Preliminary estimates released by the Eurostat showed that consumer prices in the Euro Area maintained their downward trend, easing by 20bps to 2.6% y/y in February (January: +2.8% y/y). Parsing through the breakdown provided, we note that energy costs (-3.7% y/y vs January: -6.1% y/y) declined further, while the core inflation (+3.1% y/y vs January: +3.3% y/y) cooled to its lowest level in 23 months. At the same time, price increases slowed across food, alcohol & tobacco (+4.0% y/y vs January: +5.6% y/y), and non-energy industrial goods (+1.6% y/y vs January: +2.0% y/y) items. On a month-on-month basis, consumer prices rose by 0.6% in February (January: -0.4% m/m). Barring any major shock in the economy, we anticipate consumer prices to maintain their downward trend in March, supported by the weak energy prices and a favourable base effect from last year. Nonetheless, we think the ECB will refrain from contemplating interest rate cuts at the March 7 meeting, as they may likely prioritize monitoring potential pressures arising from wage increases and energy prices. Accordingly, the financial market expects the ECB to implement its first rate cut in the June Policy meeting.

According to the Chinese National Bureau of Statistics (NBS), China’s composite PMI remained steady at 50.9 points in February (January: 50.9 points), as increased activities within the services sector were offset by depressed factory activities. Analyzing the breakdown, the non-manufacturing PMI (51.4 points vs January: 50.7 points) rose to its highest level in 5 months, partly driven by increased travel and tourism demand during the Lunar New Year holidays. Meanwhile, as measured by the manufacturing PMI (49.1 points vs January: 49.2 points), the factory activities moderated marginally, remaining below the 50-point psychological threshold due to persistent weakness in production activities and holiday-related closures in many factories. Consequently, new orders stagnated at 49.0 points (January: 49.0 points) amid further declines in foreign sales (46.3 points vs January: 47.2 points) and employment (47.5 points vs January: 47.6 points). We anticipate that private sector activity will remain in the expansionary territory in the near term, supported by the government’s efforts to shore up the economy. These measures include the recent reduction of the 5-year loan prime rate and relaxation of banks’ reserve requirements to stimulate lending, alongside the expected stimulus initiatives to be unveiled next week. Nonetheless, we think the faltering external demand and lingering real estate wobbles may pose downside risks to growth prospects.

Global Equities

Sentiments in the global equities market were mixed as investors assessed the outlook for the Federal Reserve interest rates following the release of the US personal consumption expenditures index (PCE) report. Meanwhile, optimism over artificial Intelligence (AI) and anticipated stimulus measures lifted sentiments in Asia. As of the time of writing, US equities (DJIA: -0.3%; S&P 500: +0.1%) reversed last week’s gains as investors parsed (1) easing price pressures from the PCE report and (2) jobless claims data for further clues on the strength of the economy and the outlook for interest rates. Elsewhere, European equities (STOXX Europe: -0.2%; FTSE 100: -0.5%) were on course for a weekly loss as investors digested a batch of economic data including the US PCE report, inflation reports from Germany, France and Spain, amidst Eurozone inflation concerns. Meanwhile, Asian markets (Nikkei 225: +2.1%; SSE: +0.7%) remained positive, with the Japanese market driven by tech stock rallies following persistent optimism over AI. Similarly, the Chinese market rose as the weak manufacturing report heightened bets on more robust economic stimulus measures from Beijing next week, supplementing its recent market intervention. The Emerging market (MSCI EM: -0.7%) index declined, led by bearish sentiments in South Korea (-1.0%), while Frontier markets (MSCI FM: -1.3%) followed suit with losses in Romania (-0.2%) and Morocco (-0.4%).

Nigeria

Domestic Economy

At the first meeting of the year, the Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) voted to increase the Monetary Policy Rate (MPR) by 400bps to 22.75%, reflecting the highest level ever recorded for the MPR. We highlight that the rate hike indicates the apex bank’s commitment to ensuring price stability and managing inflation expectations in the near term. In addition, the Committee voted to widen the asymmetric corridor to +100bps/-700bps (previously: +100bps/-300bps), increase the Cash Reserve Requirement (CRR) to 45.0% (previously: 32.5%) and retained the Liquidity ratio at 30.0%. While we acknowledge the Committee’s tight monetary stance to address the elevated inflationary pressures, we think the Committee will likely opt for a “HOLD” decision at its next policy meeting to allow the current adjustments to permeate the economy while awaiting additional macroeconomic data to inform future actions.

According to the Domestic and Foreign Portfolio Report of the Nigerian Exchange (NGX), total transactions in the local bourse rose to a 6-month high in January, increasing by 89.5% m/m to NGN651.52 billion (December 2023: NGN343.90 billion). Analyzing the breakdown, the domestic transactions (91.8% of gross transactions) increased by 102.2% m/m to NGN598.41 billion (December 2023: 296.03 billion), supported by higher accretions from retail (+102.2% m/m) and institutional (+53.0% m/m) investors. At the same time, foreign transactions (8.2% of gross transactions) increased by 11.0% m/m to NGN53.11 billion (December 2023: NGN47.87 billion). We expect domestic investors to continue to dominate the domestic equities market over the short-to-medium term, even as higher fixed-income yields may constrain buying activities. Elsewhere, we believe foreign investors will continue to adopt a cautious stance in the near term, closely monitoring the activities of the apex authorities in improving FX liquidity and ensuring sustainability.

Capital Markets

Equities

The Nigerian equities market lost ground for another week as investors responded unfavourably to the Monetary Policy Committee’s (MPC) meeting outcome. Specifically, there was a notable sell-off on Tuesday (-1.4%), intensified by the MPC’s announcement of a record-high MPR of 22.75% (+400bps). Despite attempts by investors to capitalize on the market’s downturn later in the week, the gains were insufficient to offset the losses. Accordingly, sell pressures on MTNN (-18.9%) and BUACEMENT (-10.0%) triggered a 3.3% w/w decline in the All-Share Index to 99,765.90 points. Consequently, the MTD and YTD returns settled at +0.1% and +38.0%, respectively. Activity levels were positive as trading volume and value increased by 36.7% w/w and 8.1% w/w, respectively. Sectoral performance was broadly negative, following losses in the Industrial Goods (-3.9%), Insurance (-3.4%), Consumer Goods (-2.6%), Oil and Gas (-1.6%), and Banking (-0.7%) indices.

In the near term, we anticipate cautious trading from domestic investors in response to the recent interest rate decision by the MPC and the uninspiring corporate earnings released thus far.

Money market and fixed income

Money market

The overnight (OVN) rate expanded by 244bps w/w to 28.2%, despite the inflow from FAAC allocations (NGN742.54 billion). However, the average system liquidity closed higher at a net long position of NGN642.18 billion (vs a net long position of NGN373.34 billion in the prior week), highlighting the impact of DMBs’ usage of CBN’s SLF window (Average for the week: NGN464.70 billion).

Next week, we anticipate the system liquidity might come under pressure following a possible net NTB issuances at the Wednesday auction. Hence, we envisage an increase in the OVN rate.

Treasury bills

The Treasury bills secondary market closed on a bearish note this week, as the average yield across all instruments expanded by 49bps to 17.4%. We attribute this week’s performance to a dampened interest in bills as market players took profits off positions across mid- and long-dated instruments. Across the market segments, the average yield advanced by 57bps to 17.2% in the NTB segment and increased by 19bps to 18.0% in the OMO secondary market.

We anticipate an upward movement of yields in the T-bills secondary market in the coming week, following our expectation of a liquidity squeeze. In addition, the CBN is scheduled to hold an NTB PMA on Wednesday (07 March) where it expected to rollover maturing bills worth NGN337.89 billion.

Bonds

Similarly, trading in the Treasury bonds secondary market was bearish as investors reacted to the 400bps hike in the MPR earlier in the week. As a result, the average yield advanced by 45bps to 17.3%. Across the benchmark curve, the average yield expanded at the short (+46bps), mid (+85bps), and long (+25bps) segments due to sell-off activities on the MAR-2027 (+109bps), APR-2032 (+197bps), and JUL-2034 (+63bps) bonds, respectively.

Given 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 remain elevated over the short term.
 
Foreign Exchange

Nigeria’s FX reserves improved further as gross reserve level increased by USD200.45 million w/w to USD33.72 billion (29 February). Also, the naira appreciated by 7.6% to NGN1,548.25/USD at the Nigerian Autonomous Foreign Exchange Market (NAFEM). This week, the CBN commenced the weekly sale of USD20,000.00 to each of the 1,368 eligible BDCs with allowable spread capped at 1.0% of the purchase price. At the NAFEM, total turnover (as of 29 February 2024) declined by 16.3% WTD to USD787.28 million, with trades consummated within the NGN1,300.00 – NGN1,778.25/USD band. In the Forwards market, the naira appreciated at the 1-month (+0.1% to NGN1,581.73/USD) contract, but depreciated at the 3-month (-0.2% to NGN1,621.98/USD), 6-month (-0.3% to NGN1,678.95/USD) and 1-year (-0.5% to NGN1,803.18/USD) contracts.

Notwithstanding the recent policy actions by the CBN, the currency has remained under pressure given that the market supply remains frail. We are encouraged by the pace of reforms within the market as well as the renewed interventions by the apex bank. In our view, (1) following through with recently implemented reforms alongside (2) continued efforts to clear the FX backlog may lead to improved liquidity over the medium-term.