Equity markets rally as Fed slows down rate hikes

Global Markets

Global Stocks edged higher as US inflation continues to ease.

• US inflation came in at 7.1% in November, which was lower than expected. This is the latest sign that runaway inflation is beginning to ease. Falling energy prices helped keep inflation at bay with a 2% decrease in gasoline prices for the month. On the other hand, food prices continue to rise, up by 0.5% for the month and 10.6% for the year. Shelter cost, which is one-third of the inflation weighting, also rose by 0.6% during the month and 7.1% for the year.

• The Federal Reserve (Fed) raised rates by half a percentage point, taking it to a targeted range between 4.25% and 4.5%. This is the highest level seen in 15 years, indicating the fight against inflation is far from over. Fed officials indicate that they expect rates to remain elevated next year, with no reduction till 2024.

• Morgan Stanley upgraded its China growth forecast to 5.4% in 2023 from its previous outlook of 5%. The firm expects a “faster and sharper rise in mobility” as the Chinese government loosens its restrictions and shift its priorities towards economic growth. Morgan Stanley also noted that this is the first time since 2019 that domestic macro policies and Covid management are aligned towards supporting growth.

Philippine Stocks

Philippine Stocks posted some gains on positive outlook for 2023.

• The Asian Development Bank (ADB) expects the Philippines to be the second fastest growing economy in Southeast Asia. It revised its 2023 gross domestic product (GDP) forecast to 7.4% this year from the 6.5% estimate in September. This will put the Philippines just below Vietnam, which ADB projects to grow by 7.5%. The Philippines has shown resilience in 2022, amid negative global headwinds. This is expected to continue into 2023.

• Bank of the Philippine Islands (BPI) believes that recession can be avoided if laggard industries like restaurants, hotels and transport can grow by 5% in the first half of 2023. Aside from rebounding industries, higher household consumption will help avert a recession. BPI projects a GDP growth rate of between 5% and 6% in 2023, which is below the government’s 6% to 7% target. However, BPI believes their growth forecast is enough to avoid a recession.

Philippine Bonds

Philippine Bond Yields trended lower on expectations of slower rate hikes.

• From January to October, the Philippines spent Php929.7 billion to service its debt, both interest and principal, a decrease of 12% compared to the same period last year. The government spent less on repayments while adding new loans. However, the Bangko Sentral ng Pilipinas (BSP) stated that the debt held by the government remained at a prudent level.

• The BSP also noted that external debt represents 26.8% of GDP in the third quarter. This ratio remains one of the lowest among the Association of Southeast Asian Nations (ASEAN) and shows the country’s strong position to service foreign borrowings.

• The BSP raised its benchmark overnight borrowing rate by 0.50% to 5.50%. This is in line with the BSP’s goal to match the Fed’s rate hikes. Inflation control remains the top priority of the central bank with the November inflation rate hitting 8%, its highest level in 14 years.

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/2022/12/13/cpi-inflation-november-2022-.html (2) https://www.cnbc.com/2022/12/14/morgan-stanley-2023-china-forecasts.html (3) https://www.cnbc.com/2022/12/14/fed-rate-decision-december-2022.html (4) https://www.bworldonline.com/top-stories/2022/12/15/493191/phl-growth-likely-2nd-fastest-in-se-asia/ (5) https://www.bworldonline.com/economy/2022/12/14/493214/bpi-says-phl-could-avoid-recession-with-5-h1-growth-led-by-laggard-industries/(6) https://business.inquirer.net/377419/ph-cut-back-on-debt-servicing-to-p-929-7b-as-of-oct (7) https://blinks.bloomberg.com/news/stories/RMX7QT073NCW

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.