Inflation moves lower as central banks maintain restrictive policies

Global and Philippine Market Update
March 2 to March 8, 2023

Global Markets

Global Stocks edged higher amid the risk of faster rate hikes.

• In his remarks to congress, Federal Reserve (Fed) Chairman Jerome Powell cautioned that interest rates may end up higher than initially expected. He is prepared to increase the pace of hikes if the economic data warrants it. January inflation came in lower than December, but the rate of decrease has slowed. He reiterated the need to maintain a restrictive monetary policy to combat inflation but received pushback from members of Congress that believe the Fed’s policies will put millions out of work. He stated that the Fed will stay the course until the job is done and warns against prematurely loosening policy.

• Eurozone inflation eased slightly to 8.5% for February. Analysts were expecting lower than 8.2% but higher food prices offset the drop in energy costs. The latest inflation print indicates that prices are not coming down at the same pace that has been registered in previous months, which raised the prospects of further rate hikes by the European Central Bank (ECB).

• European corporate earnings showed surprising resiliency in the fourth quarter according to BlackRock. The banking and energy sectors were the biggest winners, boosted by higher interest rates and soaring oil and gas prices. However, the good showing extended beyond these sectors. Earnings on the Stoxx 600 index, the European benchmark, was up 8% annually by end February, even without the energy sector. In general, European companies trade at a discount on a historical basis and versus US peers, which sets the European market up to continue outperforming the US market this year.

Philippine Stocks  

Philippine Stocks rallied as inflation began to slow down.

• The local market rode some positive sentiment to move higher. February inflation slowed to 8.6% from 8.7% the previous month. This was also lower than the 8.9% median estimate from a Business World poll conducted last week. Investors are hopeful that the lower print may keep the Bangko Sentral ng Pilipinas (BSP) from hiking rates by 0.50% in its March policy meeting.

• The Department of Finance (DoF) recommends additional imports of rice, corn, sugar, pork and other key commodities to address insufficient supply. Finance Secretary Benjamin Diokno notes that inflation has quickened due to food supply shortages. Timely importation will avoid shortages and prevent any second-round effects that may be experienced by other industries. He also stated that the government needs to trim processes and procedures that delay transport of goods. There is a need to focus on agricultural productions and productivity to help bring down prices.

Philippine Bonds  

Philippine Bond Yields continued their upward climb, but the pace of increase begins to ease.

• The Bureau of Treasury (BTr) fully awarded a reissued 10-year treasury bond at an average rate of 6.378%. This was 0.07% lower than the secondary market levels for the same bond series at the time of auction. Demand for bonds remains healthy and with inflation easing, investors are willing to bring down the yield to lock in a longer tenor. 

• February saw Philippine inflation drop for the first time in six months driven by the slower increase in transport and food prices. Transport inflation slowed to 9% as diesel, gasoline and kerosine prices eased. Food inflation was a mixed bag with slower growth in some items like vegetables and rice but faster increases in others such as bread and seafood. National Economic and Development (NEDA) Secretary Arsenio M. Balisacan said the government should rethink its strategies to combat elevated food prices. He mentioned that inflation is largely driven by domestic supply side constraints and ill-timed imports.

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/2023/03/07/fed-chair-powell-says-interest-rates-are-likely-to-be-higher-than-previously-anticipated.html (2) https://www.cnbc.com/2023/03/02/inflation-euro-zone-prices-dip-to-8point5percent-as-ecb-flags-rate-hiking-not-over.html (3) https://www.cnbc.com/2023/03/07/blackrock-european-companies-showing-surprise-resilience-and-better-value-than-the-us.html (4) https://www.bworldonline.com/top-stories/2023/03/08/509250/finance-chief-backs-additional-imports-of-rice-corn-sugar/ (5) https://www.bworldonline.com/stock-market/2023/03/07/509217/stocks-climb-further-as-inflation-eases-in-feb/  (6) https://www.bworldonline.com/top-stories/2023/03/08/509252/inflation-eases-for-1st-time-in-6-months/ (7) https://www.bworldonline.com/banking-finance/2023/03/08/509238/govt-makes-full-award-of-reissued-10-year-bonds/

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.