Markets await clues on Fed policy direction

Global and Philippine Market Update
Jan. 24 to Jan. 31, 2023

Global Markets 

Global Stocks held steady amid easing inflation.

• The US economy exceeded expectations, growing at a robust 2.5% pace in 2023, surpassing initial Wall Street predictions that anticipated minimal gains, defying forecasts of a mild recession to control inflation. The data reflects good economic growth amid a simultaneous easing of inflation. The growth can be attributed to strong consumer and government spending last year. However, challenges lie ahead, particularly concerning consumers, as worries arise about the sustainability of spending with diminishing savings and accumulating high-interest debt. 

• The core Personal Consumption Expenditure Price Index (PCE), which excludes food and energy, saw a 2.9% increase in 2023. This 12-month rate represents the lowest figures since March 2021. While the public tends to focus on the Consumer Price Index (CPI), Federal Reserve (Fed) policymakers favor PCE because it adjusts for shifts in what consumers buy. The release provides further evidence that inflation, although still elevated, is showing signs of declining, potentially signaling to the Fed that there’s room to consider interest rate cuts later this year.

• The International Monetary Fund (IMF) has revised its global growth forecast for 2024 upward by 0.2% to 3.1%. Factors such as resilience in the US, Chinese fiscal stimulus, and strong performance in large emerging market economies contribute to the slightly better outlook. Despite new risks to commodities and supply chains from Middle East tensions, global inflation has decreased more rapidly than anticipated.

Philippine Stocks  

Philippine Stocks edged lower as growth outlook stays positive.

• The Philippine economy expanded by 5.6% in 2023, a slowdown from the 7.6% growth in 2022, as reported by the Philippine Statistics Authority (PSA). This figure fell below the government’s targeted range of 6-7% for the year. Despite not meeting the target, the Philippines remains one of the fastest growing economies in the region. The government remains optimistic for 2024, setting a growth target of 6.5 to 8%. However, concerns persist about the extended El Niño dry spell potentially raising food costs and the impact of high interest rates on consumption.
• The International Monetary Fund increased its growth forecast for the Philippines’ Gross Domestic Product (GDP) to 6%, up from its previous 5.9% projection in October. This adjustment is attributed to the anticipated stronger recovery in investments and exports. However, there are still near-term growth risks, including the impact of tight monetary policy and potential weaker global economic growth.  

Philippine Bonds  

Philippine Bond yields moved higher as rate cuts likely get delayed.

• The Bureau of Treasury (BTr) fully awarded a reissued treasury bond with a remaining life of two years and 11 months. The rate was higher than 5.9% observed in the previous auction with a similar tenor last January 3. The upward trend aligns with the expectation that tight monetary policy may persist for longer than anticipated. 
• The Bangko Sentral ng Pilipinas (BSP) anticipates inflation to range between 2.8% and 3.6% in January, influenced by reduced food prices. If this materializes, it will mark the second consecutive month that inflation is within the BSP's 2-4% target. The central bank anticipates inflationary pressure due to certain agricultural products, increasing petroleum costs, and peso depreciation, but the favorable base effect in January contributes to a lower inflation print amid these pressures. However, the second quarter may witness an uptick in inflation as the base effects become less advantageous.   

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/2024/01/25/gdp-q4-2023-the-us-economy-grew-at-a-3point3percent-pace-in-the-fourth-quarter.html (2) https://www.cnbc.com/2024/01/26/pce-inflation-december-2023-.html 3) https://www.cnbc.com/2024/01/30/imf-ups-global-growth-forecast-on-us-resilience-china-policy-support.html (4) https://business.inquirer.net/443499/economic-growth-slowed-in-2023-missed-govt-target (5) https://www.bworldonline.com/top-stories/2024/02/01/572812/asian-economies-on-track-to-fuel-global-growth-imf/ (6) https://www.bworldonline.com/top-stories/2024/02/01/572822/central-bank-sees-2-8-3-6-inflation-in-january/ (7) https://business.inquirer.net/443351/btr-raises-p30b-from-t-bonds-as-planned

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.