Global Stocks pull back as the Federal Reserve (Fed) maintains its tight monetary policy.
- Fed Chairman Jerome Powell reiterated the Fed’s tough stance on inflation. He believes that maintaining a restrictive policy is necessary to restore price stability. He also acknowledged that taming inflation may result in “some pain” for US households and would likely weaken the US economy and job market.
- The Nord Stream Pipeline, a key source of natural gas for the European Union, was shut down for maintenance. There are widespread concerns that Russia is looking for excuses to halt gas deliveries to pressure Europe. Winter is coming and Europe faces the prospect of blackouts, rationing and a recession if Russia stops gas delivery.
- US consumer confidence rose to its highest level since May. The drop in gas prices improved sentiment and led to more optimism about the economy. Respondents are more positive and expect business conditions to improve in the next six months. In a separate report, job openings surged in July which shows the strength of the labor market. Parts of the economy have been resilient amid the overall challenging environment.
Philippine Stocks followed global equities lower as the negative sentiment spilled over to the local market.
- Investors continue to take profit as the prospect of global central banks increasing rates puts pressure on the Bangko Sentral ng Pilipinas (BSP) to respond. Higher rates are generally taken as a negative by the market as they would lead to higher funding costs. Selling pressure increased throughout the week with immediate support seen at the 6,500 level.
- Banks posted strong second quarter earnings as higher interest rates and further economic reopening provided a boost to income. The economic reopening not only increased lending but also improved the credit profiles of borrowers. The combination of loan growth and lower incidence of nonperforming loans shows the strength of the economic recovery.
Philippine Bond Yields ended higher by an average of 0.09% due to likely rate hikes by central banks.
- The Bureau of Treasury (BTr) rejected the latest treasury bill auction as yields would have significantly increased from the previous week. The 364-day debt paper would have jumped by 0.617% to 4.399% if awarded. The government made a full rejection as market participants asked for a higher premium given the recent statements of the US Fed to continue hiking interest rates.
- The BSP reported that August inflation will likely settle between 5.9% and 6.7% due to the continued rise in food prices. If the upper end of the forecast is realized, this would be the fastest increase since October 2018. While inflation remains high for this year, the BSP lowered its 2023 forecast to 4% from 4.2% and its 2024 forecast to 3.2% from 3.3%.
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://edition.cnn.com/2022/08/26/economy/federal-reserve-jerome-powell-jackson-hole-2022/index.html (2) https://www.bloomberg.com/news/articles/2022-08-30/us-consumer-confidence-advances-to-highest-level-since-may (3) https://www.bloomberg.com/news/articles/2022-08-31/europe-braces-for-rationing-risks-in-russian-gas-showdown (4)https://www.bworldonline.com/stock-market/2022/08/31/471785/psei-drops-on-lingering-key-rate-hike-concerns-in-us/ (5) https://www.bworldonline.com/research/2022/08/30/471254/banks-earnings-rebound-sustained-despite-rate-hikes/ (6) https://www.bworldonline.com/banking-finance/2022/08/31/471494/t-bill-bids-rejected-as-market-asks-for-higher-rates/ (7)https://www.bworldonline.com/top-stories/2022/09/01/471886/bsp-sees-5-9-6-7-inflation-in-aug/
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