US economic strength overshadowed by weak economic data from China

Global and Philippine Market Update
Aug. 10 to Aug. 16, 2023

Global Markets 

Global Stocks retreated as China acted to support its economy.

• Contrary to persistent predictions of an impending recession, the US economy has demonstrated remarkable resilience. Gross domestic product (GDP) has exceeded expectations, and the continued hike in interest rates has not yet triggered a contraction. However, the current scenario might more accurately be described as a “richcession,” with job losses primarily affecting white-collar workers. Recent headlines have highlighted numerous rounds of layoffs in the technology sector and other white-collar sectors, but the broader economy continues to do relatively well. Overall, unemployment remains near 50-year lows.

• Consumer spending remained strong in July, benefiting from the slowdown in inflation. The latest advance retail sales report revealed an increase of 0.7% for the month, higher than the 0.4% forecast by Dow Jones. July’s performance was driven by online retail, sporting goods and food service and drinking sector. Consumers appear to be relieved that inflation is easing despite the absence of a recession and significant job losses.

• China’s central bank delivered a surprising rate cut this week in a bid to bolster its ailing economy. The People’s bank of China reduced the interest rate for its one-year medium-term lending facility from 2.65% to 2.5%, marking its second rate cut in three months. This move coincided with China’s disappointing July economic data, which industrial output only managed a 3.7% increase, falling short of the forecasted 4.4%. Additionally, retail sales experienced a slower growth rate of 2.5%. These figures compound a series of lackluster economic indicators from the past week, including sluggish trade numbers and record low credit growth.

Philippine Stocks

Philippine Stocks dipped as 2nd quarter growth disappoints.

• HSBC Global Research has revised down its growth projection for the Philippines this year, from 5.3% to 4.8%, citing a “significant downward surprise” in the second quarter. Similarly. Nomura Global Research has adjusted its growth forecast to 5.2% from 5.5%. These revised forecasts were notably lower than the government’s 6-7% target. Philippine growth has been losing momentum over the past few quarters, with the persistent weakness in external demand, particularly from China, contributing to the challenging economic landscape.

• Despite the impact of elevated inflation on general consumer spending, the auto industry showed remarkable resilience by achieving a 33% jump in vehicle sales for July. This growth streak has now extended for 17 consecutive months, and industry players are optimistic about sustaining this momentum throughout the rest of the year. Majority of sales were driven by robust demand for commercial vehicles, which grew by 30.4%, and passenger car sales, which increased by 33%. 

Philippine Bonds

Philippine Bond yields remained elevated as US treasury yields jumped higher.

• The Bureau of Treasury (BTr) ended its streak of partial awards as the latest 10-year treasury bond auction fetched an average rate of 6.558%. This was below the 6.58% yield quoted for similar bonds in the secondary market. The auction was 2.2 times oversubscribed with investors eager to lock in the high yields.

• The Bangko Sentral ng Pilipinas (BSP) maintained its policy rate at 6.25% amid the ongoing deceleration in inflation. This decision was influenced by the modest 4.3% growth rate for the second quarter. The BSP’s monetary board took into account the broader economic landscape, acknowledging the challenges arising from weak domestic demand due to elevated commodity prices and lackluster government spending.

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/2023/08/15/retail-sales-report-july-2023.html (2) https://www.cnbc.com/2023/08/15/china-is-grappling-with-a-confidence-crisis-says-economist.html (3) https://www.cnbc.com/2023/08/16/rather-than-a-recession-we-could-be-in-a-richcession-instead.html (4) https://www.bworldonline.com/top-stories/2023/08/17/540079/more-research-firms-cut-phl-growth-estimates-after-disappointing-q2-print/ (5) https://www.bworldonline.com/top-stories/2023/08/16/539831/high-inflation-fails-to-dampen-vehicle-sales-in-july/ (6) https://businessmirror.com.ph/2023/08/15/btr-snaps-streak-of-partial-awards-via-bonds-auction/ (7) https://manilastandard.net/business/314361676/bsp-maintains-interest-rate-at-6-25.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.