White House and Congress reach bipartisan agreement to suspend the debt ceiling

Global and Philippine Market Update
May 25 to May 31, 2023

Global Markets

Global Stocks ended higher on positive sentiment as the US debt ceiling issue is resolved. 

• The US congress passed a bill to suspend the debt ceiling, ensuring the government can continue borrowing without risking default. The bipartisan support from both Democrats and Republicans allowed for the successful passage of the legislation, which will remain in effect until January 1, 2025. This move provides stability and allows policymakers to prioritize other important issues, putting political concerns aside until after the 2024 elections.

• The Federal Reserve (Fed) remains committed to combating inflation, but minutes from their recent meeting revealed a divergence of opinions among officials regarding interest rates. Michael Yoshikama, CEO of Destination Wealth Management, suggests that if the US economy continues to grow without a slowdown or a mild recession it could result in higher interest rates, which may be perceived as a negative. Surprisingly, a recession could potentially be beneficial for the market. If the economy manages to avoid a recession, challenges may arise for the market in the latter half of the year.

• China’s factory activity contracted more than expected in May, with the official manufacturing purchasing managers’ index (PMI) reaching a five-month low of 48.8. The slowdown in domestic demand raises concerns about the country’s economic recovery and puts pressure on policymakers to implement effective measures. The uneven performance across sectors highlights the need for targeted interventions to support the manufacturing, property, and export-oriented industries. 

Philippine Stocks

Philippine Stocks declined on the lack of a positive catalyst.

• Local stocks slid below the 6,500 level as investors adjusted their portfolios to align with the latest MSCI rebalancing results, with the Philippines experiencing a net outflow. The market was further weighed down by concerns surrounding the US debt ceiling, hindering any potential momentum from building and lifting the market higher.

• Fitch ratings upgraded the outlook on five local banks from negative to stable while keeping their ratings unchanged. This follows the agency’s similar revision of the country’s outlook, maintaining its “BBB” investment grade rating. The banks covered by Fitch include Land Bank, Development Bank, Bank of the Philippine Islands, BDO Unibank, and Metrobank. The improvement in net interest margins can be attributed to a 425-basis point increase in interest rates since May last year. With robust revenue growth, these banks are expected to gain momentum and achieve even stronger profitability in 2023.

Philippine Bonds 

Philippine Bonds were rangebound with yields staying below 6%.

• The Bureau of Treasury (BTr) fully awarded a reissued 10-year treasury bond with a remaining life of nine year and there months at an average rate of 5.958%. This was slightly higher than quotes for the same bond series in the secondary market. The auction was met with strong demand as investors lock in the high yield. While yields have trended lower, there is still a lot of value in the bond market.

• The Bangko Sentral ng Pilipinas (BSP) expects a deceleration in headline inflation, ranging from 5.8% to 6.6%, due to the decline in prices of fuel, poultry, and fish. If realized, this would mark the third consecutive month of easing inflation. The lower inflation forecast is attributed to the rollback in domestic petroleum prices, reduced poultry and fish prices and lower electricity rates. The BSP is maintaining its data-dependent approach to monetary policy and is closely monitoring developments impacting inflation and economic growth.

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://blinks.bloomberg.com/news/stories/RV617EDWX2PS (2) https://edition.cnn.com/2023/05/24/business/fitch-places-us-on-rating-watch-negative/index.html (3) https://www.cnbc.com/2023/05/23/economy-good-shape-blackrock-rieder.html?recirc=taboolainternal (4) https://www.bworldonline.com/stock-market/2023/05/22/524255/stocks-fall-on-profit-taking-as-market-eyes-leads/ (5) https://business.inquirer.net/402154/fitch-ratings-improves-outlook-on-ph-to-stable-from-negative (6) https://blinks.bloomberg.com/news/stories/RV3LJNDWLU68 (7) https://www.bworldonline.com/top-stories/2023/05/25/524794/govt-sets-p185-billion-borrowing-plan-for-june/

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.