Global Economy United States – First Quarter Growth Falls Short of Expectations at 1.6%, Amid Mixed Sector Performance

According to the Bureau of Economic Analysis, the U.S. economy witnessed a slower economic growth Q1:2024, as the estimate of the GDP figures rose at an annualized rate of 1.60% (below economists’ expectations of a 2.40%). This moderation in real GDP was reflected in consumer spending, exports, and lower government spending. Notably, residential investment saw a substantial surge of 13.9%, marking its largest increase since Q4:2020 while net exports contracted 0.86% (vs +0.25% in Q4:2023).

 

Trend Analysis of U.S Annualized GDP Growth (QoQ)

Source: Bloomberg, Zedcrest Research

 

The decline in the initial GDP growth estimate is consistent with our projections. We anticipated a slowdown in GDP growth due to the disinflationary trend, alongside decelerated wage growth and reduced government spending. Furthermore, we anticipated the effects of aggressive interest rate hikes to become evident. Looking ahead, we anticipate a continued deceleration in GDP growth. We believe that tepid government spending and decreased consumer spending, coupled with weaker wage growth, will contribute to this ongoing slowdown.

 

United States: Headline PCE grows at 2.70% YoY, Spurring Caution from Federal Reserve

According to the Unites States Bureau of Economic Analysis, the Personal Consumption Expenditure (PCE) price index for March 2024 rose by 2.70% YoY (vs 2.5% YoY in Feb. 2024). Similarly, the core PCE Index rose by 2.80% YoY. On a month-on-month basis, both headline PCE and core PCE index rose by 0.30% each. Consumer spending and Personal income was resilient during the month increasing by 0.8% MoM and 0.5% MoM respectively. Nonetheless, the personal savings rate declined to 3.20%, indicating that households are dipping into savings to sustain spending amid higher prices.

 

Trend Analysis of PCE and Core PCE (YoY)

Source: Bloomberg, Zedcrest Research

 

In our previous reports, we discussed the potential for a decrease in savings, noting that the surplus savings accumulated during the COVID-19 period may gradually diminish over time due to reduced government spending and slower wage growth. Overall, we stand by our forecast that the US Federal Reserve may initiate rate cuts by the fourth quarter of 2024.

 

Japan: BOJ Maintains Low Rates; Future Rate Hike Indications Fail to Curb Yen Decline

During the week, the Bank of Japan (BOJ) voted to keep interest rates around 0.00%. The BOJ Governor Kazuo Ueda emphasized the growing confidence that inflation is poised to sustainably reach the target of 2.00% in the coming years. This indicates the central bank’s readiness to increase borrowing costs later this year. He stated that the BOJ would consider raising interest rates if new data supports its latest price forecasts or if inflation exceeds the projections. The rate which was a month ago when the BOJ made a historic exit from its negative interest rates was based on the need to expand the Japanese economy following the slowdown in economic activities emanating from the lasting impacts of the covid-19 pandemic.

Trend Analysis of Interest rate (YoY) and Inflation Rate (YoY)

Source: Bloomberg, Zedcrest Research

Furthermore, the central bank reiterated its guidance from March regarding the purchase of government bonds. This dashed hopes among some traders that the BOJ might soon reduce purchases, partly to slow down the decline of the yen. Looking ahead, we expect the BOJ to keep rates steady till Q4:2024.

 

Domestic Economy

CBN Steps Up Intervention: Hints Dollar Sales to BDCs

The Central Bank of Nigeria (CBN) further intensified its efforts to stabilize the Naira by selling US dollars directly to Bureau de Change (BDCs) operators. In a circular issued on April 22nd, 2024 (TED/FEM/PUB/FPC/001/013) by Dr. Hassan Mahmud, Director of Trade and Exchange Department, each BDC will receive USD10,000 at the rate of NGN1,021/USD1 with a maximum mark-up of not more than 1.5% above the purchase price. This move follows the need to further strengthen the currency as we witnessed the Naira depreciate against the dollar to NGN1309.88/USD1 and NGN1330/USD1 on the official and parallel markets respectively as of April 25^th 2024.

Primarily, we hold the view that although the actions taken by the Central Bank of Nigeria (CBN) appear optimistic, they may not yield a lasting impact on the Naira. Fundamentally, Nigeria’s economy continues to rely heavily on imports, with demand for the US dollar significantly outweighing its supply.

 

The Nigerian Equities Market- The Feast of the Bears

The Nigerian equities market extended its bearish run for another week, closing all five trading sessions in negative territory. Investor sentiment remained cautious, leading to a total loss of N784.72 billion. Market capitalization tumbled from N56.30 trillion last week to N55.51 trillion this week, and year-to-date returns dropped further to 31.27%.

The Banking sector bore the brunt of the selling pressure, declining by 3.10% week-on-week. Losses were widespread, with heavyweights like ZENITHBANK (-8.17%) and FBNH (-16.26%) leading the decline. Other major sectors also closed negatively, with notable drops in MTN (-9.82%), NESTLE (-11.63%), and OANDO (-19.57%). Even positive performances from GTCO (+5.97%), UBA (+1.32%), FIDELITYBK (+5.62%), LAFARGE (+9.09%), CAP (+20.21%), and UNILEVER (+11.03%) couldn’t offset the overall market weakness.

Leading the price advancers were SUNUASSUR (+25.00% to N1.25), CAP (+20.21% to N28.85), and LIVESTOCK (+14.48% to N1.66). On the flipside, leading the top price decliners were OANDO (-19.57% to N9.25), SOVRENINS (-18.18% to N0.36), and TOMASWY (-16.82% to N1.78).

 

The Nigerian Fixed Income Market – Investors Furter Embrace the Debt Market

During the week, the Debt Management Office (DMO) successfully sold NGN362.45bn worth of treasury bills, over three tenor (91-Day: NGN 16.48bn, 182-Day: NGN11.99bn and 364-Day: NGN333.98bn). For more context, the total bids summed to NGN 757.85bn (versus NGN 362.45bn sold) resulting in an uptick in the average bid-to-cover ratio by 17 basis-points to 2.09x, compared to 1.92x at the previous auction. We noticed that the average stop rate was retained at 17.98%. For more details, the 91-Day, 182-Day and 364-Day rate printed at the last stop rate of 16.24%, 17.00% and 20.70% respectively. We noticed a cautious play by the auction participants (through the bid range) given that recent news reveals that the government is in the process of securing other sources of debt, hence reducing the need for high domestic borrowings.

In the Secondary Nigerian Treasury Bills market, the week closed bullish as the average yield further declined by 289 basis-points WoW to settle at 22.29%. We noticed more buying interest on the mid end of the curve particularly the 11-JUL-2024 and 25-JUL-2024 as the yield declined by 601bps and 583bps WoW respectively. In the same manner, the secondary bond market closed the week bullish as the average yield dipped by 11 basis-points WoW to close at 18.93%. This follows major buying interest on the short to mid-end of the curve particularly the JAN-2026, JUN-2038 and FEB-2034 as the yields declined by 67bps, 76bps and 33bps WoW respectively. For the most part, the Fixed income market closed the week bullish as the average yield decreased by 150 basis-points WoW to settle at 20.61%.

In the Eurobond market, we saw a bearish week as the average yield advanced by 5 basis-points WoW to settle at 9.98%. This performance is driven by selloff across the curve particularly the SEP-2028 and MAR-2029 Eurobonds as their yields increased by 11bps and 8bps WoW respectively.