Macroeconomy
Positive “goldilocks” data surprise markets as GDP expanded by 5.9% YoY in Q3 while inflation slid to 4.9% YoY in October from 6.1% a month ago. Government spending provided the main stimulus as infrastructure spending soared by 26.9% YoY in Q3. Consumer spending which remained a solid base for growth as it increased by 5.0% YoY, should improve further in Q4 as inflation recedes. Moving forward, the latter should continue as weak crude oil prices (even in futures market) should offset a possible further increase in rice prices due to El Nino. The peso-dollar rate should temporarily appreciate as OFW remittances bulk up in December. Thus, we see the economy growing full year at 5.8%.
Fixed Income Outlook
We side with analysts who think that the Fed will keep rates unchanged in its December meeting and may start cutting its policy rates as early as Q1-2024 provided wars do not escalate. Weaker job gains in October coupled with rising jobless claims and the sharp drop in seasonally adjusted MoM inflation to 0% in October from 0.4% in the previous month support our view. Indeed U.S. 10-year bond yields have shed around 50 bps from its peak of nearly 5.0% in October, and with inflation continuing to ease, albeit not as fast as desired, there is a slight downside for those yields. As it would have little effect on domestic bond yields, moving forward inflation prints will likely dictate the pace of further falls in 10-year bond yields until investors see the downward trend in inflation rate gaining traction.
Equities Outlook Easing inflation both here and abroad, faster GDP growth for Q3-2023, and corporate earnings up by 20.0% YTD to September and 17.0% YoY for Q3, all helped the index surpass the 6,000 mark after the end of October. Despite lower 10-year domestic bond yields, investors might opt to purchase within the 6,000- 6,300 trading range in anticipation of a strong recovery in 2024. Nevertheless, the PSEi could still finish the year beyond the 6,500 mark if inflation and interest rates become more favorable. Some headwinds may originate from the underweighing of PH stocks (-0.005% points) by MSCI rebalancing to take effect on December 1st.