Focus for the week: MPC rounds the year with a mild hike

At the last meeting of the year, all 12 members of the Monetary Policy Committee (MPC) were present. They unanimously decided to raise the Monetary Policy Rate (MPR) by 25bps to 27.50%, while leaving other rates unchanged. This brings the cumulative rate hike in 2024 to 875bps, the largest annual policy rate adjustment on record. The final adjustment was less than the median 50bps expectation of the economists surveyed by Bloomberg. 

The Committee was concerned about the uptick in inflation, especially after the recent upward adjustment of PMS prices. The Committee was however optimistic that the deregulation of the downstream sector could eliminate the scarcity of products and stabilize price levels in the short to medium term. In addition, the Committee noted the improvements in the external sector, including higher current account surpluses, enhanced remittance receipts, higher portfolio inflows, and the subsequent accretion to reserves. According to the Governor of the apex bank, external reserves had risen to $40.88 billion, which amounts to an import cover import of 17 months. We liked that the apex bank governor emphasized the focus on exchange rate stability, rather than outright exchange rate targets to wade off speculation and justify the magnitude of tightening that has been implemented thus far in 2024. While provisional data showed that foreign portfolio investment likely fell to $730 million in Q3’24, Nigeria has attracted $2 billion thus far in Q4’24, justifying the hawkish posture the apex bank has taken thus far.

Despite the sizeable hikes year-to-date, Nigeria has recorded its strongest 9M real output growth since 2014. The 3.46% y/y expansion in Q3’24 pushed growth in the economy for 9M’24 to 3.22% y/y. We expect the Nigerian economy to expand by 3.3% in 2024, which is 10bps above the IMF’s estimate (3.2%).

We expect the concerns around inflation to resurface in January, as we see inflation ticking north in November and December. Thus, another 25bps hike could be on the table. Nevertheless, we see room for moderation in inflation in Q1’25 barring any major shock to crude prices and the exchange rate. Should the Naira trade within the ₦1,650/$ – ₦1,750 range and crude prices remain below the $75/barrel handle, we may not see the need for >10% adjustment in PMS prices over the near term. Thus, we may see a pivot to a hold stance beyond January or further hikes, should economic fundamentals deviate from expectations.

What shaped the past week? 

Equities: This week, the Nigerian Exchange (NGX) recorded a stronger performance, with all major sectoral indices closing in the green. At Friday’s close, the NGX All-Share Index (ASI) gained 0.72% w/w, driven by broad-based gains across major sectors. The Insurance (+10.50% w/w), Oil & Gas (+4.84% w/w),  Industrial Goods (+2.52% w/w), and Banking (+1.30% w/w) indices all posted significant gains. The Consumer Goods sector also recorded an increase, albeit marginal (+0.13% w/w). On the gainers’ chart, GOLDBREW (+45.95% w/w), SUNUASSUR (+29.49% w/w), WAPCO (+27.59% w/w), NSLTECH (+27.27% w/w), and CORNERST (+25.00% w/w) topped the list, reflecting strong investor interest in select mid- and small-cap stocks. On the decliners’ chart, LEARNAFRCA (-11.75% w/w), ARADEL (-10.06% w/w), REDSTAREX (-10.00% w/w), ETRANZACT (-10.00% w/w), and JOHNHOLT (-9.98% w/w) led the laggards, driven by profit-taking activities.  Market sentiment appeared positive overall, with the Insurance sector’s 10.50% w/w surge standing out, largely supported by gains in stocks like SUNUASSUR and CORNERST. We may see some major news for the sector in the near term as investors appear to have been shoring up positions for months. The Oil & Gas sector also saw robust performance, buoyed by price appreciation in SEPLAT (+7.55% w/w) and CONOIL (+5.07% w/w).

Fixed Income:  This week, system liquidity was buoyant, driven by FAAC allocations and a Tbill maturity, despite the significant allotments at the NTBs and OMOs auctions. However, yields closed higher w/w, following the removal of the tier system at the SDF window, raising effective interest rates to 26.5%. At the NTBs auction, while ₦586 billion worth of bills were on offer, total allotment printed at ₦757 billion, as subscriptions topped ₦2.5 trillion, given buoyant system liquidity. At the auction, stop rates remained unchanged for the 90-day and 182-day bills at 18.00% and 18.50%, respectively, while it declined 57bps for the 364-day paper to 22.93%. Additionally, the CBN held an OMOs auction at the end of the week to mop up liquidity. While ₦500 billion worth of bills were on offer, total allotment printed at ₦773 billion, as subscriptions topped ₦2.2 trillion, given buoyant system liquidity. At the auction, allotment was only done on the 361-day bill, with stop rate printing at 23.98%. At the end of the week, yield changes were seen across the curve with the biggest jump recorded on the 91-day paper (+415 bps w/w); the 7-year note was the sole decliner (-21bps w/w).