Equity markets are rangebound as investors await impact of central banks’ policy decisions on economy

Global and Philippine Market Update
June 15 to June 21, 2023

Global Markets

Global Stocks pulled back on diverging views from major central banks. 

• The European Central Bank’s (ECB) decision to raise interest rates, contrasting with the Federal Reserve’s (Fed) pause and China’s reduction in lending rates, highlights the divergence in monetary policy approaches among the major central banks. This indicates that the global economy is experiencing distinct cycles rather than being aligned. Europe needs to tackle high inflation with rate hikes; the US is adopting a wait-and-see approach with potential future hikes, and China seeks to support its slowing recovery.

• Federal Reserve (Fed) Chair Jerome Powell’s testimony before congress clarified several key points. Firstly, the Fed is determined to continue addressing inflation and indicated that two more hikes are likely. Bringing inflation back to the target of 2% remains a significant goal. Secondly, the Fed emphasized its commitment to fulfilling both its inflation and employment mandates. Although some lawmakers criticized the rapid increase in rates which may lead to unemployment, Powell defended the Fed’s hikes by reminding lawmakers that the labor market remains strong by any measure.

• Calls for economic stimulus are mounting in China as policymakers face increasing pressure. Prominent Chinese economist Liu Yuanchun has advocated for interest rate cuts and other supportive measures. While the recent surprise rate cut by the Bank of China raised expectations for monetary stimulus, officials have been sluggish in implementing a comprehensive package of support measures.

Philippine Stocks

Philippine Stocks were steady due to a lack of fresh catalysts.

• Investors are anticipating the Bangko Sentral ng Pilipinas’ (BSP) policy decision following the Fed’s rate hike pause. Market participants are closely monitoring the interest rate outlook and assessing the potential economic impact if rates remain elevated for a longer period. The high level of uncertainty and lack of foreign flows continue to weigh on market sentiment.

• Cash remittances from overseas Filipino workers (OFWs) increased by 3.7% in April compared to the previous year. The growth was primarily attributed to higher receipts from land- and sea-based workers, with a significant portion coming from OFWs in the United States. Security Bank Chief economist Robert Dan Roces expects remittances growth to remain positive, noting its resilience during the pandemic. Despite the global slowdown, a significant decline in remittances is not anticipated.

Philippine Bonds

Philippine Bond yields continued to trend higher as expectations for interest rates remained elevated.

• The Bureau of Treasury (BTr) fully awarded a reissued 7-year treasury bond with a remaining life of five years and eleven months at an average rate of 6.097%. The yield curve continues to stay relatively flat and mostly above the 6% level. Concerns over further monetary tightening by the BSP and other global central banks may keep interest rates elevated in the near term. This is a good opportunity for investors to lock in the high yield.

• According to BSP Governor Felipe M Medalla, the Philippines’ central bank policy decision will primarily be guided by its inflation target rather than the actions of the Fed. Recent data indicates a clear decline in inflation, and it is projected to fall below 4% by September or October. Economists anticipate the BSP to maintain interest rates unchanged in its upcoming meeting, marking the second consecutive meeting where rates remain unchanged.

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://www.cnbc.com/2023/06/19/fed-ecb-boj-pboc-central-banks-monetary-policy-decision-are-diverging.html (2) https://edition.cnn.com/2023/06/21/economy/powell-testimony-house-committee/index.html (3) https://www.bloomberg.com/news/articles/2023-06-21/china-state-media-government-advisers-call-for-economic-support (4) https://www.bworldonline.com/stock-market/2023/06/21/529995/shares-drop-ahead-of-bsp-meet-powell-testimony/ (5) https://www.bworldonline.com/top-stories/2023/06/16/529004/cash-remittances-up-by-3-7-in-april/ (6) https://www.bworldonline.com/top-stories/2023/06/20/529564/easing-prices-a-reason-to-pause-bsp/ (7) https://www.pna.gov.ph/articles/1203878

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.