Markets retreat amid fading hopes of an early rate cut

Global and Philippine Market Update
May 23 to May 29, 2024

Global Markets 

Global Stocks fell as central bank officials question the impact of higher interest rates on inflation.

• The Federal Reserve (Fed) is unlikely to cut rates this summer after stronger-than-expected economic data. This view was supported by recent comments made by policymakers suggesting that near-term policy rates are unlikely. Traders are now pricing in just one rate cut by the end of the year. Minutes from the last Fed policy meeting reveal that central bankers lack confidence in cutting rates, with some open to hiking if inflation worsens. The minutes also show that some Fed officials are wondering whether high interest rates may have a smaller effect now than in the past.

• The International Monetary Fund (IMF) increased its growth forecast for China to 5%, citing recent policy actions by Beijing aimed at boosting the economy. The Chinese economy has struggled in recent years due to prolonged property debt crisis, which makes up a quarter of its gross domestic product. Additionally, weak consumer spending and persistent deflation have been significant challenges. However, the current correction in the housing market may be a necessary step to eventually place the sector on a more sustainable path.

Philippine Stocks

Philippine Stocks moved lower as sentiment remains negative.

• Local stocks extend their losing streak, closing near the 6.400 level amid concerns over inflation and the possibility of interest rates remaining higher for longer. Recent cautious comments from the Fed have driven investors away from risky assets.

• The Philippine economy may grow faster in the second quarter due to improved state spending, putting it on track to hit the low end of the government’s target, according to First Metro Investment Corp (FMIC) and the University of Asia and the Pacific (UA&P). They project growth to reach 5.9% in the second quarter and end the year at 6%. This growth will be driven by high employment levels and increased fiscal spending, particularly on infrastructure. Improved agricultural output with El Niño heat subsiding will also provide a boost to the economy.

Philippine Bonds

Philippine Bond yields stays remain high as investors await a clear sign of a rate cut.

• The Bureau of Treasury (BTr) fully awarded a re-issued three-year treasury bond at an average rate of 6.347%. This rate was lower than the prevailing rate in the secondary market. The Bangko Sentral ng Pilipinas (BSP) indicated a 150 basis point reduction until 2025, with the first cut likely coming in the third quarter.

• The probability of inflation breaching the high end of the 2-4% target band in 2024 and 2025 remains high, reflecting the potential impact of various upside risks on the outlook. These risks include upward adjustments in transport charges and toll rates, as well as higher food costs due to supply constraints. The BSP expects rice prices to remain elevated until the third quarter of this year, with other agricultural products remaining elevated until the fourth quarter.

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/2024/05/25/the-fed-probably-wont-deliver-any-interest-rate-cuts-this-summer-.html (2) https://business.inquirer.net/461374/imf-lifts-chinas-2024-growth-forecast-to-5 (3) https://business.inquirer.net/461442/rate-jitters-keep-psei-in-doldrums (4) https://www.bworldonline.com/top-stories//#google_vignette (5) https://www.bworldonline.com/top-stories/2024/05/30/598406/central-bank-sees-high-probability-inflation-may-breach-target-band/ (2024/05/30/598408/5-9-gdp-growth-seen-in-q26) https://www.pna.gov.ph/articles/1225715

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.