Macroeconomy
GDP growth may slow mildly to 5.8% YoY in Q2 as elevated inflation constrains consumer spending. However, we expect strong gains in construction due to accelerating infrastructure work, and revenge spending on transport & storage, and accommodation & food services on the Services sector space. With these gaining further traction in H2 and sharply lower inflation rates to average 3.3% by Q4, we see a return to above-6% full-year growth in 2023. However, the peso will remain under pressure due to huge trade deficits and higher Fed policy rate by another 25 bps in June while BSP remains on hold.
Fixed Income Outlook
Investor optimism surfaced in May due to improving inflation and monetary policy outlook. Crude oil prices touched below $70/barrel in early May despite the OPEC production cuts while Fed Chair Powell has taken a slightly less hawkish stance on inflation and policy rate adjustments. Domestically, the yield curve flattened further to only 8.5 bps as short-term bond yields catch up with the current policy rate of 6.25% whereas long-term yields fell given the downward momentum of local inflation. We feel cautiously optimistic that the easing of 10-year yields won’t easily reverse banking on that CPI will likely fall below 6% YoY by June. Furthermore, we think the Fed will raise policy rates by another 25 bps in June amid robust labor market (employment gains in March-April above the 10-year average) and still elevated inflation (April core inflation hardly moved to 5.5% YoY).
Equities Outlook
The PSEi performed second best in ASEAN with a +1.9% MoM uptick, driven by local investors which resulted in a higher trading range between 6,450 and 6,700. Four sectors landed in the positive territory, with Financial sector leading the sectoral race as it speeded by +5.9% MoM in April followed by the following sectors: Holdings (+2.4%), Property (+2.1%), and Industrial (+1.1%). Meanwhile, the Services and Mining and Oil sectors experienced losses at -3.5% and -4%, respectively. PSEi may continue to move ahead of equities markets in advanced economies due to domestic inflation moving back within BSP targets (2-4%) by Q4, albeit mitigated by the mild underweighting by MSCI rebalancing. Consequently, investors will have to wait for Q3-2023 for clarity in economic and financial conditions of the Philippines and around the globe.
