Global Stocks dropped on further tightening by central banks.
The European Central Bank (ECB) opted for a smaller hike, raising its key rate to 2% from 1.5%, but indicated that further hikes are still needed to tame inflation. ECB President Christine Lagarde stated that they are not slowing down and have a long way to go. The central bank expects average inflation to hit 8.4% in 2022, 6.3% in 2023 and 3.4% in 2024.
The Bank of Japan (BOJ) shocked the market by making a surprising change to its yield curve policy. The BOJ allowed its long-term interest rates to rise more which effectively eases its prolonged loose monetary policy. However, BOJ Governor Haruhiko Kuroda insisted that the move was not a prelude to a bigger change and an eventual exit from an ultra-easy monetary policy.
The Federal Reserve (Fed) officials projects a downturn next year with a growth rate of just 0.5%. Unemployment is also expected to rise to 4.6% from the current 3.7%. On the other hand, inflation is forecasted to drop to 3.1%. The Fed is clinging to the belief that a recession will not occur, but strategists still see the possibility of a recession given the projected rise in unemployment.
According to the Conference Board, a non-profit research organization, US consumer confidence rose to its highest level since April as gasoline prices drop to its lowest level since mid-2021. The worst of inflation has likely passed which provided some relief to consumers. The Conference Board data also showed that median inflation expectation over the next 12 months fell to 5.9%. While inflation remains high, it has shifted towards a downward trend.
Philippine Stocks retreated in line with global markets.
Negative sentiments from abroad spilled over to the local market amid recession fears in the US. Local investors were also surprised by the announcement of PLDT that it found an estimated Php48 billion in budget overruns. This represents 12.7% of its total capital expenditure spent in four years. PLDT saw its share price drop by 19.35% last Monday.
Socioeconomic Planning Secretary Arsenio M. Balisacan expects robust growth in the fourth quarter. He is optimistic that the government’s full year target of 6.5-7.5% may be exceeded. Growth was driven by higher consumption and increased investments in construction, utilities, mining and agriculture. While volatility remains in the short term, the fourth quarter has been positive for the local market. The reopening story and good corporate earnings provided strong support which led to the Philippine Stock Exchange index (PSEi) to jump more than 14% so far this quarter.
One of the main beneficiaries of rising interest rates and the economic reopening is the banking sector. Non-Performing loans trended lower while lending margins increased as rates rise. The aggregate net income of universal and commercial banks grew by 45.7% to Php 227.11 billion as of end September compared to the Php 155.86 billion a year ago. The current environment provides banks with more opportunities to deploy their low-cost deposits into higher yielding assets.
Philippine Bond Yields moved higher on further monetary tightening.
The Bangko Sentral ng Pilipinas (BSP) signaled further tightening in 2023 with the aim of reducing inflation to 3% by the third quarter. BSP Governor Felipe M. Medalla stated that rate hikes may happen during the first two meeting of the Monetary Board in the coming year. He indicated that the terminal rate could be at 6% by the end-2023. This is 0.5% higher than the current rate, which was last seen in November 2008.
The recent rate hike saw the yields for the BSP’s term deposit facility (TDF) rise. The 7- and 14-day term deposit were issued at above 6.2%. The results of the auction were seen as a reaction to the rate increase last week. Yields are expected to trend higher given the BSP’s guidance of further increases.
The current high yield environment provides a lot of value to bond funds even considering some upside risks. The BSP has provided guidance about their policy plans and has reassured the market that surprise hikes will be unlikely. The recent auctions have seen investors flocking toward long dated bonds which is a good indication of peak yields.
FWD Guidance: Uncertainty leads to downside risks, but diversification and a long-term investment horizon still provide the best chance for financial success.
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.