Macroeconomy
We have kept our cautious optimism despite the “disappointing” GDP growth in Q1. For the rest of the year, elevated employment levels, expected ramping up of government spending, and inflation maxing out at slightly below 4.0% up to July, dropping closer to 3.0% by August and a likely policy rate cut of 25 basis points (bps) by BSP in Q3 should put domestic demand back into the fast lane. Thus, we project a mild acceleration in GDP growth to 5.9% in Q2, but pace will likely hasten in H2 to bring full year GDP growth to 6.0% with a slight upside bias. Trade deficits will remain elevated, and the U.S. dollar’s continuing strength should put upward pressure on the USDPHP rate, albeit at a more moderate pace compared to that seen in Q2.
Fixed Income Outlook
May has seen a reversal of the April upswing in interest rates as U.S. bond market players renewed hopes of Fed policy rate cuts starting September. Underwhelming economic data released in early May—U.S. GDP expansion in Q1 at 1.6% SAAR from 3.4% in the previous quarter, lower-than-expected job creation, slightly slower inflation in April MoM, and Manufacturing PMI slowing down to 50—all contributed to the view that inflation may abate as the economy shows broader signs of slowing down. The U.S. 10-year bond yield gave up some 25 bps from end-April to May 17, triggering a 42 bps plunge in local 10-year yields, even as the BSP governor averred that its policy rates may start going down as early as August. However, with headline inflation expected to hover around 4% until July, further downside in local yields appears limited. And while the governor also said that it may slash reserve requirements in 2024 to 2025, the policy rate appears as the more important driver for bond yields at present.
Equities Outlook
After Q1-2024 GDP fell short of market expectations at 5.7% YoY, the PSEi retreated towards the support level of 6,500 by mid-May. The expected weakness in Q2, however, conceals the strong earnings of the top 3 local banks as they reported double-digit growth for the first quarter. Earnings of PSEi-constituent firms (excl. SMC) hopped by 12.9% YoY in Q1, easily beating consensus estimates. Thus, we see local investors engaging in bargain hunting in Q2 whenever the PSEi slips near or below 6,500. We also think that the PSEi can still reach our forecast of 7,000-7,500 in H2. However, PSEi now face headwinds with adjustments in the MSCI's Philippine index as a result of its May rebalancing exercise.
