Persistently high inflation keeps investors on the sidelines

Global Markets 

Global Stocks continue to retreat as high inflation and recession fears weigh down investor sentiment.

• US inflation in June surged to 9.1%, year on year, a new 40-year high. Energy prices were up 41.6% while shelter costs increased 5.6% annually. The high number caused inflation-adjusted incomes to fall for workers, which is down 3.6% from a year ago.

• Jobs in the US private sector have officially returned to pre-pandemic levels. Unemployment has remained steady at 3.6%, which is a near 50-year low. Some economists believe that the robust job market may keep the US from experiencing a recession.

• The ongoing rate hike cycle by the US Federal Reserve (Fed) and other global central banks is expected to slow down the economy and reduce demand for oil. Brent crude, the global oil benchmark, is trading near USD 100 a barrel. This is sharply down from the USD 139 a barrel in March.
• For the first time in 20 years, the exchange rate between the Euro and the US dollar has reached parity. The Fed is ahead of Europe in terms of monetary tightening which led investors towards the relative safety of the US dollar.

Philippine Stocks

Philippine Stocks pulled back following the retreat in global markets.

• The continuing decline of the Philippine Peso, which is trading above 56 against the US dollar, adds to investor concerns. Investors are already anticipating that high prices, rising interest rates and deteriorating consumer sentiment will impact corporate profitability in the coming quarters. 
• Net foreign direct investments (FDIs) surged to a four-month high in April. Bangko Sentral ng Pilipinas (BSP) data saw inflows increase by 48.3% to USD 989 million in April from USD 667 million during the same month last year. The reopening of the economy and trade liberalization reforms prompted increased investments into the Philippines.

Philippine Bonds

Yields for Philippine Bonds with a maturity of five years and below rose by an average of 0.08%. Bonds with shorter maturities continue to rise to catch up with longer tenor bonds.  

• The Bureau of Treasury (BTr) fully awarded a reissued seven-year treasury bond at an average rate of 6.76%. This is 0.27% higher than the BVAL Reference Rate, a standard benchmark rate for Philippine bonds, of 6.49%. The treasury seems willing to award higher rates, but National Treasurer Rosalia de Leon said the treasury is willing to reject bids if rates exceed their tolerance level.

• The BSP surprisingly raised rates by 0.75% to 3.25%, after policy makers previously downplayed the need for large hikes. BSP Governor Felipe Medalla stated that the action is “warranted” due to inflationary pressures. However, he believes that the domestic economy can accommodate the tightening of monetary policy.

• The International Monetary Fund (IMF) said the BSP has room to raise rates given the strength of the country’s gross domestic product (GDP) growth. IMF representative Ragnar Gudmundsson stated that supporting growth is compatible with monetary tightening. The Philippines is well positioned to withstand external shocks as one of the fastest growing economies in the region.

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/2022/07/13/inflation-rose-9point1percent-in-june-even-more-than-expected-as-price-pressures-intensify.html (2) https://www.nbcnews.com/business/economy/us-jobs-private-sector-returns-to-pre-pandemic-levels-rcna37338 (3) https://www.cnbc.com/2022/07/13/oil-markets-us-inventories-economic-slowdown-covid.html (4)https://www.bworldonline.com/stock-market/2022/07/12/460800/phl-shares-decline-as-peso-continues-to-weaken/  (5) https://www.bworldonline.com/top-stories/2022/07/12/460607/fdi-net-inflows-rise-to-4-month-high/ (6) https://www.philstar.com/business/2022/07/13/2194900/government-borrows-p35-billion-local-market  (7) https://www.bworldonline.com/top-stories/2022/07/11/460274/bsp-has-room-to-raise-rates-imf/ (8) https://blinks.bloomberg.com/news/stories/REZQ3BT0G1KW (9) https://edition.cnn.com/2022/07/12/investing/euro-dollar-parity/index.html

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.

The information here is compiled from various credible sources and is a summary of a particular period only. Though we strive to provide accurate and complete information, we cannot guarantee that this article will be error-free.