Macroeconomy
Sustained elevated employment levels and government spending in April and May should provide the impetus for faster GDP growth of 6.1% in Q2 from 5.7% in Q1. Empirical evidence in PH shows that increases in employment systematically lead GDP expansion. With more income, consumers will likely resume spending in Q2, but the big splash will occur in Q3 and Q4 when average inflation would have slowed to 3.2% YoY and 2.9%, respectively. With BSP ready to start cutting policy rates in August, interest rates have begun to fall in July and the property market could benefit from the latter. However, the peso will noticeably appreciate only by September when the Fed will likely cut its own policy rates.
Fixed Income Outlook
U.S. Fed will likely cut policy rates in September, while BSP gets ahead of it in August. The Fed has gained more confidence to cut amid a large revision (negative) in April and May new jobs, and the first fall in inflation rate (MoM, seasonally adjusted) in June to bring YoY inflation to 3.0% from 3.3% earlier. This did not only usher in lower bond yields (i.e., longer dated) in the U.S. but also induced local 10-year bond yields to plunge even more by some 40 bps over a 19-day period to July 19. But the domestic market started perking up with the first slowdown in PH inflation to 3.7% with more to come especially in Q4. This also should embolden BSP to cut policy rates by 25 bps in August and support further drops in local bond yields.
Equities Outlook
Despite reaching a low of 6,158.48 on June 21, the PSEi strongly rebounded to surpass the 6,500 resistance level by early July, driven by strong Q1 earnings growth of 11.2% YoY with hopes for sustained double-digit earnings growth in Q2-2024 buoyed by early reported muscular growth of BPI, BDO and Meralco and ease of inflation in June which boosted risk-on sentiment. By mid-July, the upward trend looked credible, supported by the possible 25 bps policy rate cut by the BSP in August and a similar cut by the Fed in September. Further catalyst has emerged with calmer discourse over West Philippine Sea (WPS) conflict with the renewal of China-PH dialogue. A stronger-than-expected Q2 GDP growth would drive further gains in Q3 and solidify the 6,500 support level for the PSEi. Moving forward, our constructive outlook for the Philippine equities remains unchanged.
