Markets pull back amid uncertainty over monetary easing

Global and Philippine Market Update
June 20 to June 26, 2024

Global Markets

Global Stocks declined as consumers remain fearful of high inflation.

• As fears of a recession subside, concerns about inflation and interest rates have surged to a two-year high. According to TransUnion’s Consumer Pulse study, 84% of American adults rank inflation as a top concern. Despite this, 55% of Americans are optimistic about their household finances for the next year, driven by confidence in the labor market and ongoing wage increases. This disconnect between the economy’s overall strength and its perceived weakness among households is referred to as “vibecession.”

• At the beginning of the year, Federal Reserve (Fed) officials projected they would cut interest rates three times this year. By June, they had revised this projection to just one cut. However, some policymakers are now indicating that there may be no cuts this year. Fed Governor Michelle Bowman has stated that inflation remains elevated, and she sees several upside risks affecting her outlook. She is also open to raising rates if necessary to bring inflation down to 2% over the long run. Additionally, a growing number of Fed officials have suggested that interest rates will likely remain unchanged for the rest of the year.

Philippine Stocks

Philippine Stocks continued to be weighed down by negative sentiment.

• The Legislative-Executive Development Advisory Council (LEDAC) has prioritized passing 28 bills before the 19th Congress ends in June 2025. One key addition to the priority list is the proposed changes to the Foreign Investors’ Long-Term Lease Act of 2018, which would extend the lease period for foreigners from 75 years to 99 years. Another important priority is amending the Rice Tariffication Act of 2020. These amendments would give the National Food Authority (NFA) the power to use existing rice stocks to address shortages or price hikes and allow the NFA to purchase locally milled rice or import rice directly.
• S&P Global Ratings has lowered its GDP forecast for the Philippines for this year and 2025 due to higher interest rates reducing demand. The 2024 forecast was downgraded to 5.8% from 5.9% and the 2025 forecast was reduced to 6.1% from 6.2%. Household consumption, which accounts for three-fourths of the country's growth, increased by 4.6%, its slowest pace since the 4.8% recorded in the first quarter of 2021. Despite the downgrade, S&P still expects the Philippines to be the second fastest growing economy in the Asia-Pacific region, just behind India, which is projected to grow at 6.8%.

Philippine Bonds

Philippine Bond yields stayed elevated over delayed rate cuts.

• ANZ Research does not expect the Bangko Sentral ng Pilipinas (BSP) to cut rates this year, as inflation may still exceed the target. While BSP Governor Eli M. Remolona, Jr. has indicated a possible rate cut in August, ANZ believes the first cut will occur in March next year, with a 50-basis point reduction. They also predict that the policy rate will decline to 5%, from the current 6.5%, by the end of 2025 and remain at that level until June 2026.

• Bank of America (BofA) Global Research doubts that the Bangko Sentral ng Pilipinas (BSP) will strongly defend the peso considering its recent policy signals. The BSP considers the recent performance of the peso to be temporary, attributing it to a delay in Federal Reserve rate cuts. BofA interprets the BSP Governor’s comments about possible rate cuts in August as a shift in market expectations, indicating a prioritization of supporting the economy over maintain foreign exchange stability.

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/2024/06/25/we-may-be-in-a-vibecession-as-inflation-fears-peak.html (2) https://edition.cnn.com/2024/06/25/economy/fed-officials-talking-down-rate-cut/index.html (3) https://www.bworldonline.com/top-stories/2024/06/25/603927/sp-global-trims-phl-growth-outlook/ (4) https://www.bworldonline.com/top-stories/2024/06/26/604174/ledac-eyes-approval-of-28-priority-bills-by-june-2025/ (5) https://www.bworldonline.com/top-stories/2024/06/26/604190/bsp-rate-cuts-unlikely-this-year-anz/ (6) https://www.bworldonline.com/top-stories/2024/06/27/604414/peso-to-remain-weak-as-bsp-appears-less-likely-to-defend/

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.