Global Economy

United States – U.S PCE Shows Weaker Rise Amid Interest Rate Hike

As reported by the Bureau of Economic Analysis within the United States Department of Commerce, Personal Income in current dollars saw growth across 49 states and the District of Columbia during the second quarter of 2023. The percentage change varied, with the highest increase at 6.1 percent observed in New York and the District of Columbia, while Maine experienced a decline of 2.7%. On a national scale, personal income surged by a noteworthy USD239.7 billion during the same quarter. This boost was attributed to rising earnings, property income (comprising dividends, interest, and rent), and transfer receipts.

Another noteworthy gauge of inflation in the United States, the Personal Consumption Expenditure Index, showed a slight uptick of 0.4% month-over-month and a 3.5% year-over-year increase in August. These figures were in line with expectations but exceeded the previous month’s 3.4% year-over-year reading. The PCE index is highly regarded for its ability to account for changes in consumer behavior, such as substituting lower-priced goods for more expensive ones. Consequently, it offers a more comprehensive portrayal of the cost of living compared to the more widely followed Consumer Price Index (CPI), which measures costs without considering substitution effects. The notable upswing in the PCE index can be attributed to the recent surge in energy costs, as reflected in the latest CPI report for August.

 

Moreover, the Core Personal Consumption Expenditure Index, which excludes food and energy components, exhibited a 3.9% YoY increase (compared to 4.3% in July). Analysts suggest that this moderating ascent in PCE figures may be positive news for the U.S. Federal Reserve, potentially influencing their decision to maintain the current interest rates.

United Kingdom – Revised GDP Forecast Indicates Improved Expansion

According to data released by the Office of National Statistics, the United Kingdom’s Gross Domestic Product (GDP) is estimated to have increased by an unrevised 0.2% in Q2 2023. Furthermore, The GDP Figures for Q1:2023 were revised upward to a 0.3% expansion in Q1:2023 compared to the previous estimate of 0.1% growth. Taking into account the recent revisions, this means that GDP is now estimated to be 1.8% above pre-coronavirus (COVID-19) pandemic levels in Q2:2023.

 

Eurozone – Sustained Disinflation Expected

According to the initial estimate released by Eurostat, the European Union’s statistical agency, annual inflation within the Euro area is projected to reach 4.3% in September 2023. This represents a decrease from the August figure of 5.2%.

When we delve into the primary factors contributing to inflation in the Euro area, it is expected that food, alcohol, and tobacco will have the highest annual rate in September, standing at 8.8% (vs 9.7% in August). Services are projected to follow closely with a yearly rate of 4.7% (down from 5.5% in August), while non-energy industrial goods are expected to register at 4.2% (compared to 4.7% in August). Conversely, energy is anticipated to experience a negative annual rate of -4.7% (a decline from -3.3% in August).

Domestic Economy – Foreign Portfolio Participation in the Equities Market

During the week, the Nigerian Exchange Limited released the Foreign Portfolio Investment report for August 2023. As culled from the report, total transactions on the bourse declined 62.65% MoM to 262.56bn in August 2023 (vs 702.98bn in July 2023). For context, Total Foreign Transactions shed 8.34% from NGN40.54bn in July 2023 to NGN37.16bn in August 2023. However, on a year-on-year basis, Total transactions on the bourse still soared 111.79% from NGN123.97bn in August 2022 to NGN262.56bn in August 2023.

We believe that the decrease in overall participation on the stock exchange can be attributed to profit-taking maneuvers executed by investors, particularly those on the domestic front. This action comes on the heels of a remarkable surge witnessed in the preceding month, a surge substantiated by the heightened engagement witnessed on the exchange, with a total value of NGN 702.98 billion in transactions recorded for July 2023.

Moreover, foreign investors are currently approaching the market with a sense of caution, as they await both the sustained consistency in policies from the government’s Monetary and Fiscal Arm and the assurance of liquidity in the foreign exchange market, which would facilitate the repatriation of their funds. We hold the view that by and large, domestic investors will continue to hold sway in the equities market.

Additionally, our anticipation is for a decrease in trading activity on the stock exchange throughout the course of September 2023. This projection takes into account the prevailing bearish momentum, coupled with the repercussions stemming from the Central Bank of Nigeria’s announcement, which disallows banks from employing foreign exchange revaluation gains for dividend payments and cost coverage. Furthermore, we posit that foreign portfolio participation will remain tepid as we enter the month of September 2023.

Afreximbank, the USD3bn Cash-for-crude Loan and NNPCL

In recent news, the African Export-Import Bank (AFREXIM) is actively engaging with oil traders to assess their interest in providing the essential funding for a USD3 billion emergency cash-for-crude oil repayment loan to the Nigerian National Petroleum Company Limited (NNPCL). This loan was announced by NNPC on August 16, 2023, with both parties signing a commitment letter and term sheet to aid in stabilizing Nigeria’s volatile foreign exchange market.

In our analysis, we posit that this move offers a short-term solution to the deep-rooted structural challenges affecting the Nigerian economy, which are now significantly impacting the foreign exchange market. It’s worth noting that this arrangement comes more than a year after NNPCL secured a USD5 billion corporate finance commitment from the bank to support significant investments in Nigeria’s upstream sector. The previous agreement was structured as a Forward Sale Arrangement, entailing the delivery of 90,000 to 120,000 barrels per day to the lender over a four to eight-year period. We believe that both of these arrangements will have a substantial long-term impact on the country’s oil revenue generation.

The Nigerian Equities Market – The Bears Remain Dominant in the Equities Market

The Nigerian Equities market closed on a bearish note for the third consecutive week as the NGX All Share Index (ASI) shed 140bps WoW to close at 66,382.14pts. The market lost in all four (4) trading days of the week following sustained profit-taking activities by investors. As a result, the bourse’s year-to-date (YtD) returns settled at 29.52% (vs 31.36% YtD last week). Sectoral performance was bearish and safe for the Consumer Goods (+1.59% WoW) and Insurance (+2.77% WoW) sectors. Leading the advancers are BETAGLAS (+30.41% WoW to NGN60.90), IKEJAHOTEL (+30.00% WoW to NGN3.25) and CWG (+23.57% WoW to NGN8.65). On the flip side OANDO (-33.76% WoW to NGN7.85), FTNCOCOA (-19.68% WoW to NGN1.51), and SUNUASSUR (-14.29% WoW to NGN0.90) led the laggards.

The Nigerian Fixed Income Market – The Bulls Revisit the Bond Market

At the primary Nigerian Treasury Bills auction held within the week, the average stop rate declined by 126bps to 7.64% (vs 8.89% at the previous auction). However, the average bid-to-cover ratio rose by 21bps to settle at 4.44% (vs. 4.23% at the previous auction), an offshoot of increased demand for the instrument. At the secondary market, the NTBills closed the week on a bullish note as the average yield shed 53bps, WoW, to close at 7.94%. Similarly, the secondary bond market ended the week on a bullish note, as the average yield declined by 2bps, WoW, to settle at 14.44%. This is following significant buying interest in the MAR-2024 instrument (yield down 79bps). Overall, the Naira Fixed income market closed the week bullish as the average yield shed 28bps, to print at 11.19%.