Interbank money market liquidity opened ₦768 billion long, with the CBN conducting two (2) OMO auctions during the week. CBN raised ₦986.9 billion at the first auction and had no sales during the second auction. On Friday, liquidity opened at ₦712.1 billion long. The range of bids was higher at the second auction, ranging from 20.50 – 23.39% compared to 19.4800% – 22.2990% at the first auction. While the liquidity position was long on Wednesday, it was short on Thursday and became long again on Friday.
The OMO auction on Friday closed with no sale and this kept the markets puzzled about the outlook going forward.
Across the globe, major Central Banks have been reducing interest rates or maintaining them at previous levels. It is anticipated that the Central Bank of Nigeria (CBN) will soon adopt a similar stance. This potential move by the CBN could be aimed at stimulating economic growth, easing borrowing costs, managing inflation, and aligning Nigeria’s monetary policy with global trends to promote economic stability. Lowering interest rates could also support businesses by reducing their financing costs, encouraging investment, and boosting consumer spending.
At inception, these interest rate hikes were aimed at curbing inflationary pressures and stabilising the Naira. The success in drawing FPIs indicates increased investor confidence and market stability, suggesting that the initial objectives of the rate hikes are being met. With this traction, the CBN might consider moderating its interest rate policy to sustain economic growth while continuing to manage inflation and currency stability.
Following the public holidays in the first two (2) days of the week, the market officially opened on Wednesday with a surplus of over ₦700 billion liquidity. As expected, this meant that there would be an OMO auction to mop up cash from the system. The auction featured the 90-day, 188-day, and 363-day tenors, respectively, and a total of ₦500 billion on offer.
Over ₦986 billion was subscribed. Like the OMO auction from May 29th, 2024, there was no subscription or sale for the 90-day benchmark; the total amount derived was between the 180-day and 365-day benchmarks. The 188-day tenor closed at 19.4800%, reflecting a decrease of 0.56% (56 bps), while the 363-day closed at 22.2990% – approximately, reflecting a decrease of 0.14% (14 bps) from the last stop rates.
At the second OMO auction of the week, on Friday, the CBN recorded no sale despite market liquidity opening over ₦700 billion long. These events make stop rates for the coming week’s bond and T-bill’s auction very important for secondary market direction.
Oil futures surged on Thursday following a report from the U.S. Energy Information Administration (EIA) indicating a significant drawdown in crude oil inventories. The EIA reported a decline of 2.5 million barrels, reducing total inventories to 457.1 million barrels for the week ending June 14th, surpassing analysts’ expectations of a 2.2 million-barrel decrease. This data and signs of a cooling jobs market have fuelled speculations that the Federal Reserve could cut interest rates.
A potential rate cut by the Federal Reserve could bolster oil prices, which have struggled this year due to subdued global demand. Lower interest rates would reduce borrowing costs in the world’s largest economy, potentially increasing oil demand as production ramps up.
According to an analyst from ActivTrades, oil prices are also expected to be supported by a growing geopolitical risk premium, particularly due to the ongoing conflicts in the Middle East. Recent military actions by Israeli forces in the Gaza Strip and southern Rafah have heightened these geopolitical tensions.
Additionally, JPMorgan commodities analysts highlighted that several factors are likely to tighten oil balances and reduce inventories over the summer. These factors include an increase in oil demand, higher refinery runs, weather-related risks, and prolonged production cuts by the OPEC+ producer group.
Meanwhile, the Bank of England has kept its main interest rate unchanged at a 16-year high of 5.25% ahead of Britain’s national election on July 4th, reflecting ongoing economic uncertainties.
This week, both the FGN Bonds and NTBs auctions will take place, putting the DMO in the spotlight amidst reports of large borrowings by the government and the need for the country to place a cap on borrowings. The question on the minds of many is probably to the extent of whether we have seen the highest interest rates for the year or to determine whether the DMO would issue securities as it did in the first half of the year.
As other central banks continue to adjust their rates in response to economic conditions, it has become increasingly likely that the CBN will follow suit to maintain competitive parity and ensure economic resilience. The major issue at this point is how the FG will fund what is left of its budget for the year and how long it will take for very necessary FPI capital injections to trickle into the system.
Irrespective, we will be here to continue giving you our opinion on market events in the second half of the year.
