June 2024 – MCR

Economy Overview in June

On the Global Scene, the Consumer Price Index for All Urban Consumers (CPI-U) was unchanged in May on a seasonally adjusted basis, after rising 0.3% in April. Similarly, the core CPI (excluding food and energy) also rose by less than expected, up 3.4% y/y(v. c.3.6%y/y in Apr 2024).

Following the recent Federal Open Market Committee (FOMC) meeting, the Federal Reserve decided to keep the Federal Funds Rate unchanged at 5.5%. This decision was driven by the need for more data to confirm a sustained decline in inflation. Recent data showed that the Core Consumer Price Index (CPI) month-over-month (m/m) decreased to 0.2% from the previous 0.3%, while the year-over-year (y/y) Core CPI fell to 3.4% from 3.6%. As a result, market participants are now pricing in the possibility of only one rate cut for the 2024 calendar year.

On the Domestic Scene, Nigeria’s headline inflation rate accelerated to 33.95% in May 2024 from 33.69% in the prior month indicating a 0.26% increase y/y. However, on a month-on-month basis the headline inflation rate in May 2024 came in at c.2.14%, which was 0.15% lower than the rate recorded in April 2024 (2.29%). Signaling a somewhat slow down in inflationary pressures as the CBN continues its hawkish monetary stance. Also, Food inflation, which accounts for the bulk of Nigeria’s inflation basket, surged to a record high of 40.66%y/y in May (v. 40.53%y/y in April 2024). On the contrary, Food Inflation decreased by 0.22% to 2.28% m/m in May (v. 2.50%m/m in April 2024). This slowdown in monthly food inflation was driven by a reduced rate of change in food index levels, suggesting some moderation in food price pressures.

Nigeria recently secured a $2.25 billion World Bank loan to support reform efforts and alleviate the cost-of-living crisis. This loan, provided by the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA), is split into two operations: a $1.5 billion Development Policy Financing (DPF) for the RESET program and a $750 million for the ARMOR program for Results (PforR). Although, Nigeria is yet to receive the funds, in the short term, we expect a positive impact on the naira from increased reserves and improved foreign investor interest. This reserve increase will enhance the CBN’s ability to support the naira in the forex market.

On the Crude oil price prices inched slightly higher as brent crude closed the month at $85.91 per barrel (vs. $81.54 per barrel in May) despite soft US demands. This uptick in price was driven by geopolitical tensions significantly between Israel and Lebanon.

The Nigerian Capital Market

The Domestic Equity Market closed the month of June 2024 on a positive note as the NGX All Share Index (ASI) posted a YTD return of +33.81% (v. +32.8% in May 2024). Market capitalization closed at c.N56.6 trillion.

This performance is reflective of the resilience of the local bourse indicating investor’s confidence in listed companies despite heightened economic uncertainties such as elevated inflation, FX depreciation, security concerns, as well as various policy announcements by the CBN.

Consequently, on a sectoral basis, the Banking sector gained c.1.14% m/m. Similarly, the Insurance index and Pension index also closed in the positive at 3.3% & 1.99%, 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 dipped closing at 18.84% (vs. 18.49% in May’23).

At the FGN Bond Auction, the DMO offered three maturities- May’33, Apr ’29 and Feb ’31, with stop rates at 21.50%, c.20.19% and c.19.64% respectively. The DMO sold a total of N297billion with Total bid/cover ratio at c.1.02x.

At the last NTB primary auction conducted during the month, stop rates stood at 16.3%, 17.44% and 20.68% for the 91-day, 182-day and 364-day papers, respectively. The DMO allocated N284.26 across the three tenors surpassing the offer size by 2.7xx.

In July , 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.