United States – Labor Market Still Solid as the Rock
During the week, the US Bureau of Labor and Statistics released the employment situation report for January 2024. As outlined in the report, the unemployment rate stagnated at 3.7% YoY for the third consecutive month. Nonfarm payroll employment rose by 353,000 (vs 199,000 in December 2023). The total number of unemployed people stood at 6.1mn. The labor force participation rate was 62.5% (the same as the previous month). The employment-population ratio rose marginally to 60.2% from 60.1% in December 2023.
Source: US BLS, Zedcrest Wealth
Industries such as Professional and Business Services (+74,000), Health Care (+70,000), and leisure and Retail Trade (+45,000)) witnessed the highest employment gains. The average hourly earnings for all employees on private nonfarm payrolls rose by 19 cents, or 0.6% MoM and 4.5% YoY to USD34.55.
Source: US BLS, Zedcrest Wealth
In the coming months, we anticipate the US labor market to sustain its resilience throughout 2024. Our outlook reflects a shift towards a recovery phase rather than a recessionary period for the US economy, with the worst believed to be behind us. Additionally, with the pause in rate hikes, we foresee minimal impact on employment, and significant labor cuts are not expected in the US job market.
Source: US BLS, Zedcrest Wealth
United Kingdom – Bank of England Keep Rates Steady
At its first monetary policy meeting of the year, the Bank of England kept the monetary policy rate steady at 5.25%. For context, six members voted to keep rates at 5.25%, two members voted for a 25bps hike while one member opted for a 25bps cut.
Based on the remarks made by the Bank of England governor, Andrew Bailey, we observed a tone suggesting the end of a period of rate hikes in the U.K., even though there are concerns among analysts about the potential resurgence of inflationary pressures. Nevertheless, we maintain our perspective that the possibility of rate cuts persists and may materialize in the second half of 2023.
Domestic Economy
The CBN NOP Circular
In its bid to curb the incessant depreciation of the Naira, the Central Bank of Nigeria (CBN) issued two notable circulars during the week.
The first circular was about the concerns around the increasing foreign currency exposure of banks. The CBN imposed a Net Open Position limit on the overall foreign currency assets and liabilities taking into cognizance that both those on and off-balance sheets should not exceed 20% short or 0% long limit of shareholders’ funds unimpaired by losses using the Gross Aggregate Method. Banks were required to reorganize any breaches and comply with February 1st, 2024 being the deadline. Furthermore, the circular also mandated daily and monthly NOP calculations using provided templates. Also, banks are expected to maintain liquid foreign assets to cover obligations and establish foreign exchange contingency funding arrangements with other financial institutions.
According to the second circular, the Central Bank of Nigeria (CBN) has lifted the previously imposed ceiling on exchange rates for International Money Transfer Operators (IMTOs). Initially, IMTOs were required to quote rates within a range of -2.5% to +2.5% around the previous day’s closing rate of the Nigerian Foreign Exchange Market (NAFEM). The removal of this cap allows IMTOs to freely quote exchange rates for Naira payouts, responding to market demand and operating on a willing buyer, willing seller basis.
While these policies might impact the FX ecosystem, we believe that these impacts are for the short term, as the fundamental issues that have permeated the Nigerian economy over time have not been adequately addressed. The Nigerian economy still grapples with FX scarcity, given the substantial burden of dollar demand and the limited supply available.
Nonetheless, we state some possible impacts of these policies below.
1. We believe this move will drive some liquidity as some banks may be forced to sell off some assets to comply with the CBN policy. Nonetheless, we do not expect this to drive significant liquidity in the market as some banks may demand for the CBN to grant a forbearance. Also, given the fact that some of these assets held by banks are not liquid, they may look for other avenues to cover this breach as opposed to selling off these assets.
2. We have seen some sell-offs in the banking tickers in the stock market, we advise investors to not fall for this herding effect as we opine that while this may cut off revaluation gains for banks (till Q1:2024), we expect some banking tickers to remain profitable given the gains that they will still accrue from the high-interest rate environment
3. The Naira is expected to appreciate in the coming weeks following the sell-offs of dollars that will permeate the market as regards this news. Nonetheless, we do not see this sustained in the long run as the major causes of the FX scarcity remain unabated.
4. The second circular points towards the CBN’s willingness to promote fairness and a willing buyer, willing seller policy in the FX market. We believe this might marginally spur market players’ interest in the market.
The Nigerian Equities Market –How Bullish Can February Be?
In another week of bullish momentum, the Nigerian stock market closed positively for the fifth consecutive trading week. The NGX All-Share Index (ASI) rose 197bps to settle at 102,401.88 points, with year-to-date returns reaching 39.65%.
Leading gainers were TRIPPLEG (+42.05% to NGN4.02), MEYER (+20.79% WoW to NGN4.30), and CORNERST (+20.25% WoW to NGN1.90). Meanwhile, top losers included DAARCOMM (-22.22% WoW to NGN0.70), ETERNA (-19.49% WoW to NGN22.10), and SUNUASSUR (-19.11% WoW to NGN1.82). The market is anticipated to maintain its bullish trend.
The Nigerian Fixed Income Market – Visited by the Bears
At the January 2024 FGN Bond auction, the DMO offered NGN360bn worth of instruments, selling a total of NGN418.20bn across four instruments (MAR-2027, APR-2029, JUN-2033, and JUN-2038). The average bid-to-cover ratio decreased to 1.68x, indicating reduced demand, particularly for the June 2038 instrument. The average stop rate declined by 32bps to 15.75%. At the OMO auction, average stop rates fell by 17bps to 13.50%, with a bid-to-cover ratio of 1.53x, showing weaker demand.
The Treasury Bills market closed bearish, as the average yield rose 306bps WoW to close at 9.79%. Similarly, the FGN Bond market closed on a negative note as yield rose 97bps WoW to 14.77%, driven by sell-offs across the curve. Overall, the Naira Fixed Income market ended the week in the negative territory, as average yield edged up 2.02% to close at 12.28%.
