United States – Headline PCE Sustains Tepid Growth

During the week, the US Bureau of Economic Analysis released the released Personal Consumption Expenditure (PCE) report for January 2024. We noticed a slowdown in the growth of Headline PCE (+2.4% YoY) and Core PCE (+2.8% YoY). However, on a month-on-month basis, Headline and Core PCE rose 0.3% MoM and 0.4% MoM respectively.

 

 

Source: US BEA, Zedcrest Wealth

We attribute the month-on-month increase to the surge in services inflation. PCE services inflation, which excludes energy and housing, rose by 0.6% MoM (vs 0.3% MoM in Dec. 2023). This increase reflects higher prices in housing, utilities, financial services, and insurance as businesses adjust their prices in the new year.

Considering the significance of the PCE Index, particularly favored by the US Fed for measuring inflationary trends over CPI, we maintain our view that the Fed will keep rates steady at the next monetary policy meeting. This assessment is supported by the continued strength of the US economy, the absence of recessionary signals, and a robust labor market. Additionally, both the PCE and CPI indexes remain above the Fed’s 2.0% target rate.

 

Euro Area – Inflation Keeps Its Downward Spiral

During the week, Eurostat released the first preliminary inflation estimate for February 2024. According to the report, Headline Inflation in the Euro Area rose 2.6% YoY compared to 2.8% YoY in January. Similarly, Core inflation rose 3.1% YoY compared to 3.3% in January.

 

 

Source: Eurostat, Zedcrest Research

While inflationary pressures remain subdued, we maintain our forecast that the European Central Bank (ECB) will keep interest rates steady till H2:2024.

China – PMI Figures Paint a Gloomy Picture

China’s economy continues to witness a sluggish performance amid economic woes. According to the National Bureau of Statistics, China’s Composite PMI rem in the contractionary region at 50.9pts in Feb. 2024. For context, the Manufacturing PMI dipped for the 5th consecutive time to 49.1pts from 49.2pts in January. However, non-manufacturing PMI advanced to 51.4pts from 50.7pts in January. We noticed that the downtrend in the Factory sector offset the uptrend in the services sector.

 

 

As China grapples with ongoing economic challenges stemming from the lingering impacts of the COVID-19 pandemic, we anticipate additional expansionary measures from the Chinese government aimed at stimulating economic recovery.

 

Domestic Economy

Monetary Policy Meeting – The Tale of the Grizzly Bear

At the 293rd Monetary Policy Committee (MPC) meeting held on the 26th and 27th, of February 2024, the Central Bank of Nigeria (CBN) adopted a hawkish policy aimed at mitigating inflationary pressures and attracting foreign investment in the economy. The committee further raised the Monetary Policy Rate (MPR) by 400 basis points to 22.75%, marking the ninth consecutive increase since May 2022. A summary of their decision is as stated below:

· Raise MPR by 400bps to 22.75%.

· Adjust the Asymmetric corridor from +100/-300 basis points to +100/-700 basis points around the MPR

· The CRR raised to 45% (formerly at 32.50%)

Source: NBS, FMDQ, Zedcrest Research

The committee’s decision to raise rates was driven by the imperative to alleviate inflationary pressures, attract foreign investors into the economy, and reduce FX volatility. Although the hike was anticipated due to the inflation rate, we

· Expect elevated yields as investors seek high-yield instruments in upcoming auctions.

· Anticipate investor shift towards fixed income over equities given current conditions.

· Foresee equities market sell-offs post-January rally due to mixed earnings and attractive fixed-income yields.

· Project increased commercial paper issuances as companies seek capital to address rising operational costs.

NGX Investor call- Emphasis on Foreign Investors: A Priority on the Agenda

On Thursday, February 29th, the Nigerian Stock Exchange (NGX) and the CBN Governor convened a crucial call for foreign investors, following the 293rd Monetary Policy meeting. This call provided insights into the state of Nigerian financial markets, emphasizing the CBN’s commitment to transparency and stability.

To address the NGN5 trillion liquidity shortfall, the CBN outlined a strategic plan, starting with increased auction sizes, including an immediate N1trn OMO auction to mop up excess liquidity and restore stability. This decisive action, along with the strategic utilization of the Cash Reserve Ratio (CRR) by banks, is expected to boost investor confidence. Excess CRR held by some banks also opens the door for refunds, injecting liquidity into the system.

The CBN reiterated its commitment to addressing the undervaluation of the Naira, aiming to curb panic-driven monetization and enhance confidence through strategic measures, including NNPC’s account transfer to the CBN. Foreign investors were reassured of improved FX repatriation processes, enhancing Nigeria’s attractiveness as an investment destination. The CBN’s dedication to combating market distortions and ensuring ample liquidity underscores its commitment to creating a favorable investment climate.

High interbank rates and upward trends in yields on bills and bonds are anticipated, with the possibility of stop rates aligning closer to the Monetary Policy Rate (MPR) as hinted by the CBN Governor. Emphasizing rational decision-making, the Governor instilled confidence in the stability of the Nigerian financial system.

In conclusion, the call highlighted the CBN’s commitment to stability and transparency, offering proactive measures to address liquidity concerns and attract Foreign Portfolio Investors. With these efforts, the Nigerian financial market is poised for intriguing potential, inviting more investors into the system.

The Nigerian Equities Market- Weak Sentiment Grips the Equities Market Amid Interest Rate Hike

After a mixed performance this week, the Nigerian Equities Market closed bearish with the NGX All Share Index (ASI) shedding -3.27% week-on-week and print at 98,751.98 points. In consequence, the ASI year-to-date returns remain positive at 32.07%.

Leading the price gainers were JULI (+45.91% to N3.75), PZ (+27.36% to N33.75), and STERLING (+14.94% to N5.00). On the flip side, leading the top price decliners were MTNN (-18.91% to N200.70), SUNUASSUR (-18.88% to N2.31), and NESTLE (-18.88% to N1262.60). Given the decision of the monetary policy committee of the apex bank to hike interest rates by 400bps to 22.75%. We expect further selloffs in the coming week as investors bargain hunt fixed-income instruments with attractive yields.

 

The Nigerian Fixed Income Market – The Grizzly Bear

At the week’s end and the close of February, the Nigerian Secondary Treasury Bills market closed the month on a bearish note, as the average yield rose 57bps to settle at 17.24%. This was driven by selloffs on the long end of the curve. In the same light, the bonds market closed the week on a bearish momentum, with the average yield rising by 57bps WoW to print at 17.25%. This was driven by selloffs on the short to mid-end of the curve particularly in the APR-2032 (yield up 197bps), JUL-2030 (yield up 122bps), and MAR-2027 (yield up 109bps) instruments. Overall, the Naira Fixed income market wrapped up the week bearish, with the average yield advancing by 51bps WoW to 17.24%.

On the other hand, we saw a mild bullish sentiment in the Nigerian Eurobond space as the average yield declined 2bps WoW to 9.85%. This is largely driven by buying interest on the mid and long-tenor instruments. Looking ahead, we foresee an uptrend in yields in the Nigerian Eurobond space driven by the trickle-down effect of the CBN’s move to attract Foreign Investors into the Nigerian market by hiking interest rates.