The Market Call | October 2023

Macroeconomy

The recovery in August of some 80% of jobs lost in rain-drenched July amid the fourth consecutive month of job gains in the Manufacturing subsector has made us more optimistic that a net gain in employment will occur between September and November. October PMI suggested a return to expansion mode. Beneath “apparently weak” spending growth in August, National Government spending on current operations and capital outlays soared by 24.7% following through the 28.9% vault in July. NG will continue to ramp up spending for the rest of the year. Together with slowing inflation to below 5% by November, these should boost GDP expansion specially in Q4. Sliding international rice prices and lower crude oil futures vs. spot prices support our view on inflation. All told, we still expect the economy to expand by 5.8% in 2023.

Fixed Income Outlook

Speeches of a growing number of Fed board members clearly sounded dovish. And so market players appear to see another pause in the Fed’s rate hiking cycle in its November meeting.  However, they also expect a longer period of elevated long term interest rates and have driven 10-year U.S. bond yields closer to 5.0% by mid-October. We agree with this view and think that developments in the local front would have more relevance to domestic bond yields. Inflation will likely go below 5% YoY by November as Thai rice prices began to decline in September, while crude oil futures remain below spot prices. The National Government’s $1.26-B dollar bond issuance and healthy cash buildup should also relieve pressure on bond yields. However, while short-term yields stay close to policy rates, 10-year yields will likely fall within the 6.4% to 6.9% range with a slight upside risk linked to U.S. bond yields.

Equities Outlook

Given the 6.1% local inflation in September and the uncertainties spawned by Hamas/Iran attack on Israel, we expect PSEi to move sideways until the end of the year, unless we see surprisingly better Q3 GDP growth and company profits. Furthermore, a significant slowdown in local inflation would offer a small boost to the PSEi, especially considering the struggling global equities markets.