While GDP growth may ease to 5.6% YoY in Q2, the economy looks set for a robust rebound in H2. Employment remains constructive and should accelerate in H2 with National Government and PPP spending on infrastructure and rail projects. Despite El Nino, inflation consensus for July has dropped to 4.9%, further down from 5.4% in June. The rapid fall in inflation to within BSP target of 2% to 4% by Q4 and cut in personal income tax should also contribute to stronger consumer spending. The balance of trade will remain elevated and together with a BSP pause in August, against the 25 bps in policy rates by the Fed, should put renewed pressure on the FX rate.
Fixed Income Outlook
Fed officials adopted a more hawkish stance in June in response to persistently intense inflationary pressures and a resilient labor market. Consequently, the market correctly priced in the 25 bps rate hike in July, bringing the local 10-year yields to surge as high as 6.7% on July 10. Markets, however, now hope for a "Goldilocks" "soft landing" since U.S. GDP unexpectedly jumped by 2.4% in Q2 (vs. consensus of 2%) at the same time that CPI inflation fell to 3% in June from 4.1% a month earlier. However, it returned to the 6.2-6.3% level later in the month following the softer June U.S. inflation at 3%. Thus, there’s little upside risk for domestic bond yields, especially in the long end, as we don’t expect the BSP to match the Fed’s move.
PSEi rallied in July to 6,600 levels as above-expectations Q1 earnings buoyed local investor interest, amid net foreign selling. Robust H2 GDP growth, falling inflation, and interest rates should pave good recovery for Q3 of this year. Foreign investors’ share in trading dropped to a low should encourage local investors to start accumulating selected counters as early as Q3. The sectors showed 50:50 performance as three sectors turned in a positive performance while three sectors turned in a negative performance. The Services sector turned in the highest performance as it posted a +3.1% MoM gain in June. Meanwhile, the Property sector ranked last in the sectoral race with its -1.7% loss in June. Still, we expect PSEi to breach 7,200-7,500 this year due to robust macroeconomic fundamentals and strong corporate earnings. The largest net foreign buying in 19 months on July 31st at $270.1-M provide support to this view.