The Market Call | February 2023

Macroeconomy

Most recent economic data suggest that the PH economy may weather the global recession relatively unscathed. While employment may slightly dip in the short-run, NG infrastructure spending and fairly upbeat Manufacturing (sub-sector) based on January PMI would provide the antidotes to pessimism. Consumer spending may ease a bit due to the elevated inflation, although the high levels of employment, the personal income tax break and OFW remittances would blunt much of the negativity. The peso-dollar rate should resume its depreciation mode amid higher U.S. interest rates and sky-high trade deficits but BSP's 50 bps policy rate hike to 6% and another likely 25 bps in March should moderate its trajectory.

Fixed Income Outlook

Easing inflation fears and expectations of slower Fed rate hikes brought enthusiasm back to bond investors globally in January. This resulted in massive tenders amounting to P907.6-B in auctions, driving yields down in the secondary market. However, unfavorable developments both abroad and domestically have driven interest rates higher once again in February. Local 10-year yields may challenge 6.5% level in Q1 as local inflation printed faster at 8.7% in January with no respite for food prices in H1, and the Fed’s renewed aggressiveness towards policy rate hikes. The latter draws from an upward revision of seasonally adjusted U.S. inflation for October to December which fed into a rebound to 0.5% MoM rate and outsized job gains in January. Besides, BSP raised policy rates also should add to the upward pressure, which will impact short-term yields as well.

Equities Outlook

The PSEi took a good head start in 2023 with a +3.5% gain in January. However, high inflation rates (both here and in the U.S.) and interest rates loom large in the horizon and have created headwinds for the equities market, which headed south in February.  We expect much volatility in Q1 but remain constructive towards the Financial and Holdings sectors.