The Market Call | September 2024

Macroeconomy

Inflation should fall to below 3% YoY starting September, as rice and crude oil prices soften.  NG should ramp up expenditures, especially for infrastructures, given below YTD budget deficit by July. Despite milder upticks in imports, trade deficits will remain above $4.6-B as the economy roars forward. We think the peso-dollar rate will stay above P56/$1 as BSP boosts its GIR and earnings, the latter being to help NG finances.

Fixed Income Outlook

Expectations of lower crude oil, inflation and interest rates globally have brightened the bond market outlook for the rest of 2024.  More aggressive Fed rate cuts (50 bps) in September and at least 25 bps more for the remaining months of 2024 and likely 175 bps in 2025 should spark further downside to local bond yields. With normal NG borrowings and inflation dropping to 2.3% in September and remaining below 3% for Q4 provide additional downward pressure on yields. BSP's 250 bps cut in reserve requirement put the nail in the coffin and brought 10-year domestic bond yields to within our target 5.25% to 5.75% for 2024.

Equities Outlook

The PSEi finally cleared the strong resistance level of 7,000 into our target 7,000-7,500 for 2024, after optimistic foreign and local investors found new momentum for the local bourse. A strong peso, robust Q2 corporate earnings, the BSP's policy rate and reserve requirement cut, and an outsized Fed rate cut in September drove the index up to a 28-month high. Lower interest rates should mean smaller corrections in the PSEi in October to November.