United States – US Economy Shows Resilience amid Domestic and Geopolitical Headwinds. 

In the United States, the personal consumption expenditure (PCE) inflation metrics for May 2023 came in in-line or slightly below expectations. In line with the forecast, headline PCE inflation rose 3.8% year-on-year compared to 4.4% in April 2023. This marks the first month since 2021 that PCE inflation has dipped below 4.0%. However, Core PCE inflation however remained grew by 4.6% YoY in May 2023, although slightly below forecasts and last month’s reading, both of which were 4.7% YoY. We opine that the current downtrend in PCE inflation is in line with the downtrend we witnessed in the Inflation figures this year. Nonetheless, inflation still remains above the Fed’s 2.0% target. Despite the pause in interest rate hikes at the last policy meeting, we opine that the US Fed might still raise rates further in the coming months if inflation remains stubborn and the US labor market continues to show resilience. 

Still in the US, On Thursday, U.S. GDP growth figures for Q1:2023 was revised upward. According to the revised figure, the US economy grew by 2.0% annualized compared to a prior reading of 1.3%. This can be linked to a stronger consumption figure, which grew at 4.2% YoY. The Fed’s GDP-Now tracker is hinting at a 1.8% YoY growth rate in Q2:2023 despite concerns about slower economic growth following the previous aggressive interest rate hikes. 

 

China – Growth Forecast Remain Gloomy Amid Declining Demand 

China’s economic growth expectation continues to remain gloomy as declines in economic demand persist. China’s factory activity report for June 2023 contracted for the third consecutive month, with non-manufacturing activity standing at its weakest since Beijing abandoned its strict “zero Covid” policy late last year. 

 

According to data released by the National Bureau of Statistics of China today, the official Manufacturing Purchasing Managers’ Index (PMI) for June 2023 stood at 49.0pts compared to 48.8pts in May and 49.2pts in April 2023. This is below the 50.0pts benchmark that depicts a relatively stable economic activity situation. 

 

Furthermore, the official non-manufacturing PMI reading declined to 53.2pts in June 2023 compared to 54.5pts in May and 56.4pts in April. A PMI reading above 50pts depicts economic activity expansion, while a reading below 50.0pts suggests economic activity contraction. The lower-than-expected PMI reading continues to cast dark shadows over China’s 5.0% ec onomic growth forecast. 

 

Domestic Economy – Downtrend in Foreign Reserves Persist 

During the week, the Central Bank of Nigeria (CBN) released the Money and Credit Statistics report for May 2023. Notably, the Narrow Money, Money Supply (2) and Money Supply (3) declined by 34bps, 27bps and 43bps each to settle at NGN22.47trn, NGN55.50trn and NGN55.80trn respectively. Similarly, Currency in Circulation (CiC) soared by 41.32% from NGN1.68trn in March to NGN2.38trn in April 2023. Furthermore, the CiC grew by 6.20% MoM, reaching NGN2.53trn in May 2023. These changes can be attributed to the reintroduction of old notes into the financial system. It appears that the objective set by the previous CBN Governor to reduce Currency outside Banks may not have been achieved, as evidenced by the rise of CiC from its lows of NGN79bn and NGN64bn in January 2023 and February 2023, respectively, to NGN2.18trn in May 2023. 

Furthermore, there has been a notable and continuous decline in the country’s foreign reserves. Since the start of this year, the foreign reserve has shed 7.75% amounting to USD2.86bn. With the recent unification of the foreign exchange (FX) system, we anticipate further declines in the FX reserves in the short term, as volatility persists within the FX market, particularly due to heightened foreign debt obligations. However, we hold the view that this new policy will ultimately bolster foreign portfolio investment and attract foreign direct investment in the long run. While short-term challenges and uncertainties may persist, the unification of the FX system is expected to create a more conducive environment for foreign investors, promoting stability and confidence in Nigeria’s economic landscape.

 

 

The Fixed Income Market– Mixed Sentiments Amid Liquidity Rubles 

At the primary NTB auction held this week, the average stop rate dipped by 159bps to settle at 4.49% compared to 6.08% at the last auction.  However, we noticed that demand declined as the average-bid-to-cover ratio plunged by 426bps to 4.03x (compared to 8.29x at the previous auction). Demand was tilted towards the 91-day instrument, as its average bid-to-cover-ratio edged up by 265bps to 4.09x (compared to 1.44x at the previous auction). Specifically, the stop rates for the all the 91-day bill, 182-day bill and 364-day bill dipped by 202bps, 75bps and 201bps each to 2.87%, 4.37% and 6.23% respectively. In consequence, the secondary Nigerian Treasury Bills market closed the week on a positive note as average yield declined by 11bps WoW to 6.34%. Similarly, the secondary bond market ended the week positively as average yield fell by 80bps WoW to settle at 12.98%. This is following significant buying interest across the curve. 

The Nigerian Equities Market in H1:2023: A Bullish Run at its Peak 

The Nigerian equities market witnessed a bullish era in H1:2022. Despite the impacts of the banking crisis that heralded major economies, The Nigerian equities market remained buoyant amid the storm. We opine that this is on the back of S 

a. Sustained January rally 

b.The impact of market rallying events that unfolded in the quarter (e.g., the Transcorp acquisition saga between Femi Otedola and Tony Elumelu) 

c. Mixed sentiments following the release of 2022FY and Q1:2023 earnings result. 

d. Lower yields in the fixed income market amid robust liquidity in the market 

e. Pro-market remarks by the new President during the inaugural speech. 

For context, a prolonged January rally and lower yields in the fixed income market bolstered the performance of the local bourse between January (+3.88% YtD returns) and February (+8.89% YtD returns). However, the 50bps hike in interest rate by the MPC of the CBN coupled with mixed sentiments that trailed 2022FY earnings result slowed the performance of the bourse in March (+7.02% YtD returns). The NGX ASI further dipped to 2.25% in April amid elevated yields in the Fixed income market and below expectation Q1:2023 earnings result. However, in May following the president’s remark on the inauguration day, we saw a substantial surge of 5.22% on May 30th, 2023, marking the most substantial single-day trading gain since November 12th, 2020, when it recorded an impressive ascent of 6.23%. As a result, the NGX performance soared to 8.82% YtD.  

In June, following the changes in the operations in the FX market which brought about the floatation of the Nigerian Naira, the equities market year-to-date performance surged to 18.96%.