Global Economy

United States – Indications of Market Fatigue Emerge in the United States Labor Market

During the week, the US Bureau of Labor Statistics released labor market data for February 2024. Nonfarm Payrolls increased by 275,000, exceeding economist expectations of 198,000.

The Unemployment Rate rose 3.9% YoY (vs 3.7% in January 2024). Furthermore, the number of unemployed people increased by 334,000 to 6,500,000. The labor force participation rate remained at 62.5% while the employment population ratio stood at 60.1%.

 

 

Health Care (+67,000), Government Employment (+52,000), Hospitality (+42,000), and Social Assistance (+24,000) saw the largest uptick in job gains. Average hourly earnings rose marginally by 5 cents to USD34.57.

Based on the data released, we observe a softening in the US labor market, influenced by both local and global monetary policy tightening and geopolitical tensions. Although wage growth increased modestly, a larger rise in the unemployment rate suggests potential future declines. However, we maintain our forecast of the US Fed maintaining steady rates until H2:2024. Additionally, we anticipate a gradual decline in the inflation rate.

 

Source: US BLS, Zedcrest Research

Euro Area – No Rate Cuts for Now

This week, the European Central Bank (ECB) opted to keep interest rates steady at 4.00% for the fourth consecutive meeting. For context, the Main Refinancing Operations Rate (4.5%), Marginal Lending Facility (+4.75%), and the Deposit Facility Rate (4.0%) were left unchanged.

The goal of the committee remains to keep inflationary pressures checked while ensuring that the economy does not plunge into a deep recession. Our analysis suggests that rate cuts might occur around H2:2024 as inflation (2.6%* as of February 2024) remains above the target of 2.0% benchmark.

 

Domestic Economy

Foreign Trade in Goods Statistics

Last Friday, the National Bureau of Statistics released the Foreign Trade in Goods report for Q4 2023. Total Imports surged 56.04% QoQ and 163.08% YoY to NGN14.11trn while Total Exports soared 22.68% QoQ and 99.60% YoY to NGN12.70trn. Total Trade advanced 38.24% QoQ to NGN26.80trn while the trade balance was negative at NGN1.41trn. For the most part, Total Trade for 2023FY stood at NGN26.80trn (vs NGN52.39trn) while the Balance of Trade for the year was surplus at NGN2.90bn. The significant surge in the trade figures for Q4 2023 can be attributed to the notable devaluation of the Nigerian naira following several FX reforms by the CBN and the current administration.

 

 

Imports – “Vehicles, Aircraft, and Parts thereof “– These are the Issues.

The notable increase in Total Imports during Q4:2023, rising by 163.08% YoY to NGN14.11trn, can be attributed primarily to the surge in Vehicles, Aircraft, and Parts thereof; Vessels, and related items (VAPV). For context, the value of VAPV surged astoundingly by 1,496.56% YoY from NGN357.66nn in Q4:2022 to NGN5.71trn in Q4:2023. On a quarter-on-quarter basis, the value skyrocketed by 739.64%, surging from NGN680.09 billion in Q3 2023. Furthermore, VAPV accounted for 40.47% of the total imports figure in Q4 2023, followed by Mineral Products (24.11%) and Boilers, Machinery, and Appliances; parts thereof (11.05%). This highlights the significant dependency of the Nigerian economy on the importation of these products, which in turn impacts the trade balance and exposes it to fluctuations in foreign exchange rates.

 

 

Exports – For How Long Are We Going to Depend on Oil?

On Exportation (+22.68% QoQ and +99.60% YoY to NGN12.70trn), the reason for the surge can be attributed to the +105.83% YoY to NGN11.67trn (vs NGN5.67trn in Q3:2023) surge in Mineral Products. It is noteworthy that Mineral Products constitute 91.90% of the Total Exports for Q4 2023. We believe that the dependency of Nigeria’s economy on these products further depicts the limited competitive advantage of the economy compared to other advanced nations.

Source: NBS, Zedcrest Research

Import and Export by Country – The Story Remains Relatively The same

The top Import trading partners were Singapore (NGN5.09trn), China (NGN2.06trn), and Belgium (NGN1.14trn). On the flip side, the top Export trading partners were the Netherlands (NGN1.91trn), India (NGN1.10trn) and Spain (NGN1.03trn).

 

Outlook

Although the Trade Balance for Q4:2023 ended in deficit, we anticipate a return to positive territory in Q1:2024. This projection is supported by the expected improvement in oil production amid sustained high prices during the quarter. Additionally, we foresee a normalization of the surge in imports of vehicles, aircraft, parts thereof, vessels, etc. in the upcoming quarter. We attribute the extreme volatility in the FX market and heightened seasonal spending (both private and government) as factors that contributed to the increased import figures during the previous quarter.

The Nigerian Equities Market- Equity Investors See Transpower Rally

Amid elevated yields in the fixed-income market, the Nigerian equities market rebounded from the negative territory. The Nigerian Exchange (NGX) All Share Index (ASI) gained +2.61% week-on-week and settled at 101,330.85 points. In consequence, the ASI year-to-date returns remained positive at 35.52%.

This bullish run was largely driven by buying interest in TRANSPOWER drove the NGX upward this week, lifting the equities market cap by approximately N835billion.

Leading the price advancers were TRANSPOWER (+45.38 TO N351.30), JULI (+32.53% to N4.97), and INTENEGINS (+20.86% to N1.68). On the flip side, leading the top price decliners were GUINNESS (-17.55% to N42.05), ETI (-17.01% to N20.00), and NEM (-16.67% to N5.50).

The Nigerian Fixed Income Market- Bonds and Bills in Bear Territory

At the Nigerian Treasury Bills auction this week, the Debt Management Office (DMO) successfully auctioned NGN1.32trn worth of treasury bills, over three tenors (91-Day: NGN 14.42bn, 182-Day: NGN10.55bn and 364-Day: NGN1.29trn). The average bid-to-cover ratio was reduced by 14bps to 1.26x, compared to 1.40x in the previous auction an offshoot of lower demand. Nonetheless, the average stop rate saw a significant rise of 108 basis points to 18.91%, up from 17.83% in the last auction. The stop rates for the three tenors (91-day, 182-day, and 364-day) experienced notable increases of 24bps, 50bps, and 249bps, reaching 17.24%, 18.00%, and 21.49%, respectively. Market players bided more for the 364-Day instrument as seen in the subscription and bid range. In addition, the DMO raised an additional NGN979.9bn (as against the 337.8bn on offer). This is an effort to finance the budget deficit
as well as support the CBN’s current move to reduce excess liquidity in the financial system. Following the same trend, the Nigerian Secondary Treasury Bills market closed the week with a bearish undertone as the average yield surged by 95bps WoW to settle at 18.52%. The secondary bond market closed the week negative as the average yield soared by 76bps points WoW to close at 18.01%. This is following major selloffs on the mid-end to the long end of the curve.

For the most part, the Fixed-income market closed the week in the negative territory as the
average yield increased 86bps WoW to settle at 18.27%. As anticipated, the Eurobond market saw a favorable outcome with a decrease in the average yield by 14bps WoW to 9.71%. This improvement is attributed to increased buying interest in Eurobond instruments, a trickle-down effect of buying interest in the sub-Saharan fixed-income market amid expectations for rate cuts, positive news from Egypt and Angola, and the CBN’s strategy to attract FPIs into the Nigerian economy. Going forward, we expect a sustained bullish trend in the Eurobond space.