The 4-month decline in headline inflation to 6.1% by May and the rebound in NG spending fling open the door to consumer optimism in addition to the P70.0-B income tax cut. Manufacturing sector supports this as PMI moved up to 52.2 in May, the 16th consecutive month of expansion. With exports still ailing from the global economic slowdown, the peso will likely remain slightly weak. However, the plunge in imports due to the slump in crude oil and other commodity prices should result in a less negative trade deficit for Q2 GDP growth which we think will slightly trail 6%.
Fixed Income Outlook
With BSP’s pause in its rate hiking cycle, taking the cue from the Fed’s taking a break after 13 consecutive rate increases, and BSP’s lowering of reserve requirements (RRR) by as much as 250 bps for universal/commercial banks would provide more liquidity to banks and likely pull down long bonds initially. By its own earlier estimates every 1% cut in RRR adds some P100.0-B to bank liquidity. Thus, by mid H2, we expect yields to fall by 25 bps as inflation loses further steam and break through 4% by Q4.
PSEi posted -2.2% MoM loss to end May at 6,477.36. Notably, DJIA and FTSE100 also slumped by -3.5% and -8.3%, respectively – possibly affecting the negative performance of the PSEi in the same month. Only the Holdings sector turned in a positive performance as it posted a +1.3% MoM gain in May. Meanwhile, five sectors landed in the negative territory. The Financial sector ranked last in the sectoral race with its -5.5% loss in May. Nonetheless, the upcoming release of Q2 GDP data should bear heavy importance on PSEi’s direction in the following months. Still, we expect PSEi to breach 6,700 even with our moderately fast projection of GDP expansion.