Signs of economic weakness unsettle financial markets

Global and Philippine Market Update
August 1 to August 7, 2024

Global Markets

Global Stocks retreated amid growing fears that delays in US rate cuts could lead to a recession.

• Investors moved away from risk assets after a disappointing jobs report, fearing that the Federal Reserve (Fed) is behind in cutting interest rates, which could lead the economy into a recession. The sell-off was intensified by a massive drop in Japan, with the Nikkei 225 falling almost 20% in three days. However, the current volatility is not a reason to panic, as the decline was somewhat expected given the recent rally that pushed major US indices to record highs. 

• US job growth slowed more than expected in July, with nonfarm payrolls increasing by just 114,000, below the Dow Jones estimate of 185,000. The unemployment rate also rose to 4.3%, its highest level since October 2021. This report adds to mixed signals about the economy, leading to heightened market volatility. Initial optimism about a potential rate cut in September turned to concern following the weak labor report. 

• The Fed is at a crossroads, facing the choice of heading off a recession or repeating past mistakes. Prevailing investor sentiment suggests that if the Fed fails to act, a recession could occur by year end. Traders are now pricing in a 50-basis point cut in September, followed by aggressive easing that could reduce the Fed’s benchmark rate by 2.25 percentage points by the end of next year.

Philippine Stocks

Philippine Stocks moved lower as global sentiment turns negative.

• The Philippine economy grew 6.3% year-on-year in the second quarter, driven by government spending and investment. This is stronger than the 5.8% growth rate recorded in the first quarter. National Economic and Development Authority (NEDA) Secretary Arsenio Balisacan stated that the economy is on track to hit its 6% to 7% full-year growth target.

• The country’s unemployment rate dropped to 3.1% in June, driven by growth in the construction sector. This matches the December 2023 figure, which was the lowest rate since 2005. However, the underemployment rate remains elevated at 12.1%, the highest rate since April’s 14.6%. 

• Economic growth is on track to outpace the rise in National Government’s debt. The debt-to-GDP ratio fell to 60.1% in 2023 from 60.9% in 2022. Finance Secretary Ralp G. Recto aims to push this ratio below 60% to provide a buffer against future crises. The Bureau of Treasury projects the ratio to decline to 56.3% by 2028.

Philippine Bonds

Philippine Bond yields edged higher as inflation breached the central bank’s target range. 

• Inflation rose to 4.4% in July, breaching the government's 2% to 4% target range for the first time since November 2023. The Bangko Sentral ng Pilipinas’ (BSP) expects inflation to temporarily exceed the target due to higher electricity rates and base effects, but eventually return to a downward trend in August 2024. Rice inflation eased to 20.9% in July from 22.5% in June, marking the fourth consecutive month of decline. The BSP now sees downside risks to its inflation outlook for this year and next, mainly due to the tariff cut on rice imports.

• The Philippine Peso appreciated back to the 57-level amid recession worries in the United States and expectations of more aggressive rate cuts by the US Fed. A stronger peso provides the BSP with more room to cut rates, and supports the possibility of an earlier cut relative to the Fed. The BSP may cut rates in its August 15 meeting while the Fed is expected to cut in September. 

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/2024/08/02/job-growth-totals-114000-in-july-much-less-than-expected-as-unemployment-rate-rises-to-4point3percent.html (2) https://www.cnbc.com/2024/08/06/markets-are-counting-on-the-fed-to-head-off-recession-with-sizeable-interest-rate-cuts.html (3) https://www.cnbc.com/2024/08/05/a-global-stock-rout-is-deepening-with-investors-fleeing-to-safe-havens.html (4) https://www.bworldonline.com/top-stories/2024/08/08/612890/philippines-q2-gdp-rises-6-3-year-on-year-just-above-forecasts/ (5) https://business.inquirer.net/473450/jobless-rate-falls-to-3-1-in-june-says-psa (6) https://www.bworldonline.com/top-stories/2024/08/06/612296/economy-on-track-to-outgrow-debt-dof/ (7) https://business.inquirer.net/473185/peso-rallies-back-to-57-level-strongest-in-over-2-months (8) https://www.bworldonline.com/top-stories/2024/08/07/612529/inflation-quickens-to-9-month-high/

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.