMENT (-10.0%) and MTNN (-5.2%). Consequently, the MTD and YTD returns moderated to +0.7% and +36.2%, respectively. Activity levels were weak, as trading volume and value decreased by 36.8% w/w and 49.7% w/w, respectively. Sectoral performance was bearish as the Banking (-6.9%), Industrial Goods (-4.2%), Insurance (-1.5%), Oil and Gas (-0.4%), and Consumer Goods (-0.1%) indices declined.

We expect the weak sentiments that dominated the local bourse this week to persist in the week ahead as investors continue to scale down exposure to equities amidst expectations of a continued uptick in fixed income yields.

Money market and fixed income

Money market

Contrary to our expectations, the overnight (OVN) rate contracted to 17.0% (-420bps w/w), despite the debits for net NTB issuance (NGN582.94 billion) amid the apex banks’ termination of daily CRR debits (to normalise the CRR management mechanism). However, DMBs’ participation at the CBN’s SLF window supported system liquidity as the average system liquidity closed higher at a net long position of NGN243.23 billion (vs. a net long position of NGN133.10 billion in the previous week).

Barring any significant inflows to boost the financial system next week, we anticipate the OVN rate will likely maintain current elevated levels.

Treasury bills

Bearish sentiments continued to dominate the Treasury bills secondary market this week, as the average yield across all market segments expanded by 626bps to 15.9%. Across the market segments, the average yield advanced by 569bps to 15.4% in the T-bills secondary market and inched higher by 830bps to 17.9% in the OMO segment. We attribute this week’s negative performance to (1) sell-offs induced by the CBN’s revised NTB auction calendar on Monday to record-high levels, and (2) the significantly higher yields at the end of the Wednesday PMA filtering into the secondary market. At the primary auction, the CBN revised the auction offer to NGN1.00 trillion – NGN200.00 billion of the 91-day, NGN200.00 billion of the 182-day, and NGN600.00 billion of the 364-day bills – from the NGN417.06 billion previously announced. The auction was keenly contested as the total subscription settled higher at NGN1.98 trillion (bid-to-offer: 2.0x). Eventually, the CBN allotted exactly what was offered – at respective stop rates of 17.24% (previously: 5.00%), 18.00% (previously: 7.15%), and 19.00% (previously: 11.54%).

Given our expectation of no significant liquidity influx to drive demand in the Treasury bills secondary market, we expect yields to notch higher next week.

Bonds

Trading in the Treasury bonds secondary market maintained its bearish trend as market players exited short positions following hints from the CBN Governor about potential increases in short-term interest rates. As a result, the average yield increased by 72bps to 15.5%. Across the benchmark curve, the average yield expanded across the short (+127bps), mid (+30bps), and long (+78bps) segments due to the profit-taking activities on the MAR-2024 (+471bps), JUN-2033 (+118bps) and APR-2034 (+227bps) bonds, respectively.

Based on our analysis of the factors expected to influence market direction in 2024E, including (1) expected money policy administration globally and domestically, and (2) sustained imbalance in the demand and supply dynamics, we anticipate yields in the FGN bonds secondary market will trend upwards over the short term.

Foreign Exchange

This week, Nigeria’s FX reserves weakened further as the gross reserves level declined by USD182.02 million w/w to close at USD33.17 billion (05 February 2024). Similarly, the naira depreciated by 2.3% NGN1,469.97/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM). At the NAFEM, total turnover (as of 08 February 2024) increased by 66.7% WTD to USD2.18 billion – following banks complying with the new macroprudential limit for net open positions amid the CBN removing restrictions on IMTOs exchange rate quotes, interbank FX deal spreads and interbank sale of proceeds – as trades were consummated within the NGN830.00 – NGN1,550.00/USD range. In the Forwards market, the naira rates across the 1-month (-2.5% to NGN1,467.81/USD), 3-month (-2.7% to NGN1,501.75/USD), 6-month (-2.6% to NGN1,544.63/USD), and 1-year (-3.9% to NGN1,643.94/USD) contracts were higher.

While we expect the pressure on the local currency to persist, we believe the CBN’s updated policy on limiting banks’ foreign currency exposure will continue to support turnover in the NAFEM and improve supply to the market over the short-term. Also, with significant gains made with regards to addressing the FX backlog – the CBN governor noted at the start of the week that the backlog had been reduced to USD2.20 billion – the potential for a more stable FX market seems possible. However, we do not expect to see meaningful appreciation of the currency until the apex authority ensures (1) the backlog is completely cleared, (2) policy actions are further aligned to be frictionless, (3) the frictionless policy actions are sustained, and (4) it builds capacity to intervene within the market to limit volatility during periods of pressure.