Global Economy

United States – The Federal Reserve Maintains its Current Stance and Acknowledges Stricter Financial Circumstances

During the week, the highly anticipated November Federal Open Market Committee (FOMC) meeting of the US Federal Reserve took place. The US Fed chose to maintain its current interest rates, expressing its intention to closely monitor the consequences of previous rate hikes on the US economy. Despite recognizing that inflation remains significantly above the 2% target and that wage growth is on the horizon, albeit at a slower pace, they believe it is essential to carefully observe the economic trends to prevent a prolonged economic downturn. Additionally, they noted the upward trajectory of US yields and the 30-year fixed-rate home mortgage rates, which are approaching 8.0%, reaching levels close to a 25-year high.

Source: Bloomberg, Zedcrest Wealth

We anticipate that the US Federal Reserve will continue to adopt a cautious “wait and see” strategy, assessing the consequences of their recent rate increase. Furthermore, we acknowledge the potential for additional rate hikes in the coming months if inflation persists at levels beyond initial expectations.

US Labor Market Signals Slowdown: Year-over-Year Unemployment Rate at 3.9%

During the week, the US Bureau of Labor and Statistics released the employment situation report for October 2023. As culled from the report, the unemployment rate rose marginally to 3.9% YoY (vs 3.8% in September 2023). Nonfarm payroll employment increased by 150,000 compared to 297,000 in September 2023 depicting lower job creation. The total number of unemployed people was almost the same at 6.5mn. The labor force participation rate, a key metric for resolving a sharp divide between worker demand and supply slowed marginally to 62.7% (vs 62.8% in September) while the employment-population ratio slowed to 60.2% from 60.4% in September 2023.

Source: BLS, Zedcrest Wealth

Industries such as Health Care (+58,000), Government (+51,000), and Social Assistance (+19,000)) witnessed the highest employment gains. The average hourly earnings for all employees on private nonfarm payrolls rose by 7 cents or 0.2% MoM, and 4.1% YoY to $34.00.

Source: BLS, Zedcrest Wealth

The report reveals a softening US job market, fostering optimism that the US Federal Reserve may abstain from imminent rate hikes. The US labor market has shown signs of weakening over the past three months due to recent interest rate increases. With this in mind, we believe that the deceleration in payroll and wage growth may result in lower future inflation figures, potentially prompting the Fed to pause rate hikes and eventually consider rate cuts.

The Bank of England (BoE) holds rates Steady at 5.25% for the Second Consecutive Time.

In alignment with the ECB and the US Fed, the Monetary Policy Committee of the Bank of England maintained the interest rate at 5.25%. In the most recent meeting last Thursday, committee members voted 6-3 to retain the Bank Rate at 5.25%, reiterating the decision from September after 14 consecutive rate hikes. Despite concerns about a potential recession and prolonged economic stagnation, the imperative to control inflationary pressures remains compelling for the UK economy, leading to the decision not to consider rate cuts in the near future.

China’s PMI drops to 49.5pts in October 2023

According to data released by the National Bureau of Statistics of China last Tuesday, the official Purchasing Managers’ Index (PMI) dropped from 50.2 points to 49.5 points in October, slipping below the critical 50-point threshold that separates contraction from expansion. Similarly, the non-manufacturing PMI decreased to 50.6 points in October from 51.7 points in September, signifying a deceleration in activity within the extensive service and construction sectors. Analysts suggest that this decline is more likely due to supply-side factors rather than reduced demand. We anticipate that the Chinese government will continue to support the economy, particularly the real estate sector.

Domestic Economy – The CBN, FX Backlogs, and the Resilient Naira: A Singular Occurrence?

Over the course of the week, the Naira staged a notable recovery, appreciating by approximately 1.8% WoW to settle at N776.14 per USD1 in the official market (NAFEM rate). In parallel markets, it experienced a substantial gain of approximately 17.11% WoW, closing in the range of N1000 to N1050 per USD1. This resurgence can be attributed to a confluence of factors, including:

1. Increased foreign exchange inflows.

2. Strategic policy measures implemented by the Central Bank of Nigeria (CBN).

3. Heightened efforts to combat illicit financial activities.

To provide better clarity, the central bank has initiated the process of clearing a portion of its outstanding foreign exchange (FX) backlogs, starting with Tier 2 Nigerian banks and international banks that have resolved 75% to 80% of their foreign exchange forward contract obligations. Recent findings indicate that Banks such as Citigroup (USD72mn), Stanbic (USD125mn), and Standard Chartered (USD63mn) are currently receiving FX futures deliveries.

Additionally, the Federal Government (FG) has expressed its intention to allocate USD10 billion for the settlement of FX obligations, bolstering the country’s FX market and ensuring stability in the value of the naira. While we anticipate ongoing strength in the naira’s value in the near term due to the factors mentioned above, there is a risk that many market participants may succumb to herd behavior. While we commend the Central Bank of Nigeria’s (CBN) efforts to fortify the naira, we believe that the government still faces a significant challenge in maintaining strong economic fundamentals to sustain the recent appreciation of the naira.

The Nigerian Equities Market – The NGX All-Share Index (ASI) Soars Past 70,000-Point Milestone Amid Bullish Market Sentiment

The Nigerian equities market closed the week on a positive note, with the NGX All-Share Index (ASI) adding 456 bps WoW to reach 70,196.77 points. It’s worth noting that the market reached an all-time high of 70,581.76 on Wednesday. Year-to-date (YtD) returns now stand at 36.97%, driven by strong earnings releases, especially in the banking and telecommunications sectors. Among the sectors we cover, all closed positively except for the Oil and Gas sector, which remained flat. Notable gains were seen in the Insurance (+7.96% WoW), Banking (+2.67% WoW), Industrial Goods (+0.73% WoW), and Consumer Goods (+0.47% WoW) sectors.

Leading the gainer’s chart are MBENEFIT (+29.27% to NGN0.53), JAPAULGOLD (+28.28% WoW to NGN1.27), and AIRTELAFRI (+27.85% WoW to NGN17.90). The top losers for the week were RTBRISCOE (-14.00% WoW to NGN0.43), BETAGLAS (-10.46% WoW to NGN59.95) and MEYER (-9.87% WoW to NGN2.74). We expect mixed sentiments in the coming week as investors may embark on profit-taking activities following the historic bullish run.

The Nigerian Fixed Income Market – Bearish Finish in the Fixed Income Market

The Treasury Bills market concluded the week on a bearish note, witnessing a significant 7.14% WoW increase in the average yield, settling at 14.29%. Likewise, the secondary bond market experienced a negative week, with the average yield rising by 74 bps WoW to settle at 15.61%, attributed to selloffs across the yield curve. In summary, the Naira Fixed Income Market ended the week with a bearish trend, as the average yield surged by 3.94% WoW to settle at 14.95%. Concurrently, the Central Bank of Nigeria (CBN) conducted an additional Open Market Operations (OMO) auction on October 30, with a total sale of NGN 400.00 billion spanning three tenors, and the 365-day bill closing at 17.50% (annualized: 21.20%). Two days later, the CBN held another OMO auction, selling NGN 77.20 billion worth of instruments, with the stop rate averaging 15.36% across the three tenors and the 365-bill concluding at 17.98% (effective yield: 21.91%).