Easing inflation keeps global markets trending higher

Global and Philippine Market Update
June 6 to June 12, 2024

Global Markets

Global Stocks moved higher as the Federal Reserve (Fed) kept interest rates unchanged .

• US inflation increased by 3.3% year on year, below analysts' expectations. While this is a positive development in the fight against inflation, Fed officials emphasized the need for more than a month or two of favorable data before considering policy easing. Despite the good news, the market is likely to remain volatile until a clear trend emerges.

• The Fed maintained its benchmark lending rate at the current level while signaling fewer cuts in the future. Officials are now anticipating just one rate cut for the year, expecting inflation to remain persistent. Fed Chief Jerome Powell indicated that it may take longer to gain the confidence needed to loosen monetary policy. He also noted that labor market data has mostly returned to pre-pandemic levels, remaining tight but not overheated. This bodes well for future path of inflation and the economy.

• The European Central Bank (ECB) beat the Fed in cutting interest rates. ECB President Christine Legarde explained that the two central banks are acting on their respective mandates and currently face different economic fundamentals. Legarde struck a cautious tone, acknowledging the difficulty in predicting the path of interest rates as Eurozone economic data shows strength, easing expectations for the pace of future cuts

Philippine Stocks

Philippine Stocks held steady amid bargain hunting.

• Fitch Ratings has revised its outlook for the Philippines’ banking sector to “improving” from “neutral.” This upgrade is driven by sustained growth in consumer lending and key infrastructure projects expected to boost bank earnings this year. Fitch also believes that high interest rates will have a manageable impact on the banking sector’s asset quality, thanks to a resilient economy. Although the increasing share of riskier consumer lending poses higher credit risk for banks’ loan portfolios, these risks should be mitigated by a healthy economy and a strong job market.

• Persistent volatility in the exchange rate poses a bigger concern than peso weakness, according to National Economic Development Authority (NEDA) Secretary Arsenio M. Balisacan. While a weaker peso makes the country’s exports more competitive and attracts more foreign visitors, Baliscan believes monetary policy can mitigate the inflationary effects of a depreciating peso. However, he admits that a sharp depreciation in the currency disrupts planning and business decisions.

Philippine Bonds

Philippine Bond yields trended lower as inflation outlook remained within the central bank’s target.

• The Bureau of Treasury (BTr) partially awarded a re-issued treasury bond with a remaining life of nine years and seven months at an average rate of 6.754%. This was a lower rate than when it was last awarded on May 7. The weakening peso and rising US treasury yields kept local bond yields elevated.

• The Bangko Sentral ng Pilipinas (BSP) remains confident that interest rates could be lowered as early as August despite rising inflation. BSP Governor Eli Remolona Jr. expressed satisfaction with the current inflation trend but acknowledged potential risks. A rate cut in the third quarter would likely put the BSP ahead of the Fed. Remolona emphasized the goal of getting inflation around 3% but cautioned against the possibility of overcorrecting, which may lead to unnecessary losses in economic output.

FWD Guidance: Uncertainty leads to downside risks, but diversification and a long-term investment horizon still provide the best chance for financial success.

Sources: (1) https://business.inquirer.net/463418/ecb-diverges-from-fed-on-rates-sparking-jitters (2) https://edition.cnn.com/2024/06/12/economy/june-fed-decision/index.html (3) https://www.cnbc.com/2024/06/12/cpi-report-june-inflation.html (4) https://business.inquirer.net/463332/fitch-turns-more-bullish-on-ph-banks (5) https://www.bworldonline.com/economy/2024/06/11/601161/peso-weakness-not-that-bad-but-needs-to-be-stable-neda/#google_vignette (6) https://www.bworldonline.com/banking-finance/2024/06/12/601125/btr-partially-awards-bonds-on-hawkish-fed-bets/ (7) https://www.msn.com/en-ph/news/money/bangko-sentral-chief-says-q3-rate-cut-remains-on-the-table/ar-BB1o214t

Disclaimer: The purpose of this article is to inform and should not be taken as an advice or offer to purchase securities. Seek professional advice before making a decision based on this presentation. Information given does not represent the views of FWD and its agents and employees.