Global Economy

Japan’s core consumer inflation decreased for a third consecutive month in January 2024, reaching 2.00% YoY, ahead of market estimates but remaining in line with the central bank’s 2% target, according to Japanese e-Stat earlier this week. The emergence of wage-driven inflation factors outweighing cost-push drivers of prices would further boost anticipation of an end to the country’s eight-year negative rate policy. On a separate note, China’s manufacturing activity declined in February 2024 for the fifth consecutive month, according to data from the Chinese National Bureau of Statistics. With a significant decline in the output component, the official manufacturing purchasing managers’ index (PMI) dropped from 49.2 points in January 2024 to 49.1 points in February 2024. It was less than the 50-point threshold that divides expansion from contraction. China’s official manufacturing PMI has been declining since March 2023, barring September 2023. On the other hand, because of strong activity over the Lunar New Year holidays, the official non-manufacturing PMI, which covers services and construction, increased to 51.4 points in February 2024 from 50.7 points in January 2024, the highest figure since September 2023.

Domestic Economy

Earlier this week, the Monetary Policy Committee (MPC) conducted its 293rd meeting and decided to raise the Monetary Policy Rate (MPR) by 400bps, reaching a historic 22.75%, up from the previous rate of 18.75% set in July 2023. Additionally, the Committee increased the Cash Reserve Ratio (CRR) from 32.50% to 45% and modified the asymmetric corridor to +100/-700 basis points around the MPR, while keeping the Liquidity Ratio unchanged at 30%. Furthermore, the Central Bank of Nigeria, amid ongoing foreign exchange reforms, addresses retail market distortions by approving the sale of USD20,000 to eligible Bureau De Change (BDCs) at NGN1,301/USD. BDCs can sell to end-users with a maximum of 1% margin above the CBN rate. Payments are to be made in Naira to designated CBN accounts for disbursement at specified branches in Abuja, Awka, Lagos, and Kano. Likewise, CBN discussed key points during a Foreign Portfolio Investor (FPI) call, emphasizing plans to increase Open Market Operation (OMO) auctions, raise rates at primary market auctions, refund banks with high CRR, stabilize the exchange rate through BDC, clear FX backlogs, and prioritize a robust FX market for foreign investors. Overall, the CBN committed to addressing inflation, and ensuring liquidity for foreign investors’ entry and exit.

Equities and stock recommendation

This week, bearish sentiment pervaded the Nigerian equities market, as it lost in four (4) out of five (5) trading days of the week. Consequently, the NGX All Share Index (ASI) shed 3.27% WoW to settle at 98,751.98 points, pushing the market’s year-to-date (YtD) returns farther down to 32.07% (vs. last week: 36.53% YtD). We also observed negative sentiment in all sectors under our coverage, with the Industrial Goods sector (-3.87% WoW) losing the highest followed by the Insurance (-3.40% WoW), Consumer Goods (-2.62% WoW), Oil and Gas (-1.55% WoW) and Banking (-0.69% WoW) sectors. The poor performance across sectors can be linked to weak 2023FY earnings results that were released during the week. The top gainers for the week include PZ (+22.4% WoW to NGN33.75), STERLINGNG (+14.9% WoW to NGN5.00) and FTNCOCOA (+10.7% WoW to NGN1.65), while MTNN (-18.9% WoW to NGN200.70), NESTLE (-18.2% WoW to NGN900) and ETERNA (-10.8% WoW to NGN15.65) topped the decliners’ chart. In the coming week, we expect bearish sentiment to persist in the market, as investors look for attractive yields in the fixed income market.

Fixed Income

At the Open Market Operation (OMO) auction held today, the Central Bank of Nigeria (CBN) offered significantly higher interest rates compared to the previous auctions. The average stop rate surged by 650bps to 20% from 13.50% observed at the last auction. This was driven by increases in the stop rates for the short-, mid- and long-term instruments which rose by 900bps to 19%, 600bps to 19.5% and 450bps to 21.5%, respectively. Furthermore, the average bid-to-cover ratio also increased significantly, rising by 75bps to 2.28x from 1.53x at the previous auction. This indicates a substantial increase in investor appetite for the offered instruments reflecting the current uptrend in yields. In the secondary market, the Nigerian fixed income market closed the week negatively, with average yields rising across board. The Nigerian Treasury bill yields rose by 57bps WoW to settle at 17.24%. Similarly, the FGN bond market saw average yields climb 45bps WoW to 16.12%, driven by sell-offs across the curve, particularly in the MAR-2027 (+109bps), JUL-2030 (+122bps), and APR-2032 (+197bps) instruments. Overall, the average yield for the Naira fixed income market rose 51bps WoW to 17.24%. Following the Central Bank of Nigeria’s (CBN) recent interest rate hike to 22.75%, we expect bearish sentiment to persist in the coming week as investors seek higher returns in the fixed income market.

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