Global Economy
United States – US Fed, Labor Market, and Yield Direction
Based on the report from the US Bureau of Labor Statistics, initial jobless claims in the United States decreased by 24,000 to 209,000 in the week ending November 18, compared to the previous week (233,000). Continuing claims for unemployment insurance settled at 1.84 million in the week ending November 11. Unadjusted claims rose by 21,239 to 238,677 last week, with notable increases in filings in California, Kentucky, Oregon, and Illinois. Despite these relatively strong numbers, there are signs of weakness in the US labor market, and the impacts may unfold later in the year.
Still in the US, yields are expected to remain stable in the upcoming months, with no anticipated further Interest rate hikes or cuts until mid-2024. The current disinflationary trends, indicating that the US Federal Reserve might be approaching its 2.0% benchmark inflation rate, along with evident weaknesses in the US labor market and slower wage growth, lead us to expect the Fed to maintain a cautious approach at the next meeting in December.
Source: Bloomberg, Zedcrest Wealth.
United Kingdom – UK PMI inches higher to 50.1 points.
According to S&P Global /CIPS Flash, the Composite PMI edged up to 50.1 pts in November (vs 48.7 pts in October 2023). For context, the Flash UK Services PMI Business Activity Index printed at 50.5 pts (vs 49.5 pts in October) a four-month high. Similarly, the Flash UK Manufacturing Output Index rose to 47.9 pts (vs 44.3 pts in October) a five-month high while the Flash UK Manufacturing PMI advanced to 46.7 pts (vs 44.8 pts in October) a six-month high. This improvement was driven by a better expansion in business activity in the service sector and a milder decline in manufacturing production. However, new order intakes decreased for the fifth consecutive month, indicating ongoing subdued demand conditions. In November, there were signs of persistent inflation, with both input costs and average prices charged rising at faster rates than in October. Service providers reported the most significant increase in average charges since July, primarily attributed to higher staff costs.
Domestic Economy
GDP – Reflecting the Impacts of a Barrage of Policy Modifications
Throughout the first three quarters of 2023, the Nigerian economy experienced a series of significant events. The initial months of the year, particularly Q1:2023 were marked by a cash crunch, electioneering activities, and the implementation of stringent monetary policies. Consequently, this led to a deceleration in economic growth from 3.52% YoY in Q4 2022 to 2.31% YoY in Q1 2023. Although the economy faced challenges, there was a rebound in Q2 2023, with a growth rate of 2.51% YoY. We attribute this recovery to the ongoing efforts to overcome the hurdles encountered in Q1:2023. However, the removal of fuel subsidies and the introduction of various new policies dampened the anticipated acceleration in growth for the quarter.
The Nigerian economy witnessed a 2.51% YoY expansion in Q3 2023, showing a marginal increase compared to both Q2:2023 (2.51% YoY) and Q3:2022 (2.25% YoY). Despite maintaining 12 consecutive quarters of GDP growth since Q2 2020, a noticeable deceleration in the growth rates of key sectors indicates lingering impacts from the aforementioned challenges.
The performance of the Oil sector remained challenging, although there was a significant improvement compared to the previous quarter. The sector contracted by 0.85% YoY in Q3 2023 (compared to 13.43% in Q2 2023), marking its smallest contraction since Q2 2020. Conversely, the non-oil sector continued to be the primary driver of the economy, albeit at a slower pace, expanding by 2.75% YoY compared to 3.58% YoY. The Agriculture sector experienced a growth slowdown to 1.30% YoY (from 1.50% YoY in Q2:2023), and the Services sector grew by 3.99% YoY, down from 4.42% YoY in Q2:2023. Notably, the Industries sector rebounded from negative territory to register a positive growth of 0.46% YoY, improving from -1.94% YoY in Q2:2023.
Sectoral Contribution and Performance
Oil Sector – The Path to the Positive Territory
The Oil sector’s contribution to the overall GDP remained disappointingly low, primarily due to persistent structural challenges such as oil theft, vandalism, reduced interest from International Oil Companies (IOCs), policy misalignment, and suboptimal productivity. However, noteworthy improvements have emerged, attributed to the previous administration’s crackdown on oil theft, the removal of fuel subsidies by the current administration, and enhanced implementation of the PIA Act. In Q1:2023, oil production increased to 1.53mbpd, reflecting the impact of the anti-theft measures.
Subsequently, it declined to 1.39mbpd in Q2:2023 due to oil theft and underproduction but rebounded to 1.43mbpd in Q3:2023 with improved production. Additionally, the Naira’s devaluation following FX market liberalization likely contributed to enhanced oil revenue in the quarter.
Source: NUPRC, NBS, Zedcrest Wealth
Looking ahead, we anticipate the oil GDP to emerge from the contractionary phase in Q4 2023. This forecast is founded on the consistent improvement in oil production observed over the quarters, a continual rise in oil prices fueled by geopolitical tensions and production cuts by OPEC+ and Russia and enhanced revenue from oil production driven by the ongoing decline in the Naira’s value amid FX volatility.
Non-Oil Sector – Scathed by Inflation and Tight Monetary Policy Rates
The non-oil sector experienced a deceleration in growth due to the adverse effects of new policies introduced during the quarter, with a growth rate of 2.75% (compared to 3.58% in Q2:2023). The Industries Sector exhibited a recovery, expanding by 0.46% YoY (compared to -1.94% YoY in Q2:2023). Growth in the Agriculture sector moderated to 1.30% YoY from 1.50% YoY in Q2:2023. Likewise, the Services sector witnessed a slowdown to 3.99% YoY from 4.42% YoY in Q2:2023. The growth in the Industries sector is attributed to the base effect in Q3:2023, as there was no substantial improvement in the sector during the quarter.
Source: NBS, Zedcrest Wealth
The slowdown in Agriculture and services can be attributed to factors such as Insecurity, inadequate infrastructure, logistics issues, and the decision of the CBN to stop the Direct Development Finance Intervention (most of the fund was channeled to the Agriculture sector). Additionally, the decline in productivity in the services sector can be linked to inflationary pressures emanating from FX issues during the quarter and a high-interest rate environment. To further bolster our point, productivity dipped during the quarter as evidenced by the PMI Figures below.
Source: Stanbic IBTC, Zedcrest Wealth
Looking ahead, we predict a continued deceleration in the non-oil sector, with no substantial shift expected in Q4 2023, as the prevalent issues persist in the economy. Despite the Central Bank of Nigeria’s commitment to maintaining tight interest rates and resolving FX backlogs to mitigate FX volatility, we foresee limited changes in this quarter, given the persisting volatility in the economic landscape.
The Agriculture: Chronicles of Insecurity, Funding Challenges, and Elevated Capital Costs
The Agriculture sector expanded by 1.30% YoY, indicating a deceleration from the 1.50% YoY growth in Q2:2023. Notably, Crop production, constituting 92.24% of the sector, registered a growth of 1.35% YoY (compared to 18.82% YoY in Q2:2023). Meanwhile, the Livestock and Forestry subsectors recorded growth rates of 1.18% YoY and 2.21% YoY, respectively. Conversely, the Fishing subsector experienced a contraction of 2.33% YoY.
Our outlook for the Agriculture sector is cautious, and we anticipate continued suboptimal growth. Factors such as insecurity, insufficient infrastructure, limited capital, and the recent cessation of the Direct Development Finance Intervention are expected to impede growth. Additionally, the deficient logistics system hindering the transportation of farm products across regions in the country is likely to sustain weak growth unless addressed.
ICT – Policy Changes to Impact Growth
The ICT sector experienced a deceleration in growth, recording a rate of 6.69% YoY (compared to 8.60% YoY in Q2 2020). This slowdown is primarily attributed to reduced growth in the Telecommunication and Information Services subsector (+7.74% YoY vs 9.74% YoY in Q2:2023), which constitutes 85.21% of the ICT sector. The decline in growth is linked to rising inflation, a decrease in demand, and declines in the number of subscribers. The heightened cost of living likely influenced the subdued demand within the sector. Additionally, the Broadcasting subsector experienced a slowdown in growth, declining by 252bps to 3.18% YoY. On the other hand, the Motion Pictures, Sound recording, and music production contracted by 1.01% YoY (compared to 1.99% YoY in Q2:2023), while the Publishing subsector expanded by 55bps to 3.10% YoY.
Source: NCC, Zedcrest Wealth
Looking ahead, we anticipate subdued growth in the sector. Our projection is grounded in the diminishing demand stemming from the elevated cost of living, tariff plan price hikes across the board, and increased operational expenses for businesses.
Trade: Still Scathed by Policy Plus Fours
The growth momentum of the Trade subsegment decelerated by 89bps to 1.53% YoY in Q3:2023, primarily influenced by inflationary pressures throughout the quarter. Additionally, the FX volatility further intensified the challenges faced by the subsector, resulting in a subdued growth outlook.
Our optimism for the next quarter remains constrained due to continued subdued activities, reflecting the lower purchasing power of the currency and the persistent high cost of living.
Manufacturing: Anticipating A Turn of Events
The growth of the Manufacturing sector decelerated to 0.48% YoY (compared to 2.20% in Q2:2023). The Food, Beverage, and Tobacco segment, representing 39.56% of the sector, expanded by 0.92% YoY, while the Textile, Apparel, and Footwear segment, constituting 18.92% of the sector, contracted by 2.75% YoY (compared to -4.38% YoY in Q2:2023). This slowdown is attributed to factors such as decreased demand, high production costs, and FX pressures.
Our expectations for the next quarter are tempered, considering the persistent decline in PMI figures, indicating a further slowdown in growth (October PMI at 49.1 points).
Real Estate, Construction, and Cement: Kindred Spirits
The Real Estate sector’s growth momentum advanced to 1.90% YoY (vs 1.87% YoY in Q2:2023). Similarly, the Construction (3.89% YoY) and Cement (4.20% YoY) sectors also witnessed a positive momentum in year-on-year growth rate. Over time, these sectors have demonstrated a parallel growth pattern due to their interconnectedness and the shared factors influencing their expansion. These factors include government spending, infrastructure development, the standard of living, diaspora remittances, and foreign investors’ sentiments. While the current administration has not undertaken any substantial projects or implemented notable policy changes that would impact the Real Estate, Construction, and Cement sectors, we keep an optimistic outlook for these sectors in Q4:2023. We believe the implementation of the 2024 budget will drive the growth of the sector.
Source: NBS, Zedcrest Wealth
Attribution Analysis
In our Q3:2023 attribution analysis, we assessed the performance of key sectors relative to the total GDP benchmark. The Services sector led with a notable performance of 2.08%, followed by the Agriculture Sector at 0.38%. The Industries sector contributed 0.16%, and the Manufacturing sector added 0.04% to the overall performance. However, the Mining and Quarrying sector showed a negative performance, with a decline of -0.79%.
Source: NBS, Zedcrest Wealth
The Nigerian Equities Market – The Bulls Extend their Stay on the Local Bourse
The Nigerian equities market closed the week on a positive note, as the NGX All-Share Index (ASI) advanced 17bps WoW to settle at 71,230.48 points. The Year-to-date (YTD) returns settled at 38.75%. Sectoral performance was mixed as the Banking (-4bps WoW) and Industrial Goods (-1.18% WoW) sectors closed bearish, while the Oil and Gas (+2.61% WoW), Insurance (+0.91% WoW) and Consumer Goods (+0.20% WoW) sectors closed bullish.
Leading the gainer’s chart are MECURE (+60.73% to NGN9.21), MULTIVERSE (+60.06% WoW to NGN5.81) and UNITYBNK (+57.26% WoW to NGN1.84). The top losers for the week were THOMASWY (-42.22% WoW to NGN2.08), ELLAHLAKES (-10.05% WoW to NGN3.40) and STANBIC (-7.08% WoW to NGN65.00).
The Nigerian Fixed Income Market – Bullish Momentum Caps Off the Week
The Nigerian Treasury Bills market concluded the week on a bullish note, witnessing a decline of 61bps WoW in average yield, settling at 12.75%. In the November primary bond auction, the Debt Management Office (DMO) successfully auctioned NGN434.5 billion worth of bonds, reopening four instruments (APR-2029: NGN31.47 billion, JUN-2033: NGN33.19 billion, JUN-2038: NGN47.07 billion, and JUN-2053: NGN322.77 billion). The average bid-to-cover ratio increased by 17 basis points to 1.24x compared to the last auction. However, the average stop rate experienced a surge of 136 basis points, reaching 17.13% from the previous 15.76%. Notably, the stop rates for the four instruments (APR-2029, JUN-2033, JUN-2038, and JUN-2053) witnessed significant increases of 110bps, 125bps, 170bps, and 140bps, respectively, reaching 16.00%, 17.00%, 17.50%, and 18.00%.
The secondary bond market, on the other hand, closed the week on a bearish note, with the average yield rising by 10 basis points WoW to close at 15.73%. This was driven by selloffs in the FEB-2028 (+79bps), MAR-2050 (+70bps), and JUN-2053 (+90bps) instruments. Overall, the Naira Fixed income market wrapped up the week on a bullish note, with the average yield dropping by 25 basis points WoW, settling at 14.24%. Looking ahead, we maintain our view of bearish sentiment in the coming week, considering the current scarcity in financial system liquidity and the Central Bank of Nigeria’s restrictive monetary policy stance.
