The Market Call | July 2019

Macroeconomy

PH economic growth should rebound by 6% (y-o-y) in Q2, and accelerate further for the rest of 2019 supported by the three domestic demand engines—consumer, government and investment spending—revving up to high gear. We expect a minimum 25 bps cut in US Fed’s policy rate in July and additional trimming of BSP’s policy rate by 50 bps and the RRR by 200 bps in H2 to add fuel to growth—in the real economy and financial markets.

Fixed-Income Market

With our projection that the headline inflation which will go below 2% (y-o-y) in Q3, 10-year T-bonds yields should drop to 4.5% in that quarter. This will be supported by US interest rates remaining low unless the next Fed policy rate move surprises. Besides, the June PH inflation of 2.7% translated into a huge decline on 91-day T-bill with 3.883% yield last July 8th auction. We will expect a slew of corporate bond issuances as lower interest rates seep into H2. ROPs should track US Treasuries with sideways movement since we don’t see new incentives for it to break away from the spread range of the past three months.

Equities Market

With inflation at a 22-month low in June and expected to go below 2% by August, lower interest rates due to plunging inflation and more liquidity provided by BSP, a vigorous bouncing back of NG spending, and good corporate earnings, we find it likely that PSEi will resume bull run only in the latter half of H2 amidst the MSCI rebalancing set to happen in August. Corporate earnings should rebound with the strong acceleration of the economy starting Q2.