Economic Balancing Act: Remember to stick the landing

Watching Carlos Yulo bag two gold medals over the weekend, I can’t help but remember the phrase everyone was screaming: stick the landing!

With the US Federal Reserve (Fed) attempting to gently set down the economy to achieve the proverbial “soft landing”, markets are laser-focused on the latest US jobs report. Friday’s Non-Farm Payrolls (NFP) numbers came in below expectations, with the previous month’s data also revised lower.

Overall, the US labor market appears to be cooling, which, alongside a parallel slowdown in inflation, solidifies expectations for a September rate cut. Markets, however, appear to have plans of their own.

From 0 to 4 in 60 seconds

Seeing the US unemployment figures, it appears the market has swung violently to now expecting some form of hard landing: a hop and a skip or a step out of the mat upon impact.

Market participants now expect more than four Fed rate cuts this year as investors appear to be pricing in the need for the Fed to go in hot and heavy with easing to stave off a deep economic downturn.

Are we really going to see more than four cuts this year? Admittedly, the move does look exaggerated, with the market once again getting ahead of itself. Just a couple of months ago (feels like 60 seconds), the market had priced in almost 0 cuts this year as the dot plot moved, rather inconsequentially.

Now the pendulum has swung all the way back, with the right answer probably somewhere in the middle.

Holding on to 3 cuts (for the BSP and the Fed)

This takes us to our rates call for the year. Three weeks back, we had penciled in up to three rate cuts for the Bangko Sentral ng Pilipinas (BSP) and the Fed, arguing that a now somewhat more dovish Governor Eli Remolona Jr. could look to wield a cut even ahead of the Fed.

When Remolona gives this much forward guidance, he oftentimes does follow through with action, whether a cut or a hike. A projected three rate cuts (or 75 basis points worth of easing) by the Fed should give the BSP scope to ease at each of their remaining meetings.

Will we be open to adjusting our rate cut call in the future if data trends change? Of course. So, for now, we’ll be looking to inflation forecasts for 2025, with our attention glued to where those forecasts are headed before we think about changing our minds.

NICHOLAS MAPA is Metrobank’s Chief Economist, Market Strategist, and Head of the Research and Market Strategy Department in the Financial Markets Sector. He graduated from the University of Asia and the Pacific (UA&P) with an undergraduate degree in Humanities and a Master of Science (MSc) in Industrial Economics. He also completed an MA in Economics from Vanderbilt University and an MBA from the Kelley School of Business at Indiana University. He travels regularly with his family, enamored by culture and history. An avid learner, he also reads extensively.