We project robust GDP growth in Q1 at 7.1% YoY, albeit with downside risks. Big overall employment gains powered by the Services sector should support consumer spending, besides the income tax cut and resilient OFW remittances. In addition, inflation shall continue to head south. The Manufacturing sub-sector looks set for a good run as PMI expanded for the 14th consecutive month and Volume of Production Index showed spritely growth in the first two months of 2023. NG spending on infrastructure should get into high gear as a more detailed inspection of NG data showed surprisingly robust expansion.
Fixed Income Outlook
Trepidation roiled market confidence with the sudden collapse of Silicon Valley Bank (SVB) and Signature Bank in the U.S., which dragged down the 10-year U.S. Treasuries by as much as -44 bps in March. This, together with slower domestic inflation and less fresh supply, roused the local bond market in March. Despite growing bets of a pause in Fed hikes in May, we think a 25 bps is more likely amid surprise huge OPEC supply cut in March and Fed’s commitment to bring inflation down to its 2% target. Domestically, BSP Medalla averred a pause in its hiking cycle if April inflation decelerates further. However, the lingering negative real 10-year bond yields and the recent crude oil production cut by OPEC will likely hold off a major fall in these yields until May. Local yield curve has flattened further and may invert. However, no studies support curve inversion as a predictor of recession in developing countries. The low 10-year yields simply reflect market expectations of a rapid slowdown in inflation to turn real yields positive.
The PSEi slipped into a narrow trading range which should remain until after reports on corporate earnings and Q1 GDP growth surface by mid-May. Nonetheless, the PSEi appears to have slipped to a lower strong support at 6,300 in which price-to-earnings (PE) could remain attractive for long-term investors. Besides, our upbeat view on Q1 GDP growth should provide a boost to PSEi to hit 7,500 in 2023, although uncertainties surrounding foreign and domestic interest rates may provide a dampener.