Global Economy
US Economy- Key Fed Gauge Rises 2.5% Annually in February
According to the Bureau of Economic Analysis, United States released the Personal Consumption Expenditure figures for February 2024. For context, PCE serves as the Federal Reserve’s preferred measure of inflation, offering a broader perspective than the Consumer Price Index (CPI). While CPI primarily reflects consumers’ out-of-pocket expenses, PCE encompasses both individual expenditures and payments made on behalf of consumers by third parties or the government. The (PCE) price index rose 2.5% YoY while the core PCE rose 2.80% YoY. On a month-on-month basis, the headline PCE and core PCE advanced by 0.30% each.
Trend Analysis of US Headline and Core PCE
Source: US BEA, Zedcrest Research.
While Inflation sustains its downtrend, we noticed a slower contraction in Energy goods and services Index (-2.3% YoY compared to -4.3% YoY in Jan. 2024). Services Index rose 3.8% YoY (vs 3.9% YoY in Feb. 2024). We believe that the recent upsurge in the Russia-Ukraine conflict and the unrelenting Israel-Hamas war may trigger another upsurge in oil prices. Nonetheless, we maintain our forecast that the PCE will sustain its downtrend and we might see a rate cut in H2:2024.
United States of America – US Economy Witnessed Slower Expansion
During the week, the Bureau of Economic Analysis released the GDP figures for Q4:2023. The US economy expanded by 3.4% YoY (vs 4.9% YoY in Q3:2024) according to the third estimate.
Trend Analysis of United States GDP Growth
Source: US BEA, Zedcrest Research
The deceleration in the GDP growth compared to Q3:2024 can be attributed to slowdowns in Private Inventory Investment, Federal Government Spending and Residential Fixed Investment.
Looking ahead, we foresee further slowdown in the GDP figures as we expect slower demand amid a lower in Personal Income and Government Spending to keep economic growth tepid. Furthermore, we do not expect a rate cut by the US Fed in early H2:2024.
United Kingdom – The Recessionary Fears
According to the Office of National Statistics, United Kingdom, the UK GDP contracted by 0.3% YoY in Q4:2023. This marks the second consecutive contraction spelling an official recession in the UK. The decline in the UK Inflations echoes the impact of the previous aggressive hikes by the Bank of England. Given the recession in the UK, we opine that this will spur the BoE’s decision to cut rates in H2:2024.
Trend Analysis of United Kingdom Inflation
Source: ONS. Zedcrest Research
Domestic Economy
CBN Hikes Rates Again to Combat Inflation and Attract Investment
At the 294th Monetary Policy Committee (MPC) meeting held on the 25th and 26th of March 2024, the Central Bank of Nigeria (CBN) further adopted a hawkish monetary policy aimed at mitigating burgeoning inflation and attracting foreign investment into the economy. The committee raised the Monetary Policy Rate (MPR) by 200 basis points to 24.75%, marking the tenth consecutive increase since May 2022. A summary of their decisions is as stated below:
- Raised MPR by 200bps to 24.75%.
- Adjusted the Asymmetric corridor from +100/-700 basis points to +100/-300 basis points around the MPR.
- Retained the CRR of Deposit Money Banks at 45.00%
- Adjusted the CRR of Merchant Banks to 14.00% (formerly 10.00%)
- Maintain Liquidity Ratio at 30.00%
Trend Analysis of the MPR, Inflation Rate, NGX Monthly yield and Treasure Bills Yield
Source: CBN, NBS, FMDQ, NGX, Zedcrest Research
The Monetary Policy Committee (MPC) of the Central Bank of Nigeria (CBN) considered both domestic and external factors while making their decision. Factors considered include but not limited to
- The need to curb inflationary pressures (Inflation for Feb. 2024 – 31.70% YoY).
- The need to attract Foreign Investment into the economy.
- The need to reduce burgeoning money supply.
- The need to reduce financial system liquidity.
Looking ahead, we anticipate additional rate hikes at the next MPC meeting. Although we foresee continued appreciation of the Naira and inflation may also subside marginally due to factors such as slowdown in food prices and FX volatility. We believe that maintaining high rates until inflation significantly decreases remains imperative.
February 2024 Money Supply figures – Where are the currencies outside the banks?
During the Week, the CBN released the data of the money supply statistics for February, 2024. According to the report, Narrow Money (M1) increased by 44.46% YoY to NGN30.28trn, M2 increased by 77.56% YoY to NGN 93.97trn and Broad Money (M3) increased by 79.30% YoY to NGN 95.56trn. On a month-on-month basis, M2 and M3 advanced by 1.18% and 1.97% respectively. On the flip side, M1 declined by 3.05% resulting from a decline in demand deposits NGN26.87trn (vs NGN27.88trn in Jan. 2024).
Trend Analysis of the Money Supply M1, M2 and M3
Sources: CBN, Zedcrest Research
The Cardoso-led CBN administration had reiterated its intention to keep money supply low given the recent surge. We foresee a decline in the coming months as the impacts of the 600bps hike at the last two MPC meetings unfolds.
Banking Sector Recapitalization – Let the negotiations begin!
As mentioned at the last MPC announcement, the CBN released the New Minimum capital requirements for commercial, merchant and non-interest banks in Nigeria. According to the memo, the following are the requirements of banks:
- Commercial banks with international license now require 10 times the previous minimum capital requirement of NGN50bn, that is NGN500bn to operate in Nigeria,
- Commercial banks with national license require NGN200bn (as against NGN25bn previously).
- Commercial banks with regional license require NGN50bn (as against NGN10bn previously)
- Merchant banks with require NGN50bn (as against NGN15bn previously),
- Non-interest banks with national license require NGN20bn (as against NGN10bn previously),
- Non-interest banks with regional license require NGN10bn (as against NGN5bn previously) to operate in Nigeria.
The Apex Bank gave banks 24 months commencing from April 1, 2024, and ending on March 31, 2026, to meet these conditions. The banks are also required to submit their implementation plan to the CBN on or before April 30, 2024. In addition to this, the CBN has also clearly stated that the new minimum capital requirement will be calculated as a composition of the paid-up capital and share premium only. In other words, the retained earnings and other components of the shareholders’ fund of existing banks would not be considered as a composition of the minimum capital requirement.
The CBN stated that the recapitalization is aimed at building stronger, healthier and more resilient banks to support the achievement of a $1 trillion economy by the year 2030. For more context, the new capital requirement will help to improve the risk profile of banks, minimize the impact of inflation and foreign exchange instability, and help gauge banks’ resilience to absorb current and unexpected external and internal shocks.
Looking ahead, we foresee mergers and acquisitions in the banking sector. Also, we expect this decision to spur Foreign Investment into the economy as banks source for foreign investments to meet up with the capital requirement.
Naira Gains Strength as CBN Resumes Dollar Sales to Legit BDCs
The resumption of sale of dollars to licensed Bureau De Change (BDC) operators by the Central Bank of Nigeria (CBN) may have started yielding results in the FX market. While the recent appreciation of the Naira against the dollar can be linked to the flurry of policies implemented by the CBN, the current market-determined system, and the availability of dollars from the CBN has achieved some goals such as FX stability, smaller FX rate gap, improved accessibility to FX and a stronger Naira.
We expect sustained Naira appreciation in the coming months as carry trade opportunities following the hike in interest rate and a possible inflow of FX amid bank recapitalization continue to boost the supply of dollars into the economy.
The Nigerian Equities Market – Bulls Charge Briefly, But Bears Maintain Grip on Nigerian Equities
The Nigerian equities market closed the week on a bearish note despite a mixed trading session. The NGX All Share Index (ASI) dipped by 8bps WoW to close at 104,562.06pts as the year-to-date return of 39.84%. Banking tickers such as ACCESSCORP saw a bullish run following a circa 300% YoY profit growth. However, these gains were overshadowed by losses from heavyweight companies such as MTNN, DANGSUGAR, and TRANSCORP.
In terms of volume and value traded, GTCO, ZENITHBANK and ACCESSCORP collectively accounted for 589.94mn (32.70%) and N23.28bn (44.73%) respectively.
Leading the top advancers were CWG (+26.05% to N7.50), MORISON (+24.82% to N1.76), and JULI (+20.74% to N9.49). On the flipside, leading the top price decliners were INTBREW (-14.26% to N4.45), DANGSUGAR (-11.86% to N52.00), and GUINEAINS (-10.26% to N0.35). We foresee a bullish run in the coming weeks.
The Nigerian Fixed Income Market – The Reign of the Bills
At the last Nigerian Treasury Bills auction for the month, the Debt Management Office (DMO) successfully sold NGN1.18trn worth of treasury bills, over three tenor (91-Day: NGN 29.83bn, 182-Day: NGN25.57bn and 364-Day: NGN1.13trn). For context, the total bids summed to NGN2.62trn (vs NGN 1.1trn sold) resulting in a decline in the average bid-to-cover ratio by 707bps to 2.20x, compared to 9.27x at the previous auction. Surprisingly, despite the increased sales amount the average stop rate stood flat at 18.12%, the DMO maintained the same stop rates as the previous auction; 91-Day, 182-Day, and 364-Day printed at 16.24%, 17.00%, and 21.12%, respectively.
The Secondary Nigerian Treasury Bills market closed the week bullish as the average yield further declined by 4bps WoW to settle at 17.66%. We noticed more buying interest on the short end of the curve particularly the APR-2024 instruments. On the other hand, the secondary bond market closed the week bearish as the average yield soared by 15bps WoW to close at 19.41%. This follows major selling interest at the mid-end of the curve, particularly the APR-2032 as the yield advanced by 290bps WoW. For the most part, the Fixed income market closed the week bearish as the average yield increased by 5bps WoW to settle at 18.54%.
In the Eurobond market, we saw a bullish week as the average yield dipped by 6bps WoW to settle at 9.42%. This performance is driven by buying interest in the MAR-2029 (yield down 19bps) and FEB-2030 (yield down 10bps) instruments.
