Focus for the week: Terminal rate hikes on the offing

In the third meeting of the year, the Cardoso-led Monetary Policy Committee (MPC) raised the Monetary Policy Rate by 150bps to 26.25%, leaving other rates constant. In line with the Governor’s guidance at the 2023 Banker’s Committee dinner, the apex bank has delivered a cumulative 750bps hike in H1’24, in a bid to moderate inflation and assuage currency pressures.

Despite the record 600bps hike in Q1, growth in the real sector was likely strong. Preliminary economic indicators show that the Nigerian economy grew by 3.5% – 4.1% in Q1’24. Thus, we expect overall growth to settle between 3.2% – 3.5% in FY’24 (CBN: 3.38% y/y) on the back of the recovery in the oil sector. Thus, in the face of resilient economic growth outcomes, the apex bank continues to deploy tools at its disposal to tackle both inflation and FX pressures head-on.

The Committee’s decision to slow its hawkish momentum is due to the moderation in m/m inflation and the need to consolidate on previous hikes. We also believe the foreseeable accretion to reserves from improved oil production, a Eurobond issuance, and multilateral inflows could provide further succor to the Naira and reduce the need for further hikes.

We expect a terminal 100-150bps hike in Q3’24

Highlighting the tendency of central banks in advanced economies to pause rate hikes soon, the apex bank hinted at grounding rate hikes to a halt. The past hawkish decisions and some regulatory changes helped a great deal in moderating FX pressure in Q1’24. While we see multilateral inflows and high money market rates keeping the Naira in check, we believe further upticks in inflation may necessitate mild tightening. Our base case posits that inflation may peak in July and begin to moderate in August. This could give room to a 100bps hike in July followed up with a terminal 50bps hike in September. Should inflation begin to moderate from June alongside stronger-than-anticipated accretion to reserves and subsequent FX gains (bull case), we could see a terminal 100bps rate hike in July. Over the near term, we expect investors to take advantage of the attractive yields on treasury bills.

What shaped the past week? 

Equities: This week, the local equity market traded in a bearish manner, shedding 0.52% w/w to settle at 97,612.51 pts. Leading the sectoral losses was the Banking sector (-7.35% w/w), as sell-offs in UBA (-12.13% w/w) and FBNH (-10.89% w/w) helped drag the sector lower. Similarly, the Insurance sector closed in the red (-3.50% w/w).  On the flip side, the Oil & Gas sector gained 0.19% w/w, driven by gains in OANDO (1.44% w/w), while the Consumer Goods index rose by 0.31% w/w.

Fixed Income: This week, system liquidity opened on Monday at c.₦863 billion negative and finally opened on Friday at c.₦170 billion positive, owing to borrowings via the Standing Lending Facility (SLF). This led to further tightening pressure at the interbank window as the OPR rate rose 400bps to 32.40% w/w. Meanwhile, earlier in the week, the CBN held an OMO auction where ₦500 billion worth of bills across the three tenors was on offer.  At the end of the auction, subscriptions totaled ₦1.6 trillion. Stop rates closed at 18.99%, 19.74%, and 22.49% on the 99-day, 183-day, and 365-day bills, respectively. Also, the DMO through the CBN held an NTBs auction where it offered ₦508 billion worth of papers across three tenors. At the end of the auction, the DMO allotted ₦637 billion worth of papers across the three tenors. Meanwhile, the DMO held stop rates on the 91-day, 182-day, and 364-day papers constant at 16.50%, 17.44%, and 20.69% respectively. Meanwhile, the OMO and NTBs auction influenced trading sentiments in the secondary market, as cautious trading activity dominated the market throughout the week.

Currency: At the NAFEM, the Naira depreciated by ₦0.28 w/w to close the week at ₦1473.41 per dollar.

Domestic Economy:

In the third meeting of the year, the Cardoso-led Monetary Policy Committee (MPC) raised the Monetary Policy Rate by 150bps to 26.25%, leaving other rates constant. In line with the Governor’s guidance at the 2023 Banker’s Committee dinner, the apex bank has delivered a cumulative 750bps hike in H1’24, in a bid to moderate inflation and assuage currency pressures. Highlighting the tendency of central banks in advanced economies to pause rate hikes soon, the apex bank hinted at grounding rate hikes to a halt. Our base case posits that inflation may peak in July and begin to moderate in August. This could give room to a 100bps hike in July followed up with a terminal 50bps hike in September. Should inflation begin to moderate from June alongside stronger-than-anticipated accretion to reserves and subsequent FX gains (bull case), we could see a terminal 100bps rate hike in July. Over the near term, we expect investors to take advantage of the attractive yields on treasury bills.

Global: Global investors reacted to major economic news; notably, the release of U.S. labor data, and the Flash Manufacturing PMI. Of note, the US unemployment claims declined to 215k m/m from 223k in the previous month, while the US manufacturing index printed 50.9% m/m, indicating a stronger manufacturing sector. This influenced trading sentiments in the US Financial Markets, where we saw the S&P 500 contracting by 0.3% w/w to close at 5304.72pts and the Dow Jones also declined by 2.3% w/w to close at 39070pts, at the end of the trading session on Friday. Meanwhile, European stocks slipped at the end of trading session today, reacting to the preliminary manufacturing data which printed 46.7% m/m in May.  The Stoxx Europe 600 index finished down 0.19% to close at 520.57pts. Similarly, the FTSE 100 Index fell 0.22% to 8,321.16pts, the French CAC 40 index dropped 0.09% to 8,094.97pts, while the German DAX increased 0.01% to 18,693.37pts.

What will shape markets in the coming week?

Equity market:  The equity market remains under pressure, as investors pursue safety in the fixed income space. However, given the strong sell-side action in the Banking space, we anticipate some buy-side action in the coming week, as traders seek to take advantage of some stocks that have been beaten down in recent sessions.

Fixed Income: In the next trading session, we expect the NTBs and OMO auction that held this week to influence the trading patterns in the secondary market.