Markets rally as inflation shows further signs of easing

Global and Philippine Market Update
June 27 to July 3, 2024

Global Markets

Global Stocks advanced as price increases slowed down.

• The US core Personal Consumption Expenditure (PCE) price index increases by 2.6% year-over-year, its lowest annual rate since March 2021. This indicates that the tight monetary policy is effectively reducing inflation. The data met expectations, offering relief to the Federal Reserve (Fed). Despite some mixed economic data, evidence that the tight monetary policy is working is welcome news.

• Fed Chair Jerome Powell expressed satisfaction with the progress on inflation but emphasized the need for more consistent data before cutting interest rates. Recent inflation readings suggest the economy is back on its disinflation path. However, he remains cautious about acting too soon, which could jeopardize the downward trend in price increases.

• Eurozone headline inflation dropped to 2.5%, in line with expectations. Analysts foresee the probability of two 25 basis point cuts in the remaining four European Central Bank (ECB) meetings. However, persistent service inflation could pose a challenge to further cuts if it remains stubbornly high.

Philippine Stocks

Philippine Stocks moved higher amid positive sentiment over possible monetary easing.

• The Development Budget and Coordination Committee (DBCC) maintained its gross domestic product (GDP) growth target at 6-7% for this year and 6.5-7.5% for next year. Growth momentum is expected to continue over the medium term, despite domestic and external risks. The deficit-to-GDP ratio was revised to a more realistic and sustainable path, projected at 5.6% of GDP in 2024, decreasing to 3.7% by 2028. This adjustment aims to create sufficient fiscal space for government programs to invest in infrastructure and other growth initiatives.

• The Department of trade and Industry (DTI) has launched the AI Roadmap and the Center for AI Research (CAIR) to position the Philippines as a premier destination for AI-driven innovation and investment. National Economic and Development Authority (NEDA) Secretary Arsenio M. Balisacan believes that the country could gain Php 2.6 trillion annually if businesses adopt AI-powered solutions. An immediate priority is to upskill, reskill, and train workers to be ready for AI adoption. He emphasized that properly preparing for this disruptive technology could greatly benefit the country, while inaction could turn it into a disadvantage.

Philippine Bonds

Philippine Bond yields changed little as investors awaited clearer signs of rate cuts.

• Philippine annual inflation in June was likely between 3.4% and 4.2%, according to the Bangko Sentral ng Pilipinas (BSP). Most economists believe it will end at the upper end of this range. Inflation is expected to be driven by higher utility costs, while food and transport price increases slow down. While June may see a spike in inflation, it is still expected to moderate in the third quarter, with full-year inflation likely to settle below 4%.

• The BSP may delay its easing cycle due to risks to the inflation outlook, the peso’s depreciation, and a hawkish Fed. According to Nomura Global Research, the BSP is expected to cut rates only after the Fed, with a projected 50 basis point cut this year and another 100 basis points next year. However, Nomura data indicates that the Philippine is among the top countries in Asia facing underlying inflationary pressures, second only to Singapore.

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/2024/06/28/may-pce-inflation-report.html (2) https://www.cnbc.com/2024/07/02/euro-zone-inflation-june-2024.html (3) https://www.cnbc.com/2024/07/02/powell-says-fed-has-made-quite-a-bit-of-progress-on-inflation-but-needs-more-confidence-before-cutting.html (4) https://www.bworldonline.com/top-stories/2024/06/28/604723/dbcc-keeps-growth-targets-until-2028-despite-external-headwinds/ (5) https://www.bworldonline.com/top-stories/2024/07/04/606010/phl-could-reap-p2-6t-annually-from-ai-balisacan/#google_vignette (6) https://business.inquirer.net/466457/june-inflation-pegged-at-3-9-as-utility-costs-dip (7) https://www.bworldonline.com/top-stories/2024/07/03/605715/bsp-seen-to-have-slower-easing-cycle/

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.