July 2024 – MCR

Economy Overview in July

According to the US Bureau of labor statistics, The US Consumer Price Index rose 3% in June 2024 (v. 3.3% in May 2024), majorly driven by gasoline prices which fell c.3.8% in June relative to May 2024. Consequently, at it last FOMC meeting, The Federal Reserve opted to hold interest rates steady once again at a target range of 5.25% to 5.5%. Though June’s Consumer Price Index showed a mild cooling of inflation compared to a month prior, but not enough of a decline to warrant an interest rate cut.

Also, The US economy grew at a faster than expected pace in the second quarter. The US gross domestic product (GDP) showed the economy grew at an annualized pace of 2.8% during the period (v. 1.4% in Q1 2024). Core PCE Personal Consumption Expenditures index grew by 2.9% in the first quarter, above estimates of 2.7% but significantly lower than 3.7% gain in the prior quarter. This implies the June PCE rose at 0.28% M/M (Exp. 0.1%). The data’s release sets a pace as Federal Reserve will start cutting interest rates and if the central bank can achieve a soft landing, where inflation comes down to its 2% target without a significant economic downturn.

On the Domestic Scene, Nigeria Inflation Pressures Remain Persistent, With Headline Inflation Surging to 34,19% from 33.95% YoY. Nigeria’s headline inflation for the month of June accelerated to c.34.19% y/y (v. c.33.95% in May 2024) largely driven by food and energy prices. On a m/m basis, headline inflation increased to c.2.31% m/m in June after declining for three consecutive months. Similarly, food inflation increased c.2.55% m/m in June (v. c.2.28% m/m in May 2024). Across all sub-indices, m/m inflation rates also rose reflecting the impact of the exchange rate pass-through effect on commodity prices.

The Central Bank of Nigeria’s (CBN) Monetary Policy Committee (MPC) at its last meeting raised its monetary policy rate by 50bps to 26.75% (v. 18.75% in June 2023). With inflation still elevated, the Apex bank is willing to keep rates higher for longer to attain its 21.4% inflation target by year-end and encourage dollar inflows as a means of supporting the Naira which weakened considerably within the month. The CBN also adjusted the asymmetric corridor around the MPR from +100/-300 to +500/-100 basis points while keeping the Cash Reserve Ratio (CRR) for Deposit Money Banks (DMBs) and the liquidity ratio unchanged at 45% and 30%, respectively.

Oil prices inched slightly lower as brent crude closed the month at $80.77 per barrel (vs. $85.91 per barrel in June) despite soft US demands. This uptick in price towards the end of the month was driven by geopolitical tensions as Hamas political leader Ismail Haniyeh was assassinated in Tehran, Iran, renewing fears that the Middle East is teetering on the brink of a regional war.

The Nigerian Capital Market

The Domestic Equity Market closed the month of July 2024 on a negative note as the NGX All Share Index (ASI) posted a YTD return of +30.76% (v. +33.81% in June 2024) indicating a 3.05% decline m/m. Market capitalization closed at c.N55.1 trillion.

With the release of the half-year earnings results within the month, the impact of the Naira depreciation in the first quarter of the year still weighs in on companies’ performances. Also, the announced windfall tax on banks also put investors in an apprehensive mood, driving bearish performances in most banking stocks during the month.

Consequently, on a sectoral basis, the oil and gas sector gained c.7.67% m/m. Conversely, the banking index and consumer goods index closed in the negative at c.3.21% & 6.38%, month-on-month.

The Nigerian Fixed Income Market closed bearish in the month of June as we saw sellers at the mid-long end of the curve investors. Consequently, average yields inched higher closing at 19.63% (vs. 18.84 % in May’23).

At the FGN Bond Auction, the DMO offered three maturities- May’33, Apr ’29 and Feb ’31, with stop rates at 21.98%, c.19.89% and c.21% respectively. The DMO sold a total of N297billion with Total bid/cover ratio at c.1.24x.

At the last NTB primary auction conducted during the month, stop rates stood at 18.5%, 19.5% and 22.1% for the 91-day, 182-day and 364-day papers, respectively. The DMO allocated N225.72 across the three tenors surpassing the offer size by 1.35x.

In August , we expect yields to remain relatively stable, as the central bank continues to weigh in on inflation while also looking to strengthen the continued flows from FPI. Notwithstanding, we opine that the continued quantitative tightening by the central bank would provide forward guidance to the direction of yields in the month.