VETIVA RESEARCH – Federal Reserve maintains tightening stance

What shaped the past week?

Global: This week in Asia-Pacific markets, investors reacted to news on the banking sector and economic data. China’s industrial profit declined 22.9%, while the IMF noted signs of a robust economic recovery. Major stock markets traded mixed as investors gauged the crisis in the banking sector. Alibaba’s decision to split into six separate units drove gains at the end of Wednesday’s session. Concerns over the global economic outlook lingered, keeping sentiment mostly negative on Thursday. Friday saw gains, boosted by positive sentiment on Wall Street and optimistic data from Japan and China.

Major stock market indexes in Europe closed mostly higher this week with a focus on economic data and the banking sector. Positive reports on Germany’s business climate and inflation contributed to early gains. Investors also turned their attention to the Eurozone’s inflation, unemployment rate, and the UK’s GDP updates. Meanwhile, ECB Chief Economist predicted inflation would decline to 2.8% by year-end and assured investors that the banking system is not at imminent risk of a crisis. Positive consumer prices data from Germany on Thursday and a preliminary report on March inflation in the Eurozone on Friday boosted investor sentiment.

Major US stock markets closed Monday’s session mixed, with the Dow Jones increasing nearly 200 points after a merger deal between two banks. Investors anticipated the new GDP data to be released on Thursday. However, on Tuesday, the stock market indexes closed lower due to an increase in the trade deficit and a decline in consumer confidence. Tech and bank stocks continued to perform well on Wednesday, and the markets closed higher. Positive news on ad revenue from companies like Meta, Google, and Snap pushed up shares, while the banking sector appeared to calm on Thursday. The Biden administration proposed an update to rules for mid-sized banks to avoid another collapse.

Domestic Economy: As a result of the Central Bank of Nigeria’s naira redesign policy, the amount of currency in circulation in the nation decreased by 29.16% m/m, from N1.4 trillion in January 2023 to N0.9 trillion in February 2023. Despite the intended objective of moderating inflation, inflation ticked up in February. The cash crunch had a countervailing effect on economic activities amid numerous digital transaction failures, restricted access to cash in rural areas, and the crippling of the informal sector. While high base effects could momentarily ease inflation, the suppression of demand may not tame inflationary pressures over the medium term, as inflation in Nigeria is primarily cost-push.

Equities: The Nigerian equity market had a bearish trading week, with the All-Share index returning 0.06% w/w. While the banking, consumer goods, and industrial goods sectors closed in the green, the oil and gas sector closed in the red. The banking sector returned 3.67% w/w, with interest in Zenith Bank and Access Bank driving the sector higher. The consumer goods sector continued its impressive run in 2023 returning 0.94% w/w, taking its YTD return to 19.15%. The industrial goods sector returned 0.36% w/w, with another round of buyside interest in Dangote Cement driving the positive performance. On the other hand, sell-side pressure drove a -2.02% w/w return for the oil and gas sector.

Fixed Income: While the week unfolded with bearish undertones in the secondary market, it was the constrained liquidity levels that truly hampered activity. Notably, investors were left to digest the latest NTB auction, where a broad-base rise in stop rates offered left little room for optimism. This translated into yields across benchmark bonds rising 10bps on average w/w, as investors found themselves driven by a sell-side mentality in the long-end of the market. Unfortunately, limited liquidity compounded matters, leading to a dearth of activity in the NTB space.

Currency: The Naira depreciated  N0.09 w/w at the I&E FX Window to close the week at  N461.33.

What will shape markets in the coming week?

Equity market: We anticipate a mixed week to trading in the secondary market, as investors wrap up their portfolio rebalancing period.

Fixed Income: Given the limited changes to the drivers of activity in the space, we anticipate a quiet start to the trading week on Monday, barring an improvement in liquidity levels.

VETIVA RESEARCH – Federal Reserve maintains tightening stance  The U.S. Federal Reserve has once again voted to raise the Federal Funds Rate (FFR), this time by 0.25% to a range of 4.75% – 5.00% following the March Federal Open Market Committee (FOMC) meeting. This decision comes amidst concerns about elevated inflation and a need to maintain the stability of the economy.

Elevated inflationary pressures persist in February

According to the U.S. Bureau of Labor Statistics, consumer prices rose 6.0% year-on-year (Jan: 6.33% y/y) in February. Prices rose 0.4% month-on-month, as shelter and higher gasoline prices drove the month-on-month increase in inflation.

Housing prices having increased by 7.58%, when compared to housing prices in

February 2022. On a more positive note, gasoline prices have fallen significantly.

Gas prices are 18% lower when compared to prices in February 2022.

Overall, the February inflation data suggest a mixed picture, with some categories experiencing higher prices while others experienced a decline. This could be an indication of a moderating inflationary environment. Even though inflation is moving in the right direction, it poses a risk to the economy if it persists at a high level for an extended period. We see U.S. inflation decreasing slightly in March, largely due to lower global oil prices that should alleviate domestic fuel prices. However, we remain cautious about housing demand if the labour market remains tight.

U.S. Treasury, FED, step in to protect regional banking sector

The collapse of Silvergate Bank, Silicon Valley Bank, and Signature Bank has sent shockwaves through the U.S. banking sector, causing investors to pull their funds from smaller regional banks to larger banks with a stronger global presence. While it is certainly a cause for concern for investors, the fact is, the U.S. Treasury and the FED are stepping up to provide emergency funding to regional banks through various measures, and with that kind of support, there is reason to believe that this situation will be contained to just these three banks.

Nigerian Eurobonds – Sell-side sentiment remains amid rising rates

It is no surprise that global investors have been adopting a risk-averse approach to emerging and frontier market government debt, in light of the recent widespread increase in interest rates across advanced economies. Unfortunately, Nigeria’s Eurobonds have not been immune to this trend. As of YTD, the yield on the nation’s 5-Year Eurobond has risen by 123bps to 12.59%. With the recent 0.25% hike by the U.S. Federal Reserve, there will be further downward pressure on the prices of the nation’s Eurobonds, which translates to higher yields in the space.

Outlook – FED remains hawkish despite concerns about banking sector

Upon analysing Chairman Powell’s recent statement to the press in the aftermath of the FOMC decision, it is clear that the apex regulator is firmly committed to the objective of bringing inflation down to the 2% target level, while simultaneously upholding price stability. Additionally, it was emphasized that rate cuts are not part of their base case for the year 2023. As such, we interpret this to signify that the Federal Reserve is unlikely to reduce interest rates during the year. That said, in light of the unanimous vote by all members to increase rates in March, we anticipate that the FED will closely monitor inflationary pressures and will rely on it for guidance on future rate hikes. If inflationary pressures continue to be high, our expectations are that the FFR will likely reach a target range of 6.00% – 7.00% in 2023, with rate hikes at the upcoming May and July FOMC meetings.