FOMC of US Fed Reserve May Hike Rate - FSDH


Friday, December 11, 2015 10:23PM / FSDH Research             

Executive Summary

The major highlights of the Monthly Economic and Financial Market Outlook report are:

  • There are strong indications that the Federal Open Market Committee (FOMC), of the United States (U.S) Federal Reserve System (The Fed) would announce a rate hike


  • It may become more difficult and expensive for emerging markets to access funds from the international market


  • The Central Bank of Nigeria (CBN) announced an expansionary monetary policy in November 2015, marking a departure from its tight policy


  • The CBN’s intention is to stimulate lending to the real sector, agriculture, infrastructure and solid minerals sector


  • Our conversations with banks reveal that they are cautious about lending at the moment


  • We believe measures to de-risk the economy would likely stimulate lending


  • The Nigerian economy grew by 2.84% (year-on-year) in Q3 2015, compared with 6.23% in the corresponding period of 2014 and 2.35% in Q2 2015


  • We estimate that the inflation rate would remain unchanged at 9.3% in November 2015


  • The shock to oil prices and the weak global economic outlook still portend major downside risks to a sustained accretion to Nigeria’s external reserves


  • The yields on the fixed income securities are expected to inch up marginally in the month of December 2015


  • The December effect may generate some activities in the equity market leading to appreciation in some share prices.


Global Developments
The prices of government bonds appreciated in more countries in November 2015 than in October 2015. The 16.39% January 2022 Nigeria Government Bond recorded the highest price increase of 7.29% to 121.58 in November 2015. This was followed by the 12.705% June 2022 Kenya Government Bond, which recorded a price increase of 6.91% to 95.89.


The Argentina Bond and the Russia Bond closed the month at negative real yields. The real yield on the Kenya Bond remains the most attractive amongst the countries we monitored, followed by the Brazil Bond. The real yield on the Nigeria’s Bond dropped sharply in November, reflecting the huge liquidity in the system.


According to the Bureau of Economic Analysis (BEA) of the United States (U.S.), the US economy grew by 2.1% (quarter-on-quarter) in Q3 2015, from 3.9% in Q2 2015. The BEA added that consumer spending grew less than previously estimated while inventories expanded almost twice.


Personal consumption expenditure was the biggest contributor to growth at 2.05%. Similarly, the U.S. Fed Chairwoman, Janet Yellen recently indicated that economic and financial data since the last FOMC meeting has been in line with forecasts and economic growth.


She added that the economic growth in the US.S is expected to be sufficient to achieve labour market improvement and higher inflation. Meanwhile, China's annual inflation rate stood at 1.3% in October 2015, down from 1.6% in September. The food prices increased by 1.9%; while non-food cost rose at a slower 0.9%.


The Global GDP
The latest monthly report of the Organization of the Petroleum Exporting Countries (OPEC), November 2015, asserted that the global economy dynamics remain modest. OPEC added that the observed slowdown in the global economy from Q3 2015, points to the possibility of a downward revision for global economic growth in the coming months. The report forecasts global growth at 3.1% and 3.4% in 2015 and 2016, respectively.


The Organisation for Economic Co-operation and Development (OECD) is forecast to grow at 2.0% and 2.1% for 2015 and 2016, respectively. The United States (U.S.) growth is forecast at 2.4% and 2.5% in 2015 and 2016, respectively.

The report added that the fragility in the Euro-zone remains and it will watch the general trend of the growth in the U.S. Japan will need to manage a balancing act of fiscal tightening and at the same time, stimulate its economy.

The report indicated that the deceleration in emerging and developing economies seems to be continuing, with the exception of India. Growth forecasts for the major emerging economies remain unchanged in 2015, with the exception of Russia’s 2016 growth, which has been revised down from 0.6% to 0.3%.


Geopolitical issues and their potential spill over into the real economy also constitute a challenge. OPEC added that central bank policies will be an influential factor amid lower global inflation. Most importantly, a decision by the US Fed to hike interest rates has become more likely recently.

FOMC May Hike Rate
There are strong indications that the Federal Open Market Committee (FOMC), of the United States (U.S) Federal Reserve System (The Fed) would announce a rate hike. The FOMC will meet between December 16-17, 2015 and our forecast range of increase is 0.25%-0.50%. This would be the first rate hike since 2006.


The FOMC has achieved its unemployment rate target. The latest figure stood at 5% for October 2015. The economic growth in the U.S. is also on a sustainable growth path. The FOMC believes it will achieve its inflation rate target in the medium-to-long term.


A rate hike may likely lead to the following:

·         Flow of funds to the U.S.

·         Appreciation of the U.S. Dollar

·         Further downward pressure on commodity prices

·         Increase in fixed income yields

·         Increase in the yields on the fixed income securities.


The implication of the rate hike is that it may become more difficult and expensive for emerging markets to access funds from the international market. Already, the yield on the US Treasury Note has adjusted upward for a possible rate hike.

Domestic Real GDP
The Nigerian economy grew by 2.84% (year-on-year) in Q3 2015, compared with 6.23% in the corresponding period of 2014 and 2.35% in Q2 2015. The oil sector recorded a growth of 1.06%, compared with the decline of 6.79% recorded in Q2 2015.


On a quarter-on-quarter basis, the oil sector also increased by 14.35%. The oil sector contributed approximately 10.27% to the real GDP in Q3 2015, lower than the 10.45% contribution in Q3 2014, but higher than 9.81% contribution recorded in Q2 2015.


The non-oil sector recorded a growth rate of 3.05% in Q2 2015, lower than the 7.51% recorded in the corresponding period in 2014, and the 3.46% recorded in Q2 2015. The growth in the activities recorded in the Financial Services, Telecommunications, and Trade sectors drove the non-oil sector.


The nominal GDP stood at N24.31trn in Q3 2015. This represents an increase of 6.02% from N22.93trn recorded in Q3 2014, and higher by 6.34% from N22.86trn recorded in Q2 2015. In Q3 2015, the services sector contributed 49.70% to the GDP, followed by Agriculture at 26.79% and Industries at 23.51%.


GDP by Expenditure Approach
The GDP by expenditure approach grew by 2.30% in Q2 2015 to stand at N16.62trn, compared with N16.25trn recorded in the corresponding period in 2014. This is the lowest growth in real terms since 2011. The growth in the same period of 2014 was 6.47%.


The Household Final Consumption Expenditure (HFCE) grew by 11.79% in Q2 2015, increasing from N9.69trn in Q2 2014 to N10.83trn in Q2 2015. This is the strongest growth since Q4 2013. Household consumption is the largest component of expenditure on GDP. Its share of GDP in real terms was recorded at 65.17% in Q2 2015, up from 59.64% in Q2 2014.


The Government Final Consumption Expenditure (GFCE) recorded a decrease of 14.83% to stand at N936.59bn in Q2 2015, the lowest level since Q1 2010. This decrease can be attributed to the drop in the oil price, which adversely affected government revenues. The GFCE accounted for 5.63% of expenditure on GDP, lower than the 6.74% contribution in Q2 2014.


The Gross Fixed Capital Formation (GFCF) grew by 7.49% in real terms in Q2 2015. The largest changes in the components of GFCF in real terms came from transport equipment and machinery. As a share of expenditure on real GDP, GFCF accounted for 18.14%, higher than 17.16% recorded in Q2 2014.


In nominal terms, net exports had a relatively large negative effect on GDP growth in Q2 2015. Imports dropped by 37.03% in Q2 2015, compared with Q2 2014. In real terms, the value of exports was N2.86trn in Q2 2015, a decline of 35.06% (year-on-year). Consequently, net exports stood at N1.64trn, accounting for 9.86% of real GDP.


In nominal terms, Compensation of Employees (COE) was broadly the same in Q2 2015 as it was in the same quarter of 2014, increasing by only 0.11%. The COE was N4.52trn in Q2 2014; it had fallen to N4.16trn in Q2 2015.


The National Disposable Income (NDI) grew in nominal terms by 6.09% in Q2 2015, from N20.74trn in the same quarter of 2014 to N22trn. Growth was however 5.33% lower when compared with the corresponding quarter of 2014. Relative to the previous quarter, NDI was up by 10.62%. In Q2 2015, the proportion of nominal NDI that was allocated to savings was 15.87%, which represents an increase on the previous quarter (when 13% was saved) but lower than 20.47% recorded in Q2 2014.


In real terms, Operating Surplus (OS) was estimated to be N11.21trn in real terms in Q2 2015, representing 6.78% increase on the same quarter of the previous year, when operating surplus stood at N10.49trn. As a share of expenditure on real GDP, OS was recorded at 67.41% in Q2 2015, compared with the 70.24% contribution in Q2 2014.


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