Global markets rally as likelihood of additional Fed rate hikes diminishes

Global and Philippine Market Update
Aug. 24 to Aug. 30, 2023

Global Markets

Global Stocks moved higher as the US showed some signs of economic weakness.

• Bad news turned out to be good news for markets. Worries about high interest rates eased after the US 2nd quarter gross domestic product (GDP) was revised downward from 2.4% to 2.1% on an annualized basis. Additionally, August data showed job growth was lower than expected while wage growth for workers decelerated. The data reflects a shift towards more stable wage and employment expansion following remarkable post-pandemic recovery gains. This has raised hopes that the Federal Reserve (Fed) might pause its rate hikes and transition into a more accommodative monetary policy.

• Fed Chair Jerome Powell pledged a more cautious approach in its upcoming meetings. He acknowledged the progress made in reducing price pressures while also recognizing the risks from a surprisingly strong US economy. Powell mentioned that the Fed is prepared to raise interest rates if appropriate, until inflation shows sustained movement toward the 2% target. His comments highlighted the Fed’s challenge in interpreting mixed signals from an economy where inflation has slowed considerably but not enough to fully accomplish its goals.

• Chinese banks are gearing up to reduce interest rates on existing mortgages and deposits, in a move directed by the government to boost economic growth. This targeted action by Beijing intends to increase consumer spending, encourage more investment in the stock market, and alleviate pressure on bank’s profits. Yet, it’s still uncertain how effective this move will be in restoring investor confidence over the long term.

Philippine Stocks

Philippine Stocks rebounded amid some bargain hunting.

• The Philippine Stock Exchange index (PSEi) edged higher, following the positive trend in global markets. Investor confidence improved due to the decrease in US treasury yields and a slower US 2nd quarter GDP growth rate. Any hint of a shift from a strict monetary policy to a more relaxed approach is viewed as a favorable development by the local stock market.

• GlobalSource Partners forecasts a slowdown in Philippine economic growth this year and in 2024, citing adverse external factors and the conclusion of “revenge spending.” The firm has revised its GDP forecast down to 5.2% from 5.5% for the current year, and to 5% from 5.8% for 2024. The extent of economic recovery largely depends on the government’s effective implementation of its catch-up spending plan, which has contributed to the growth moderation. However, GlobalSource expects the Bangko Sentral ng Pilipinas (BSP) to begin reducing interest rates next year which could foster a more positive outlook. 

Philippine Bonds

Philippine Bond yields remain flat but may begin to trend lower going into the final quarter of the year.

• The Bureau of Treasury (BTr) fully awarded its latest 5-year treasury bond auction at an average rate of 6.22%. This rate was in line with similar bonds in the secondary market. The treasury was able to issue at an acceptable yield after the rejections and partial issuances from the previous auctions.

• The Philippines continues to grapple with persistent inflationary pressures, largely stemming from the continuous rise in food prices. According to Nomura Global Market Research, the country is notably susceptible to elevated food costs, especially concerning rice. If food prices, continue to climb, it could lead to higher headline inflation rates and a broader current account deficit. In July, rice inflation surged to 4.7% from 3.6% in June. Despite these challenges, the central bank remains optimistic about inflation converging to the 2-4% target range by the 4th quarter. However, BSP Governor Eli M. Remolona Jr. indicated that any potential rate cuts are still a distant possibility.

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/2023/08/31/stock-markets-fewer-jobs-higher-stocks.html (2) https://www.bloomberg.com/news/articles/2023-08-29/china-to-cut-rates-on-existing-mortgages-as-soon-as-today (3) https://www.reuters.com/markets/us/fed-registers-gains-powell-may-take-lay-low-approach-2023-08-25/ (4) https://www.bworldonline.com/top-stories/2023/08/30/542192/phl-economic-growth-seen-to-further-slow/ (5) https://www.bworldonline.com97/stock-market/2023/08/24/541556/psei-tracks-rise-on-wall-street-asian-bourses/ (6) https://www.bworldonline.com/top-stories/2023/08/31/542401/inflationary-pressures-remain-elevated-in-phl/ (7) https://business.inquirer.net/418480/ph-govt-raises-p30b-from-t-bonds-auction

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.