Beneath apparently negative headlines, the economy still shows signs of vitality as the Manufacturing sector posted double-digit output gain in January, job losses emanated largely in the Agriculture sector (75%) and fairly steady in the Services sector. We think inflation has hit a peak in January and is now on a downtrend which should ease worries about a slowdown in consumer spending. We think the latter shall find support in the personal income tax cut effective January 2023 and solid OFW remittances. We expect the BSP to hike policy rates by 25 bps in its March meeting to 6.25%, but this won’t suffice to stem the depreciation tendency of the peso given the Fed’s resolve to raise its policy rates by 25 bps in March and in May and PH’s burgeoning trade deficits. The recent SVB bank failure in the U.S. won’t derail those plans.
Fixed Income Outlook
Robust U.S. job growth in February and core inflation rising to 0.5% MoM (seasonally adjusted) from 0.4% a month earlier will likely persuade the Fed to continue with its policy rate hiking cycle. The collapse of the Silicon Valley Bank, not a “Systemically Important Bank” (SIB), will only temper the Fed to pursue the rate increases more gingerly with 25 bps upticks in March and May or June. This will provide an upward pressure on local bond yields. And despite local YoY inflation sliding, real 10-year bond yields will remain negative in H1 which should prove unsustainable. The external and domestic factors should keep those yields above 6% in H1.
The PSEi dipped up by -3.5% by the end of February. With likely tighter monetary policy in the U.S. and PH, equity investors largely exited in February. Nonetheless, the PSEi which had strong support at 6,500 pierced through it downward by March 14th to 6,393.33, as net foreign selling speeded up due to the SVB failure in the U.S. At this level, market price-to-earnings (PE) has dropped to 13.6x, some 12.5% lower than the 10-year average PE of 15.5x. This could become attractive for long-term investors, but during a period of strong risk aversion, that may convince only the brave.