Macroeconomy
Elevated employment levels in the semester ending in February should buoy GDP faster, as empirical evidence show that employment changes precede GDP movements. The Manufacturing sector’s output has risen faster in each of four months to February, while PMI for March remained expansionary. NG should be able to ramp up infrastructure spending in huge ODA-supported projects as interest payments take a smaller portion of total expenditures, while PPP projects gain further traction. Although inflation will likely average 4.2% in Q2, we expect it to go within the BSP target range by Q3. The peso-dollar rate should have a depreciation bias as large importations for the infrastructure projects and rice imports keep trade deficits elevated.
Fixed Income Outlook
After an uneventful March, local 10-year bond yields surged by some 50 bps in the first half of April in response to a 34 bps vault in equivalent U.S. Treasury bonds. The latter in turn arose from the near certainty that the Fed will keep policy rates unchanged up to June amid another strong job gains in March and inflation rising to 3.5% YoY. Besides, the possibility of escalation in the Middle East conflict and other geopolitical troubles—e.g., Ukraine, West Philippine Sea—puts an uncertainty premium into risky assets. Local benchmark 10-year bond yields will likely challenge 7.0% in H1 but will reverse to a slow downward trend as the Fed becomes more dovish and domestic inflation returns to within the BSP target range in Q3.
Equities Outlook
After the release of U.S. employment figures in March, a widespread risk-off sentiment led to selloffs in Japan (-5.0%), U.S. (-4.7%), Germany (-4.4%), and the United Kingdom (-1.0%) from April 1-16. This also caused the PSEi to break through the strong support level of 6,500 after dropping by -7.0% for the same period. We anticipated a subdued Q2, but the tense situation in the Middle East (ME) could deter local equity investors for at least the rest of Q2. However, unless the conflict in ME escalates, we maintain our PSEi forecast of 7,000-7,500 in H2. Besides, early Q1 reports of top banks BDO and BPI (+12.0% and +25.8% YoY, respectively), suggest a boost from robust corporate earnings.
