Despite the slowdown in GDP expansion to 4.3% YoY in Q2, other key economic data do not preclude a full year growth of 6-7%. Sustained job growth, especially in Manufacturing, Construction(for industry), Accommodation & Food Services and Other Services (in Service sector), and a slight uptick in exports, with an added boost from the peso depreciation in August, provide some glow for the economy. Apart from inflation slowing to 4.7% a 15-month low, NG will likely ramp up spending in H2, specially in infrastructures, which will also benefit from ongoing major PPP projects (classified as private construction). Higher crude oil and rice prices constitute the headwinds for the economy, albeit transitory, and these will again enlarge trade deficits and put upward pressure on the peso in Q3 amidst elevated foreign interest rates.
Fixed Income Outlook
With local inflation easing to 4.7% in June, investors flocked the short-dated bonds in both auctions and secondary market in July, pushing down yields in the front-end of the curve. However, domestic yields continue its ascent as U.S. 10-year Treasuries climb further in August as the Fed hinted more rate hikes to come. In our view, the Fed will likely pause in its September meeting as they will have to wait for more data that shows clearer signs that inflation will fall within target. Furthermore, we see that the yields of peso bonds and U.S. Treasuries will tend to decouple as local inflation falls within BSP target range of 2% to 4% by Q4. Besides, real 10-year yields have turned positive by June and neared normal levels in July after an abnormal, prolonged 11-month run with negative readings.
PSEi broke through strong support as it resulted to 6,200 levels in mid-August due to fears of renewed inflation upswing and weaker GDP growth in Q2-2023. PSEi gained by 1.9% in July after the Fed raised its policy rates by 25 bps as expected by markets. Four of PSEi sectors turned in a positive performance, while two sectors turned in a negative performance. The Financial sector turned in the highest performance as it posted a +5.1% MoM gain in July. Meanwhile, the Holdings sector ranked last in the sectoral race with its -0.9% loss in July. Still, emergence of robust macroeconomic data and milder-than-expected inflation prints for August and September could bring back investors to the equities market.