Economy shows signs of improvement even as inflation remains a concern

Global and Philippine Market Update

Feb. 2 to Feb. 8, 2023

Global Markets

Global Stocks edged lower as interest rates may remain higher for longer.

• Federal Reserve (Fed) Chairman Jerome Powell stated that the “disinflation process” has begun. However, he does expect it to be a long process and rates could still climb higher than anticipated if economic data does not cooperate. The Fed is waiting for further signs of weakness before hikes stop and it will likely take till 2024 before the Fed feels comfortable.

• US nonfarm payroll increased by 517,000 in January, higher than the Dow Jones estimate of 187,000. The unemployment rate also fell to 3.4%, its lowest jobless level since 1969. The strong jobs report may cause some economists to rethink the possibility of a recession this year. The surprising report increases the possibility of a “soft landing,” wherein the economy slows down without crashing.

• The employment cost index increased by 1% in the fourth quarter, lower than the expected 1.1%. This is also lower than the 1.2% increase in the third quarter and the lowest gain in a year. Fed officials consider this an important gauge because it adjusts for occupations in higher demand and outsize wage increases in certain industries. This is another positive sign that the Fed’s policies are having the desired impact in slowing inflation.

Philippine Stocks  

Philippine Stocks dropped as inflation hit 14-year high. 

• Inflation accelerated to 8.7% in January on the back of higher food prices. This was above the Bangko Sentral ng Pilipinas (BSP) target of 7.5% to 8.3%. This raises the possibility of further monetary tightening to get inflation under control.

• Philippine unemployment rate fell to a three-year low of 5.4% in 2022 while the underemployment rate averaged 14.2%, also a three-year low. Number of hours worked increased to 40.3 hours in December, higher than the 39.7 hours for the same month in 2021. The good job numbers shows that the Philippine economy is growing and is moving further away from the pandemic.

• The Philippines produced 8,085 vehicles for the month of December, a 57.5% increase compared to the same period in 2021. Total vehicle production for 2022 hit 92,223 vehicles, slightly below the 96,094 produced in 2019. Increased mobility during the second half of last year contributed to the increase in production. The manufacturing momentum is expected to continue and lead the sector to grow past its pre-pandemic number.

Philippine Bonds  

Philippine Bond Yields trended higher as inflation spikes.  

• The Bureau of Treasury (BTr) launched a new 5.5-year retail treasury bond (RTB) at a coupon rate of 6.125%. This was higher than the rates seen in the secondary market for bonds with a similar tenor. The bond is primarily targeted towards retail investors as the government is planning to source 75% of its debt domestically. The launch saw the government raise P162.18 billion on its first day.

• The BSP is not ruling out another surprise shock after the 14-year high 8.7% inflation rate. Economists are expecting a higher rate hike after the upcoming Monetary Board meeting on February 16. Bank of the Philippine Island economist Jun Neri says that inflation may hit 6.6% if supply problems are not addressed instead of the 4.8% base case scenario. Food inflation rose 10.7% while other vegetable prices surged 80.8%, reflecting the impact of onion prices.

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/2023/02/07/fed-chief-powell-says-the-the-disinflationary-process-has-begun-but-has-a-long-way-to-go.html (2) https://www.cnbc.com/2023/02/03/jobs-report-january-2023-.html (3) https://www.cnbc.com/2023/01/31/employment-cost-index-q4-2022.html (4) https://www.bworldonline.com/stock-market/2023/02/07/503500/shares-fall-on-faster-than-expected-jan-inflation/ (5) https://www.bworldonline.com/top-stories/2023/02/09/503830/jobless-rate-eases-to-3-year-low-in-22/ (6) https://business.inquirer.net/385631/ph-vehicle-production-nears-pre-covid-peak (7) https://business.inquirer.net/385483/govt-raises-p162-18b-from-retail-t-bonds (8) https://www.philstar.com/business/2023/02/09/2243537/bsp-not-ruling-out-another-supply-shock

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.