Global markets get a boost from easing inflation

Global and Philippine Market Update
June 8 to June 14, 2023

Global Markets

Global Stocks ended higher as the Fed paused its rate hikes. 

• US inflation experienced a notable decline in May, reaching its lowest level in two years. The annual rate dropped to 4% from April’s 4.9%. However, core inflation, which excludes volatile food and energy prices, was less encouraging. Core inflation remained elevated at 5.3% compared to the previous year, indicating consumers are still facing significant challenges despite easing inflation. Nonetheless, the lower inflation rate brought positive news for workers, as hourly earnings, adjusted for inflation, increased 0.3% monthly, according to the Bureau of Labor Statistics. On an annual basis, real earnings have risen by 0.2%, a noteworthy turnaround after being in negative territory for a significant portion of the inflation surge that began two years ago.

• The Federal Reserve (Fed) opted not to raise interest rates at its recent meeting, but it signaled the possibility of future rate hikes. Most Fed policymakers foresee at least one more rate hike in the second half of the year. Fed Chairman Jerome Powell emphasized that the pause allows the economy additional time to adjust as the Fed makes decisions moving forward. While the US economy shows signs of slowing down, with a mild recession projected later this year, inflation remains elevated despite the Fed’s tightening efforts.

• The People’s Bank of China has made its first cut in its reverse repurchase rate (RRR) in nine months, reducing it from 2% to 1.9%. This decision comes as the Chinese economy faces a loss of momentum and disappointing hard data. Analysts perceive this move as the beginning of a broader easing cycle. Economists at Barclays predict that China will continue with rate cuts for every quarter until early 2024. The action taken by central banks can be seen as a shift in policy from a wait-and-see to proactive easing by Chinese policymakers.

Philippine Stocks

Philippine Stocks edged lower as investors stayed away from risk assets.

• Local equities decline as sentiment was dampened by reports of a sharp drop in foreign direct investment (FDI) in March. Concerns have risen regarding the potential spillover effects of lower inflows on the economy, including slower growth and reduced consumer spending. Michael Ricafort, chief economist at Rizal Commercial banking Corp., attributes the decline in FDI to increased risk aversion amid uncertainties stemming from regional bank failures. However, there is optimism that FDI may rebound in the coming months as inflation eases and the economy further reopens. Despite these challenges the Philippines is still expected to remain among the fastest growing economies in the region.

• According to the Philippine Amalgamated Supermarkets Association, the sales of grocery items in supermarkets have slowed down as inflation eases. Fewer suppliers have notified price adjustments, indicating that producers have recognized that they have reached the peak consumer-acceptable prices for their products. The Department of Trade and Industry has stated that it does not anticipate any increase in suggested retail prices of basic necessities and prime commodities (BNPCs), despite manufacturers filing petitions for price hikes for items like canned sardines, milk, and salt.

Philippine Bonds

Philippine Bond yields moved higher in line with the rise in US treasuries.

• The Bureau of Treasury (BTr) fully awarded a reissued 20-year treasury bond with a remaining life of fourteen years and eight months at an average rate of 6.085%. This was higher than the 5.986% seen for the same bond series in the secondary market. The auction continues to be well supported as investors lock in the high yield.

• Deputy Governor Francisco Dakila Jr. stated that the monetary policy of the Fed has a lesser impact on the decision-making process of the Philippine central bank. While the Fed has paused its rate hikes, the Philippines may not necessarily follow suit if domestic inflation requires a different approach. In its recent policy meeting, the Bangko Sentral ng Pilipinas (BSP) maintained its interest rate at 6.25%, signaling a pause in its tightening cycle that began last year.

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.philstar.com/business/2023/06/15/2274061/fed-pauses-interest-rate-hikes-signals-more-tightening-ahead (2) https://www.cnbc.com/2023/06/13/cpi-inflation-report-may-2023-.html (3) https://www.cnbc.com/2023/06/14/china-is-seen-to-be-kicking-off-a-new-cycle-of-rate-cuts.html (4) https://www.bworldonline.com/stock-market/2023/06/14/528733/philippine-shares-fall-weighed-by-fdi-fed-meet/ (5) https://www.philstar.com/business/2023/06/14/2273624/fdi-inflow-drops-196-q1 (6) https://www.bworldonline.com/top-stories/2023/06/13/528191/supermarket-association-sees-slower-price-increases-for-grocery-items/ (7) https://www.bworldonline.com/banking-finance/2023/06/15/528749/treasury-fully-awards-reissued-t-bonds-allows-rate-to-advance/ (8) https://interaksyon.philstar.com/business/2023/06/15/253715/philippines-may-not-move-in-lockstep-with-fed-on-rates/

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.