The Market Call | August 2022

Macroeconomy

Robust Q2 GDP growth should contribute to a 6%-7% full year (back to the upper end) as employment increases in May-June and the peso depreciation should provide more income to some 70% of the population. These will likely offset weakness in spending by the remaining 30% constrained by the high inflation. Besides, NG spending, especially for infrastructures, has room to expand given that there is a leeway of 60% of the target full year budget deficit. The Philippine peso may recover with the seasonal inflow of OFW remittances but remains under pressure from U.S. dollar strength which will likely to continue due to the Fed’s commitment to bring down inflation more quickly.

Fixed Income Outlook

The upward trend in 10-year T-bonds suddenly reversed in July as recession fears gripped U.S. markets despite hotter local inflation in June. Remarkable demand, both in auctions and secondary market, drove yields below 6% by mid-August, levels not seen since April. However, we see a slight upward bias and continued volatility as domestic inflation will likely remain above 6% for most of H2 in addition to a still hawkish stance from the Fed.

Equities Outlook

PSEi experienced a 2.6% uptick in July associated with positive sentiment from U.S. and Asian markets. Likewise, a downward trend of crude oil prices and flat inflation rate of the U.S. is observed for the month of July, alongside the peaceful transition to the new administration, which likewise boosted confidence for local investors in the market. Thus, we should expect a calm market in fear of drastic Fed policy rate hikes for the rest of the year

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