Weekly Market Review: Vol. 97
Prologue
Last week, attention was centred on the MPC meeting, as the CBN further tightened conditions. The Monetary Policy Rate (MPR) was hiked 150 basis points from 24.75% to 26.25% as the asymmetric corridor, Cash Reserve Ratio (CRR), and Liquidity Ratio (LR) were maintained. Analysts had
projected a hike not exceeding 100 basis points to 25.75%, but the MPC action was taken in response to the April inflation numbers (33.69%) and continued northward movement in FX rates. It is noteworthy to mention
that the committee acknowledged the slowed rate of inflation growth to 2.29% in April from 3.02% in March.
Although the secondary markets reacted logically to the rate hike with yields on recently auctioned securities trading at levels equal to or higher than their stop rates, the NTB result was not reflective of the monetary policy aggression, and this brought about a temporary bull-run,
particularly at the short end of the curve. The OMO auction conducted on Friday and indeed the stop rates approved were a confirmation of CBN’s
commitment to tackle inflation and FX pressures head-on.
Nigerian Financial Market
With Friday’s liquidity position at ₦170 billion long, the CBN issued ₦1.1 trillion in OMO bills from the ₦500 billion offered. In tandem with the MPC decisions, CBN allotted the 1-year benchmark OMO 99bps higher than it did at the last OMO auction. This signal may set the tone for higher yields across the yield curve in the near term, subject to fiscal policy alignment.
The NTB auction conducted during the week in the opinion of many stakeholders was largely influenced by the anticipation of FAAC inflows and without any consideration of a potential OMO. Although the auctions have closed at the same stop rates a good number of times in previous auctions, the recently conducted auction had different stop rates, with the first two (2) tenors showing a significant increase; the 91-day tenor closed at 16.5000% (+26bps), the 182-day tenor closed at 17.4490% (+45bps approximately) and there was a decrease in the 364-day tenor which closed at 20.6990% (-1bp).
Opinion
In recent times, the administration of the Federation Account Allocation
Committee (FAAC) has highlighted the need for more collaboration between
fiscal and monetary policies. It may be necessary for Nigeria to
consider the establishment of a Treasury Single Account (TSA) mechanism
independent of the banking system for the exclusive use and control of
the state governments.
Currently, FAAC allocations to the Federal Government are deposited into
the Treasury Single Account (TSA), which centralises federal funds and
enhances fiscal discipline. Allocations to state and local governments,
however, are deposited into various commercial bank accounts and this
trend leads to a consistent distortion in monetary policy efforts.
Whenever FAAC is posted, liquidity in the banking system is boosted and
consequently, money supply. The mass influx of funds could stimulate
inflation, where not properly managed, as increased money supply can
drive up prices without a corresponding increase in goods and services.
Extending TSA implementation to include state and local governments
could address these challenges more effectively. By requiring all levels
of government to deposit their FAAC allocations into a centralised TSA,
Nigeria could achieve stricter controls over public funds, reduce excess
liquidity in the banking system, and mitigate inflationary pressures. We
believe that such actions will enhance efficiency and transparency,
potentially leading to better economic outcomes.
Alternative Assets
Commodities
According to SC, the bearish sentiment coupled with low market volatility is likely to persist until OPEC+ announces its new policy during its next meeting scheduled for early June 2024. However, SC notes that the exact timing of that unilateral announcement is uncertain because voluntary cuts are outside the scope of the OPEC+ ministerial meeting.
The U.S. crude oil benchmark, West Texas Intermediate (WTI), fell significantly below the $80 mark it had surpassed earlier in the week. Brent crude also declined, dropping to around $82 per barrel, as concerns around inflation became the focal point.
Last Tuesday, oil prices were influenced by the Federal Reserve following an indication of delay in rate cuts for several months due to unclear inflation figures. The Federal Reserve aims to see inflation firmly on track to reach 2% before considering rate cuts which some analysts had anticipated would occur in June or July 2024. Typically, lower interest rates reduce borrowing costs, boost industrial activity, and increase energy consumption.
Although interest rates are falling, it appears not quickly enough to guarantee rate cuts. The Federal Reserve’s reluctance to cut rates helps keep inflation higher by suppressing consumer spending.
About two weeks ago, economic data presented conflicting signals about crude oil traders. The Producer Price Index (PPI) rose by 0.5% in April 2024, indicating inflationary pressure, while the Consumer Price Index (CPI) increased by a modest 0.3%, suggesting easing inflation. Oil prices appear to be reacting to these mixed inflationary signals, with analysts perceiving a potential weakening of demand.
What Lies Ahead
The markets are expected to be in slight disarray this morning given the mixed signals at the MPC, PMA, and OMO, all last week. At this juncture, several market analysts foresee a rate cut by the end of the year based on inflation being curtailed and the currency falling back within targeted bands There is also a strong expectation that the much anticipated Foreign Direct Investment, (FDI) flows may start to trickle into the system as banks look to recapitalize in tandem with CBN’s directives and as the infrastructure segment of the economy (particularly the power sector) seems overdue for investment revival.
Quite frankly, we do not expect yields to climb excessively higher than present levels, but having said that, system liquidity and regulatory signals will continue to dictate the tune.
