The United States unemployment levels recorded another improvement in March 2021. According to the United States Bureau of Labor Statistics, the unemployment rate declined to 6.00% in March 2021 from 6.20% in February 2021. Although the unemployment figure for March 2021 was considerably below the pandemic levels, the figure was 160 basis points higher than the 4.40% unemployment rate in March 2020.
The job gains in March 2021 were majorly recorded in leisure and hospitality, public and private education, and construction. During the month, the United States government approved a US$1.90trn coronavirus relief package.
The plan will send direct transfers of up to US$1,400 to Americans, aimed at mitigating the pain caused by the COVID-induced decline in the economy.
Vaccine Development in the United States
According to the Centers for Disease Control and Prevention (CDC), about 100mn+ have received at least one dose of a COVID-19 vaccine. The vaccine providers are administering 3.21mn doses per day on average. At that rate, it could take another three months to cover 75% of the population. The United States leads the world in total vaccines administered.
Despite the progress achieved with vaccination, there were reports of new COVID variants which have driven a surge in cases across the country.
Meanwhile, the US 10-year Treasury Yield has been on an upward trend over the past two months, on the back of increasing investors’ confidence amid the accelerating vaccine rollout and stimulus plan, although there are speculations about the possibility of an overheated economy and overvalued asset prices.
The US 10-year yields have risen to 1.60% as of March 2021 from 0.52% lows in July 2020. At 1.60% in March 2021, the US 10-year Treasury yield reverted to its prepandemic levels.
The Monetary Policy Committee (MPC), in their meeting held on March 22 – 23, 2021, kept policy rates and other parameters constant. The Monetary Policy Rate (MPR) remained at 11.50%. The Liquidity Ratio and Cash Reserve Ratio (CRR) were left at 30% and 27.50%, respectively. The Committee cited the need to focus on consolidating the fragile economic recovery process, despite the rising inflationary pressures.
The Committee also argued that the inflation drivers were supply-side driven. Thus, higher interest rates might not tackle the inflationary problem. The National Bureau of Statistics (NBS), in March 2021, reported an increase in headline inflation for February 2021.
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Headline inflation rose to 17.33% in February 2021 from 16.47% in January 2021. The rise in inflation is attributed to security challenges in major food-producing states. Also, the lingering impact of FX scarcity contributed to the increase in inflation in February 2021.
The NSE All-Share Index declined by 39,799 index points in February 2021 to 39,045 index points in March 2021, representing a 2% decline. Quarter-on-quarter, the NSE ASI declined by 3% from 40,270 index points in Q4 2020.
As noted in our previous note, the rising yields in the fixed income market were the catalyst to the declining prices in the equities market.
Fixed Income Market
Meanwhile, in the fixed income market, yields across all tenors rose in March 2021, attributed to the investors’ demand for a higher risk premium due to the rising inflationary pressure. Yields on one-year financial instruments rose from an average of 1% as of December 2020 to 4% in March 2021.
We expect to see relatively faster growth in the economy, as we move into Q2 2021. Our faster growth expectations stem from a continued vaccination and a near-full resumption of economic activities across the economy. However, we note that constraints to growth persist, some of which include weak government revenue and foreign inflows to stabilise the exchange rate market. Owing to the unabated security challenges in the economy, we expect headline inflation to remain high in the near term.
We initially expected to see the impact of higher energy prices on price levels in the economy, however, the national authorities appear to have made a U-turn on the fuel subsidy removal. Hence, we might not see the expected pressures from higher energy prices, at least in the near term. Nonetheless, the pass-through effect of the exchange rate pressures could drive prices up. In the fixed income market, we believe that the demand for a higher risk premium by investors will continue to drive yields upwards, amid rising inflation and higher-than-expected government borrowings.
At the most recent Treasury Bills Primary Market Auction (PMA), the stop-rate of the 364-day bill stood at 8.00% in March 2021 (Just three months ago, the stop-rate of the 364-day bill was 1.50%). We expect that to see an upward movement towards 10% – 11% in the near to medium term. Accordingly, the activities in the equities are expected to be depressed, owing to higher opportunity costs in the fixed income market.
However, we posit that the direction of the economy could guide what to expect in the equities market. In our view, a major policy shift would be required again to drive the market.
A policy breakthrough with the foreign exchange market or in the fiscal space (e.g., effective implementation of the budget or concrete policies aimed to boost investments and employment) could be the catalysts to drive growth in the equities market in the medium term.
We note that the volatility in the market tends to rise at this time, and it could be an opportunity to position in names that might be mispriced.
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We expect to see sustained pressures in the foreign exchange market. We note the rising crude oil prices, but the compliance to OPEC’s output quota could cap the extent of dollar inflows. In 2020, the foreign portfolio declined by 69% YoY from US$16.37bn to US$5.14bn.
The total capital imported into the Nigerian economy dipped by 60% from US$23.99bn in 2019 to US$9.68bn in 2020, attributed to the combination of the coronavirus pandemic, capital controls, and poor FX policies.
Nonetheless the flattening COVID curve, we yet do not expect to see a rebound in foreign inflows in the near term. The basis for our pessimism stem from the uncertain FX policies and low investors’ confidence in the Nigerian economy