Markets consolidate in anticipation of central bank actions

Global and Philippine Market Update
June 12 to June 19, 2023

Global Markets

Global Stocks edged higher as economic data supported monetary easing.

• US retail spending in May was weaker than expected as consumers grappled with high inflation. Month-on-month sales rose by only 0.1%, and excluding autos, they declined by 0.1%. Year-on-year, sales increased by 2.3%. Given that consumer spending drives about two-thirds of economic activity, this weakness could influence the Federal Reserve (Fed) to consider rate cuts. While the market expects two rate cuts this year, Fed officials have indicated just one.

• UK inflation fell to the Bank of England’s 2% target in May, primarily due to declining food prices. This drop could prompt the central bank to consider a “surprise” rate cut at its next policy meeting. However, risks remain, with potential upward pressure on prices in the second half of the year. Despite this, most economists anticipate a rate cut sometime in the third quarter.

• European stocks have retreated following French President Emmanuel Macron’s decision to call for snap elections after a defeat by Marine Le Pen’s National Rally in European parliamentary elections. Rising political uncertainty has weighed on the market. However, long term investors might see the recent drop as an opportunity to acquire undervalued stocks.

Philippine Stocks

Philippine Stocks saw little movement amid a lack of any positive catalyst.

• Local stocks traded within a narrow range as investors awaited the Bangko Sentral ng Pilipinas’ (BSP) next policy review. The peso’s continued weakness added to market caution. While bargain hunting may offer some support, a positive catalyst is needed to push the market higher. 

• The government plans to fast-track nearly 50 infrastructure projects (IFPs) following the implementation of Executive Order No. 59. The order limits the number of required permits and simplify the approval process for government agencies. Licensing agencies must adhere to the 3-7-20 rule, meaning simple transactions must be completed within three calendar days, complex transactions within seven days, and highly technical transactions within 20 days.

Philippine Bonds

Philippine Bond yields remained elevated as the market awaited further signs of easing inflation.

• The BSP is expected to deliver fewer rate cuts as the Fed is likely to delay its own policy easing. BSP Governor Eli M. Remolona mentioned that the central bank could cut rates as early as August. However, Finance Secretary Ralph G. Recto, a monetary board member, believes the BSP will not cut rates before the Fed does. The Fed kept rates unchanged in its last meeting and remains cautious about future cuts. 

• According to HSBC Global Research, the BSP has room to partially diverge from following the Fed if inflation eases faster than expected. The Philippines is the only Southeast Asian economy where the real policy rate differential from the Fed exceeds pre-pandemic levels. The real policy rate, which is the nominal rate adjusted for inflation, is crucial as a wider differential helps the Philippines attract foreign capital. In the first quarter, the gap between the BSP policy rate and the Fed target rate stood at 1%. With Philippine inflation expected to ease further in the coming months due to lower rice tariffs, this difference could widen further.

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/2024/06/18/retail-sales-report-may-2024-may-retail-sales-rise-0point1percent.html (2) https://www.cnbc.com/2024/06/19/uk-inflation-may-2024.html (3) https://www.bloomberg.com/news/articles/2024-06-18/european-stocks-rebound-as-dust-settles-from-macron-vote-call (4) https://www.bworldonline.com/top-stories/2024/06/19/602695/more-ifps-to-be-fast-tracked-neda/ (5) https://www.bworldonline.com/stock-market/2024/06/17/602311/psei-may-move-sideways-in-absence-of-leads/(6) https://www.bworldonline.com/top-stories/2024/06/18/602339/central-bank-might-deliver-fewer-rate-cuts-this-year/ (7) https://business.inquirer.net/464555/softer-inflation-may-help-bsp-move-away-from-fed

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.