Equity markets lose most gains for the week as high US inflation leads to negative sentiment

Global Markets 

Global Stocks ended the week little changed as inflation remains stubbornly high.

• US inflation increased by 6.3%, year-on-year, for the month of August. Surprisingly, the rise in costs was driven by food, shelter, and medical services rather than fuel. Economists believed that once fuel prices go down and supply chain issues ease, inflation would also go down. However, the latest inflation report tested this narrative. The broad increase in prices seems to be more ingrained than initially thought.

• US core consumer price index, which removes volatile food and energy components, increased by 6.3% from a year ago. The first acceleration in six months on an annual basis. This provides the US Federal Reserve (Fed) more reason to be aggressive and increase rates by at least 0.75% in their upcoming September meeting with another 0.75% increase in November a clear possibility. An aggressive Fed is largely taken as a negative by the equity markets.

• Kevin O’Leary, founder of investment company O’Leary Ventures, believes that the recent drop in equity prices is an opportunity to enter the market. The bulk of the economy is still robust with consumption and jobs remaining resilient.

Philippine Stocks 

Philippine Stocks ended higher amid a volatile trading week. The weak peso and lingering recession fears remain a drag on the local market. 

• The Philippine Peso continues to trade around the 57-level. The weak peso is currently causing negative sentiment, but a recovery may provide a boost. Investors are looking toward upcoming data regarding overseas Filipino workers’ remittances, foreign direct investments, and balance of payments for the catalyst that may lift the market higher.

• Vehicle sales nearly doubled to 30,185 units sold in August compared to the 15,847 units sold during the same month last year. Monthly sales above 30,000 units was last recorded in 2019. The automotive industry is progressing well and is on track to recovery. This is a good sign for the overall economy as it shows increased mobility with the country truly moving beyond the pandemic.

Philippine Bonds 

Philippine Bond Yields climbed higher in line with US treasury yields.

• The Bureau of Treasury (BTr) fully awarded the latest 10-year treasury bond auction. The bond was issued with a coupon rate of 6.75%. This was 0.15% higher than the rate for a similar bond in the secondary market. National Treasurer Rosalia V. de Leon stated that “strong demand kept rates within secondary market levels.”

• The Philippines reported a debt to gross domestic product (GDP) ratio of 62.1% as of the second quarter. This is lower than the 63.5% at the end of the first quarter.  The government is targeting a ratio of 61.8% by the end of the year. The easing ratio shows that GDP is growing at a faster pace than debt which is a good sign that the higher government borrowing is sustainable.

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.bloomberg.com/news/articles/2022-09-13/us-inflation-tops-forecasts-cementing-odds-of-big-fed-hike (2) https://www.cnbc.com/2022/09/13/inflation-isnt-just-about-fuel-costs-anymore-as-price-increases-broaden-across-the-economy.html (3) https://finance.yahoo.com/news/billionaire-investor-mr-wonderful-says-115228470.html (4)https://www.bworldonline.com/stock-market/2022/09/11/473730/cautious-trading-seen-as-recession-fears-linger/ (5) https://www.bworldonline.com/top-stories/2022/09/15/474666/vehicle-sales-nearly-double-in-aug/ (6) https://www.bworldonline.com/banking-finance/2022/09/14/474341/treasury-makes-full-award-of-new-10-year-bonds-on-strong-demand/  (7)https://businessmirror.com.ph/2022/09/15/bsp-most-aggressive-in-hiking-policy-rates/

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.