Market Levels (week-on-week)

Market Updates

Last week:

Despite the shortened trading week, it was a good way to end the month of August as the peso government securities (GS) market rallied. Following the rebound in global yields, buying interest spurred in the local bond market. However, some clients took advantage of the rally to lighten up positions.

On Wednesday, the Bureau of the Treasury (BTr) fully awarded the reissuance of the 5-year Fixed Rate Treasury Note (FXTN) 10-64 auction at an average of 6.22% and

Headline inflation steered to the upside at 5.3% in August 2023 versus 4.7% previously, and after consistent downtrend in the previous months, driven primarily by the uptick in prices of food and non-alcoholic beverages, restaurants and accommodation services, and transport.

This month’s inflation print came in higher than Research’s anticipated print, which indicates that the upside risks projected from increasing global rice prices and transportation fare hikes have already fed into headline inflation.

Given this recent development, Research reverts its FY average inflation estimate back to 6.0% (from 5.6%) for 2023 but maintains its 4.6% forecast for 2024.

Download our report for full details.

Inflation Report

August 2023 Inflation steered upward

Four commodity groups recorded lower year-on-year inflation, five (5) posted faster inflation, and four recorded stable inflation.

Download

WHAT HAPPENED LAST WEEK

The lack of economic data releases led the peso government securities (GS) market to track the move lower in US Treasury yields. Players were mostly on the sidelines at the start of the week as they waited for the Jackson Hole Symposium (August 24-26) and US Fed Chairman Jerome Powell’s talk about the trajectory of monetary policy.

The week started off on a defensive tone as peso GS cheapened compared to the previous week’s levels. This, however, was short-lived as a rally was seen in the local GS space after US Treasury yields started to retrace from their highs, and this combined with the Bureau of the Treasury (BTr) rejecting all bids for the reissuance of 15-year Fixed Rate Treasury Note (FXTN) 20-23.

Had the BTr fully awarded the PHP 30 billion offering, the 20-23 reissuance would have had an average of 6.927% and a high of 7.240%. For the rest of the week, buying interest was prevalent in medium- to long-term bonds. FXTN 10-69 was the most traded security, with the 9-year benchmark ending the week 4.5 basis points (bps) lower at 6.445% despite touching a high of 6.560% early in the week.

Meanwhile, the volume in the

For Regis Chatellier, the Senior Emerging Markets Strategist of CreditSights, there are several reasons to like emerging markets if you’re looking for sovereign bonds to buy.

In a webinar titled “2023 Mid-Year Economic Briefing: Opportunities amid growth headwinds”, Chatellier shared his insights, distilled from closely studying the markets, with Metrobank clients.

First, growth in emerging markets is stronger compared to advanced economies, with Asia leading them by quite a margin, followed by the Middle East.

Second, inflation is generally easing among emerging economies, and “it is coming down at a faster pace than people expect,” said Chatellier.

Third, the debt-to-GDP ratio is much lower compared to the rest of the world. Chatellier reckons that, excluding China, it is around 60%. “External debt is relatively benign,” he said.

Fourth, commodity prices remain supportive of emerging economies’ external trade since they are net commodity exporters. “The sovereign credit market is dominated by commodity exporters,” said Chatellier.

Hence, attractive valuations of emerging market sovereign bonds present opportunities

WHAT HAPPENED LAST WEEK

Last week, the local bourse closed at a new nine-month low at 6,160.61 (-129.66 points; -2.06% w-o-w). The index mainly traded in the red throughout the week amid the lack of local positive catalysts, cautious trading ahead of the Jackson Hole Symposium, and the US 10-year bond yield reaching a 16-year high at 4.34%. The market slightly rebounded on Thursday as US jobs growth was seen less robust, offering support for a US Fed pause.

WHAT TO EXPECT THIS WEEK

We expect a volatile market this week, with a downward bias, as the index hovers around the 6,000 support while the technical indicator RSI nears oversold levels (~32.75). Midweek, a surge in trading activity is also expected as the MSCI Quarterly Index Review takes effect on August 31, 2023, when the Philippines will have a marginal country weight decrease of 0.016%.

There will be no changes in the MSCI Philippines Standard Index composition; top weight increases include BDO Unibank (+0.202%), SM Prime Holdings Inc. (SMPH) (+0.196%), and Bank of the Philippine Islands (BPI) (+0.150%), while the sole weight decrease is Ayala Corporation (AC) (-1.326%).

Furthermore, gains may be capped as investors digest the recent pronouncements from US Fed Chair Jerome Powell, who hinted at another rate hike by year-end during his August 25 speech at the Jackson Hole Symposium. Meanwhile, on the local front, the market will also be pricing in the eighth consecutive week of fuel price hikes as diesel is expected to rise by PHP 0.40 to PHP 0.70 per liter and gasoline by PHP 0.10 to PHP 0.30 per liter.

Resistance: 6,380/6,400

Support: 6,000/5,700

ANALYSIS

Last week, the PSEi fell for the fifth straight week, reinforcing the downtrend after it broke below the support around 6,400 in the previous week. The market is currently trading below its key moving averages (50-day, 100-day, and 200-day) and its technical indicator MACD is showing increased bearish momentum.

Bounces could be limited by role reversal around the broken previous support (6,380 to 6,400). Should the market continue its descent, the nearest support is the retest of the low at around 6,000, then next is the retest of the low at around 5,700.

Stay light but watch out for possible basing as the PSEi nears oversold RSI (currently at 32.75) which could provide trading opportunities. For those who plan to increase exposure, consider tranche buying around identified support areas (6,000, then 5,700) while leaving some buying power to take advantage of lower prices should the downtrend continue.

STOCK CALLS FOR THE WEEK

First Gen Corp. BUY ON PULLBACKS | CONSENSUS TARGET PRICE: PHP 28.19

First Gen Corp. (FGEN) reported a recurring net income of USD 167 million (PHP 9 billion) (+30% y-o-y) mainly driven by higher earnings contributed by Energy Development Corp. (EDC) as a result of better operating income from higher electricity prices. FGEN’s solid performance in the 1st half or 2023 is expected to be sustained for the rest of the year on the back of significant milestones.

In terms of price action, FGEN is currently consolidating within the PHP 18.80 to PHP 21.70 range. Moreover, the counter is below short-term moving averages (9-day, 20-day, and 50- day) but remains above the long-term moving averages (100-day and 200-day). For a more optimal risk-reward ratio, it is advisable to take position around the support zone at PHP 18.80.

Accumulating once FGEN pulls back to PHP 18.80 is advisable. Set stop limit orders below PHP 17.30. Take profit at around PHP 21.60/21.70.

Puregold Price Club* BUY | FMSEC TARGET PRICE: PHP 31.00

Puregold Price Club, Inc. (PGOLD) reported lower earnings y-o-y of PHP 2.0 billion in the 2nd quarter of 2023, despite net sales rising by 7.2% y-o-y, as negative operating leverage pulled down quarterly earnings before interest and taxes (EBIT) by 6.4% y-o-y to PHP 6.7 billion.

As for the price action, PGOLD has been trading below its 50-, 100-, and 200- moving averages (MA) within a downtrend channel. PGOLD has also created a year-to-date low at PHP 27.50 last August 4, 2023. Nevertheless, the counter seemed to have established a support around this area, which also marks the lower trend line of the descending channel. Notably, the counter has historically bounced back after hitting this level, hence, PGOLD may retest the next resistance levels.

Accumulating PGOLD at current levels is advisable. Set stop limit orders below PHP 25.58 and take profit at around PHP 32.00/PHP 33.00. For long-term investors, our fundamental target price for PGOLD is PHP 31.00 (+11.51% upside from latest close).

Semirara Mining and Power Corp. BUY ON PULLBACKS | CONSENSUS TARGET PRICE: PHP 39.89

Semirara Mining and Power Corp. (SCC) ended the 2nd quarter 2023 with net income of PHP 10.2 billion (-5% y-o-y), bringing the 1st half of 2023 net income of PHP 25.8 billion (-26% y-o-y) from high base effect and significant correction in global coal index prices.

However, earnings came in ahead of consensus estimates driven by higher coal shipments, improved plant availability, and increased electricity sales amid elevated spot prices. As for price action, SCC is currently trading above key moving averages (200-day, 100-day, and 50-day) with MACD both above the zero and the signal line. However, the counter is hovering at overbought levels with RSI at 73.1, hence, we think that the counter is due for a pullback.

Accumulating once SCC pulls back at PHP 30.00 is advisable. Set stop limit orders below PHP 27.60. Take profits at around PHP 34.50/PHP 36.00.

KEY DATA RELEASES

1) US 2Q23 GDP quarter-on-quarter growth rate on Wednesday, August 30, 2023 (1Q23: 2.4%; estimates: 2.4%)

2) US Initial Jobless Claims as of August 26 on Thursday, August 31, 2023 (as of Augst 19: 230k)

3) US Unemployment Rate for August on Friday, September 1, 2023 (July 2023: 3.5%; estimates: 3.5%)

4) US S&P Global Manufacturing PMI for August on Friday, September 1, 2023 (July 2023: 47)

5) PH Budget Balance for July on August 28 – September 1 (June 2023: 225.4 billion)

6) PH S&P Global Manufacturing Purchasing Managers’ Index (PMI) for August on Friday, September 1 (July 2023: 51.9).

As most economies grapple with stubbornly elevated inflation globally, China recently reported a drop in its consumer price index (CPI). Its July CPI inflation fell by 0.3% year-on-year, thereby bringing its economy into deflation.

This triggered worries of another deflation crisis like Japan’s in the 90’s that may have rippling effects to the global economy.

Drivers of China’s deflation

China’s recent negative inflation growth was driven primarily by decreasing transportation and food costs, which account for 14.5% and 20% respectively of its Consumer Price Index (CPI). Easing energy commodities (and access to Russian oil) have translated to lower transportation costs while a recovery from African swine fever resulted in an oversupply of inventory in the world’s largest producer and consumer of pork.

It would be premature to call this trend deflationary since core CPI, which excludes volatile energy and food prices, still grew by 0.8%. But it cannot be denied that China’s recovery since the end of its lockdown has been disappointing.

It can be recalled how global investors were ecstatic when the Chinese Communist Party (CCP) announced the end of its Zero-COVID policy in December 2022. The world’s manufacturing hub back in operations meant more efficient supply chains, which would help reduce costs, especially in countries that were still dealing with elevated supply-side inflation.

Consumer spending was also expected to explode as Chinese citizens were finally free to leave their homes and travel. However, the country started to realize the consequences of its prolonged lockdown.

Multinational corporations already started to diversify their manufacturing plants in other Asian countries such as India and Vietnam, leading to declining Chinese exports and jobs. Exports fell by 14.50% year-on-year in July versus -12.40% the previous month. While unemployment decreased to 5.30% from its 6.20% high in 2022, an alarming 1 in 5 young adults (16 to 24 years old) in urban areas remains unemployed.

Private sector investment spending also remains depressed. New bank loans and aggregate financing, a broader measure of credit, were only at CNY 345.9 billion and CNY 528.2 billion respectively from a staggering CNY 3.05 trillion and CNY 4.22 trillion the previous month. The lack of demand for real estate threatens China’s property sector, whose companies have started to default on their bond payables.

To make matters worse, the US President Joe Biden advocated to limit investment into China’s technology sector, citing national security issues.

Japan: The Bubble Economy

China’s problems today were compared to those of neighboring Japan in the early 1990s. Labeled the “Japanese Economic Miracle,” the country quickly recovered from its loss in the Second World War to become a technological and industrial powerhouse. Japanese electronics and automobiles were high quality yet inexpensive, so much so that the United States, which accounted for 40% of Japan’s exports, was quickly incurring a trade deficit.

In 1985, the Plaza Accord was signed – an agreement that would allow foreign exchange intervention to devalue the US dollar and help reduce the US’ growing trade deficit. The USD/JPY exchange rate fell from a high of 200 to the 128-level by 1987. With the stronger yen threatening to make Japanese exports less competitive, the government and central bank cooperated to boost public spending and ease monetary policy to drive up domestic demand. From 1986 to 1987, the Bank of Japan (BOJ) cut its policy rate by 200 basis points (bps), from 5.50% to 2.50%.

Easy access to cheap capital resulted in a growing asset bubble that saw Japanese corporations and individuals alike speculating on real estate and the stock market. From January 1985 to December 1989, the Nikkei 225 Index grew by almost 237%. By this time, Japanese corporations were profiting more from trading and positive revaluations while their core businesses started to lose to foreign competitors. Increasing asset prices allowed borrowers to assign larger amounts of collateral which led to an unending cycle of even greater borrowing and spending.

Japan’s inflation jumped to 2.4% year-on-year by April 1989 from a full-year average of just 0.68% in 1988. In response, the BOJ started a series of rate hikes totaling 350 bps that brought its policy rate to 6% by August 1990.

The shift to monetary tightening caused the asset bubble to burst, with property and stock prices falling in the years that followed. Declining asset prices resulted in growing debt ratios and unattractive balance sheets, further exacerbating the sell off. The Nikkei 225 Index dropped 63% from December 1989 to August 1992.

Chart 1. Nikkei 225 Index vs. Japan Consumer Price Index (CPI) year-on-year 1985-1995

The crisis eradicated as much as USD 2 trillion in value and left the Japanese in debt. Households prioritized saving which forced businesses to slash prices on goods and services to generate sales. This resulted in consistent disinflation which turned into deflation when the consumer price index (CPI) entered negative territory in 1995. Wages remained stagnant and businesses were forced to lay off workers, with the unemployment rate hitting a high of 12%.

The 1990s is known in Japan as “The Lost Decade” but the country struggled with bouts of deflation and disinflation well into the 2010s. It took the supply chain disruptions of the COVID-19 pandemic for businesses to start raising prices and profit margins, without alienating consumers. This has translated to renewed optimism in the Nikkei 225, but the index remains 20% below its 1989 high.

China and Japan: Not quite the same

People are quick to compare China to Japan because of the latter’s decades of experience with deflation. Aside from being geographical neighbors, both countries were the manufacturing hubs of their time and attracted significant amounts of foreign investment.

They both went on building sprees and severely overestimated the demand for real estate. Like the Nikkei 225, the China Securities Index (CSI) 300 was also on the rise and even managed to peak in February 2021 amid the pandemic but has since sold off due to loss of investor confidence, especially in the country’s inflated property sector and contentious technology sector.

But that is where the similarities seem to end.

Chart 2. China Securities Index (CSI) 300 vs. China Consumer Price Index (CPI) year-on-year 2018-2023

China’s problems today were not the result of loose monetary policy like what happened to Japan. Its economy did not overheat but rather, the country’s restrictive lockdown engineered a self-induced slowdown. To stimulate the economy, the People’s Bank of China (PBOC) has already cut its 1-year medium term lending facility rate from 2.75% to 2.50%. Chinese officials have recently announced plans for further monetary easing and fiscal support, which are the most appropriate actions they can take to avoid a recession. More government support was also promised for the struggling property sector to prevent more defaults.

Only time will tell if the Chinese government’s policies would help the world’s second largest economy truly recover from its post-pandemic woes. Compared to other nation’s governments, the CCP has been known for taking immediate and decisive actions with little internal resistance.

Once one of the fastest growing economies in the 21st Century, China will have to learn the hard way how to get out of a slowdown so that it does not get compared to its neighbor. As long as the country can reclaim once more its competitive advantage as the world’s top manufacturing hub and pull its property sector together, it should be able to conquer the threat of deflation.

EARL ANDREW “EA” AGUIRRE is a Market Strategist at Metrobank’s Financial Markets Sector and has 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a master’s in business administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.

The month of July would turn out to be a repeat of June, starting with initial US dollar weakness followed by month-end recovery that helped the currency recoup some of its losses. The June non-farm payrolls (NFP) report underperformed for the first time since March 2022, posting 185,000 new jobs vs. 225,000 forecast.

The US Federal Reserve also released dovish statements that it was nearing the end of its tightening cycle and the US dollar sell-off intensified after June inflation came out at 3%. Relief would come for the US dollar after the United Kingdom (UK) and Eurozone posted their own lower inflation figures, and the US gross domestic product (GDP) for the 2nd quarter of 2023 grew by 2.4% vs. 1.8% forecast, adding to the possibility that the US economy can still stomach more rate hikes.

Since succeeding Felipe Medalla on July 3, 2023 as governor of the Bangko Sentral ng Pilipinas (BSP), Eli emphasized the agency’s inflation-targeting role, described it as “structurally hawkish.”

It was also a demanding time for him as he took charge of BSP while local inflation remains well above target and borrowing costs already at a near 16-year high. This was a clear challenge for the new BSP chief to bring inflation back within the central bank’s 2-4% target range.

‘Raise rates if necessary’

Since taking the helm, Remolona maintained a hawkish stance regarding the BSP’s monetary policy direction. Although local inflation sharply moderated in recent months, he continued to emphasize that the BSP stands “ready to raise [rates] if necessary,” as supply side pressures and second-round effects still posed upside risks to prices.

The BSP chief has cited elevated rice prices out of Vietnam and Thailand, El Niño, the recent typhoons, and wage and transport hikes as some of the current risks to inflation—the same factors that have prompted the upward revisions in the BSP’s inflation forecasts in the recent MB Meeting.

Remolona also echoed the BSP’s view that local inflation will likely go back to within target by the fourth quarter of the year (and then likely reach below 2% in early 2024). He consistently affirmed that it would be a bigger mistake to reverse a premature easing, thereby making the case for a “prudent pause” for three consecutive meetings.

Battle vs inflation isn’t over

A notable change in the BSP’s rhetoric however, is how the current chief has cautioned against declaring that the battle against inflation has been won—contrary to previous pronouncements that the BSP “has done enough”.

Guidance on future interest rate decisions has also shifted from centering on the timing of rate cuts—counting months that inflation would likely be within target—to softening expectations that a pivot is forthcoming. Reiterating that it is “too early” to talk about cuts, Remolona also underscores that the BSP is “structurally hawkish”.

More recently, he also noted that the Philippine economy can tolerate a policy rate of as much as 6.8%, a level that will not impede growth, albeit 50 bps higher than the current level. We attribute this change in tone to a pick-up in inflation expectations given the aforementioned risks. As already emphasized by Remolona on different occasions, the BSP has maintained a hawkish bias for its primary mandate of promoting price stability through inflation targeting. This means that the BSP will tend to keep rates higher for longer, for its main purpose of moderating inflation back to target. This is in contrast with the US Federal Reserve, whose dual mandate includes maximum employment, apart from stable inflation.

When Metrobank compared the lengths of the Fed’s and the BSP’s most recent tightening cycles, we found that the Fed kept rates steady by an average of 11 months between the last hike and the first cut. Meanwhile, the BSP tended to pause for a longer period, 13 months on average, from the last hike to the first cut.

On policy rate guidance

When Remolona held his first Monetary Board meeting as BSP governor last August 17, he aligned his remarks with his previous statements during his first month in office, affirming that inflation will determine the central bank’s policy direction. Governor Remolona signaled that the monetary board sees no easing at least in the next meeting on September 21, and that the current policy rate is still low enough to not hurt growth.

While price pressures have significantly tempered, Metrobank expects the BSP to be vigilant on the upside risks to inflation mentioned earlier. These factors will be a major consideration for the BSP to keep interest rates higher for longer. Thus, we think the BSP will maintain current monetary policy settings until yearend to manage inflation expectations and the volatility of the USD/PHP exchange rate.

PATTY MEMBREBE and GERALDINE WAMBANGCO are Financial Markets Analysts at Metrobank – Institutional Investors Coverage Division. Patty, who is under the Market Strategy and Advisory Section, communicates strategies on fixed income, rates, and portfolio solutions for our high-net-worth individual and institutional clients. Meanwhile, Geraldine provides research and investment insights to high-net-worth clients.

WHAT HAPPENED LAST WEEK

Good buying and selling interest was seen for the most part of last week as selling activity brought about by US yields trading at fresh multi-decade highs was met by opportunistic buying interest from players looking to load up on longer-tenor bonds.

Proceeds from the recent Retail Treasury Bond (RTB) 10-4 maturity, which freed up around PHP 140 billion of liquidity, also played a part in the persistent buying seen mostly in short- to medium-term bonds.

The Bureau of the Treasury (BTr) fully awarded the auction for Fixed Rate Treasury Note (FXTN) 10-71 and set the coupon of the new 10-year benchmark at 6.625%, or just in line with market expectations. Given the relatively decent auction participation, which garnered around PHP 66 billion of total tenders, spill-over demand was seen in the comparable 9-year FXTN 10-69 near the 6.48-6.55% area from those who were priced out of the auction.

Later in the week, the Bangko Sentral ng Pilipinas (BSP) held the key policy rate at 6.25%, as widely expected by the market. It also revised upward its 2023 inflation forecast from 5.4% to 5.60% and ruled out the possibility of a rate cut a

The Philippine economy posted a more muted growth of 4.3% year-on-year in the second quarter of 2023, lower than the previous quarter’s 6.4% growth and market expectations of 6.0%. This downward trend was driven by the contraction in government and investment spending, and moderating consumption spending.

Meanwhile, inflation has shown a continued slowdown in the latest July print of 4.7%. We expect this trend to persist in the succeeding months sans supply shocks. However, we also recognize looming upside risks emerging from higher rice prices which may feed into the headline inflation by yearend and until the following year.

The central bank governor recently noted that the recent economic growth performance is an indication of a broad-based slowdown in domestic demand and that the impacts of the monetary policy tightening are already manifesting in the economy.

Thus, the monetary board deemed it appropriate to keep the interest rate unchanged to allow for further moderation in inflation. The BSP further anticipates inflation to fall within its target by the 4th quarter of 2023, consistent with our view.

Lastly, hawkish signals from the US Fed amid still-stubborn inflation in the US has strengthened the dollar and led the USD/PHP exchange rate to breach the PHP 56 level. Nevertheless, the BSP remains undeterred and supportive of a market-determined exchange rate, focusing on its primary mandate.

Considering these developments, we have revised our full year GDP growth forecast for 2023 to 5.5% (from 6.0%), our full year inflation forecast to 5.6% (from 5.8%) for 2023 and to 4.6% (from 4.3%) for 2024, and our overnight policy rate forecast to 6.25% (from 6.0%) for 2023 and to 5.25% (from 5.0%) for 2024. See table below: