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Global Slowdown

Outlook. The Fed will meet this Wednesday, January 30 (PH time, Thursday, January 31) and is expected to stand pat (Fed futures prices imply 100% odds of a no hike) amid growing concerns of slower global growth outlook. This sentiment was echoed by the European Central Bank (ECB), saying that downside risks may necessitate significant stimulus. The latest casualty of slower growth outlook: Taiwan, with 2019 GDP expected to grow by 2.2% from 2.7% last year. Meanwhile, the Philippines posted a GDP growth of 6.1% in the fourth quarter of 2018, slower than 2017’s 6.5% in the same period and consensus expectation of 6.2% and brought full-year GDP growth to 6.2%, missing the downward-revised target of 6.5%-6.9%. Despite falling short of its target range, the government reiterated its target of growing at least 7% this year, a sentiment not exactly mirrored by the private sector. Bloomberg shows a consensus estimate of 6.4% this year, a slight improvement from last year. On the heels of the GDP report, yields continued to trend lower. With external factors like the US-China trade war far from resolution, US government shutdown, and timid global growth outlook, we expect downward pressure on yields to persist.

Market review. The local benchmark yield curve fell by 3bps on average week-on-week (WoW) following the release of GDP numbers. The spread between the local 10-yr local benchmark and the 10-yr US Treasury (UST) slightly widened to 371bps from 369bps in the week prior as the former fell by 1bp to 6.47% while the latter shed 3bps to 2.76%. Yields of ROPs fell by 4bps on average, tracking the movement in US Treasuries which fell by 2bps on average.

Average total daily down by 46% week-on-week (WoW) to Php13.0bn. The liquid yield curve fell by an average of 4bps WoW as the front-end (364-day T-bill) shed 12bps to 6.15%, the belly (FXTN 10-63: 9.5yrs) down by 1bp to 6.47%, while the tail (R25-01: 20.5yr) shed 4bps to 6.79%. Secondary trading average volume almost halved to Php13bn as traders were sidelined towards the end of the week in anticipation of the GDP figure release. Average T-bond volume fell halved to Php9.1bn while T-bill volume was down by 12% to Php3.9bn. The latest Php15bn auction of 91-day, 182-day, and 364-day T-bills was only partially awarded amid mixed reception. Only the 182-day and 364-day were fully-awarded at an average rate of 5.892% and 5.946%, respectively, both 2bps lower than the previous auction. On the other hand, the 91-day T-bill was only partially awarded and was capped at an average of 5.534%, 12bps higher than the previous auction. The auction was 1.73x oversubscribed. Like the previous two auctions, a tap facility was opened for the 364-day T-bill worth Php8bn, which brought the total proceeds of the T-bill auction to Php26.4bn. Lastly, the Php20bn auction of 20-yr T-bonds was fully awarded amid strong demand. The auction was 2.5x oversubscribed.

Emerging Markets’ (EM) 10-year down 6bps (WoW). Yields of EM bonds we follow were down by 6bps on average WoW on news that the US-China trade negotiations are still far from over. Turkey (10-year yield -9bps), Indonesia (-8bps), and Chile (-8bps) outperformed, while the Philippines (10-year yield -2bps), Colombia (-3bps), and Mexico (-4bps) relatively underperformed.

USTs down 2bps WoW. US Treasuries were down by 2bps WoW on average as the 10-yr UST likewise shed 3bps to 2.76% ahead of the Fed meeting this week on news that the US and China are far from reaching a trade agreement. News also broke out that the government shut down might be ending soon. On the data front, latest jobless claims data fell again by 13,000 to 199,000, a five decade low and outperformed expectations of 220,000, while the four-week lagging average (the less volatile measure) fell to 215,000, the lowest level since November 2018, despite the government shutdown. However, claims by federal workers are reported with a one week lag, while the recent holiday (MLK) pushed the reporting of the impact of the government shutdown further. Unemployment rose to 3.9% in December as strong labor market conditions attracted unemployed people back into the labor force. This figure is expected to rise to 4% as the impact of the government shutdown, around 800,000 employees, will be reported.

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