Worries over inflation and the Middle East weigh on sentiment

Global and Philippine Market Update
Oct. 12 to Oct. 18, 2023

Global Markets

Global Stocks ended lower amid rate hike concerns.

• Consumers demonstrated significant strength in September, propelling retail sales beyond expectations. This occurred despite the presence of high interest rates and concerns about a weakening economy. The remarkable strength in retail figures provides the Federal Reserve (Fed) with no convincing argument for easing monetary policy. While the Fed is widely expected to halt its ongoing rate hikes, the unexpected robust performance of consumers add complexity to the situation.

• US headline inflation reached 3.7% year-on-year. The primary contributor to this increase was shelter costs, which rose by 7.2% year-on-year and accounts for one-third of the inflation weighting. However, some factors helped keep inflation in check, including a 2.6% decrease in medical care costs and 8% decreases in used vehicle prices compared to a year ago.

• Philadelphia Fed President Patrick Harker, who is a voting member for the Federal Open Market Committee, expressed his belief that the central bank can halt its rate hikes. His statements, in line with those of other officials, carry significant influence as they provide a clear endorsement of a pause in rate hikes. Harker’s perspective is that current rates are already restrictive, and as long as they stay at this level, they will gradually reduce inflation and bring stability to markets.

Philippine Stocks

Philippine Stocks steady, awaiting new catalysts.

• The local equity market stays rangebound due to continued bargain hunting, and a robust rally may not be on the horizon due to lingering concerns. Worries persist about potential tightening of monetary policy by central banks in response to elevated inflation. Additionally, the ongoing conflict in Israel has the potential to push oil prices higher, which, in turn, could significantly impact local inflation, due to the Philippines being a net importer of oil.

• Personal remittances from Overseas Filipino Workers (OFW) increased by 2.8% to reach USD 3.1 billion compared to the same period last year. This marks the fastest increase since the 2.9% growth observed in May. The consistent flow of remittances, combined with receipts from business process outsourcing activities, is anticipated to help offset the somewhat pessimistic outlook for the Philippine peso. The United States held the largest share of cash remittances followed by Singapore and Saudi Arabia.

Philippine Bonds

Philippine Bond yields moved higher in line with US treasury yields. 

• The Bureau of Treasury (BTr) fully awarded a reissued seven-year treasury bond with a remaining term of six years and nine months at an average rate 6.675%. The yield was higher compared to the 6.37% seen during its last auction on September 12. The higher rate reflected the signal from the central bank indicating the possibility of additional rate hikes.

• The Bangko Sentral ng Pilipinas (BSP) Governor Eli M. Remolona emphasized the necessity of a thorough review before deciding on a rate hike. The BSP has maintained its benchmark rate at 6.25% since March. He expressed uncertainty about inflation returning to the target range of 2-4% this year, especially after the higher-than-expected September inflation print. Additionally, he noted that the increase in borrowing costs hasn’t adversely affected the Philippine economy, suggesting that there may be room for further rate hikes. 

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/2023/10/17/retail-sales-september-2023-.html (2) https://www.cnbc.com/2023/10/12/cpi-september-2023.html (3) https://www.cnbc.com/2023/10/13/philadelphia-fed-president-harker-advocates-holding-interest-rates-where-they-are.html (4) https://www.bworldonline.com/stock-market/2023/10/15/551563/weak-trading-likely-amid-tightening-concerns/ (5) https://business.inquirer.net/426671/aug-ofw-remittances-inched-up-2-8-to-3-1b (6) https://www.pna.gov.ph/articles/1211978 (7) https://www.bworldonline.com/top-stories/2023/10/19/552396/hawkish-bsp-seen-to-bring-inflation-to-target-in-q1/

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.