Markets, from S3/ 5

Mr. Mapa:

Local financial markets will once again take their cue from global developments with the Fed rate cut cycle (once called the pivot) still in question.

Mr. Terosa: The peso can become strong this year if the Fed cuts policy rates and inflation will continue to be tame. In the first quarter, the peso will continue to trade sideways as interest rates in the USA remain elevated and inflation remains within the BSP range.

Mr. Tsuchiya: We expect the peso to depreciate a bit in [the first half of] 2024, before strengthening later in the year. Relatively high prices, particularly given assumed reacceleration in prices in [second quarter] due to base effects, would likely keep investors cautious. But once the Fed and the BSP starts cutting rates and inflation rate declines, it should provide support to the peso.

EQUITIES MARKET BSP:

The robust economic growth outturn for 2023, easing inflation, and the positive growth outlook for 2024 are expected to support investor confidence.

Domestic economic activity is seen to remain intact over the medium term. The projected GDP growth path is supported by improved global GDP growth outlook and a projected decline in global crude oil prices, tempered in part by the lagged impact of the policy interest rate adjustments.

Inflation also eased further to 2.8% in January 2024 from 3.9% in December 2023, and the lowest since October 2020 when inflation was at 2.3 percent.

Various multilateral organizations expect the Philippines to be one of the fastest-growing economies in Asia in 2023 and 2024.

Risks to the macroeconomic outlook include a temporary rise in inflation in April to July 2024 due to possible price pressures from lower domestic supply of rice and corn as well as positive base effects. Downside risks to global economic growth include new commodity price spikes from geopolitical shocks — including continued attacks in the Middle East — and supply disruptions and concerns over the property sector in China.

Mr. Arogo: We believe financial markets will remain volatile due to the possibility of inflation reacceleration in [second quarter 2024] to [third quarter 2024]. Nevertheless, average inflation in 2024 and 2025 should generally be better. This is because we assume that supply shocks will not be as severe compared to 2022 (RussiaUkraine war) and 2023 (State of Calamity from November 2022 to April 2023 due to Typhoon Paeng). As such, PSEi may reach 7,250 as a baseline (8,150 as bull case).

Mr. Asuncion: Our updated PSEi year-end 2024 forecasts using autoregressive distributed lag models (commonly known as ARDL models) yielded a range of 6,900 to 7,100. ARDL models are often used to analyze dynamic relationships with time series data in a single-equation framework. Using the same set of economic variables used previously (PISM, Inflation, RRP, USD/PHP, and Dow), we updated our PSEi using this top-down forecasting method.

Initially using the assumptions from our latest PSEi ARDL forecasting exercise, we update the assumptions looking at the following: 1) PISM or the local version of the S&P Global Philippines Manufacturing PMI (or simply the PMI) monitored by the BSP was assumed to gradually slowdown (as the PMI noted a December 2023 manufacturing growth slowdown, albeit still above the 50-level that indicates an expansionary environment within the manufacturing sector) that will eventually recover as the US Fed eventually embraces monetary policy rate cuts starting third quarter 2024 with an upside of earlier-than-expected cuts; 2) For the inflation trajectory, we assumed our current view seeing El Niño impacts as upside to CPI food especially in the summer months; 3) Consequently, we adopted our BSP monetary policy rate stance that sees the BSP tracking its US counterpart’s monetary policy movements throughout 2024 with a potential 100 bps cut that starts around November 2024; 4) For USD/PHP, we assumed steady currency movements between P55-P56 and an end2024 a little over P56 to the USD; and 5) Finally, US Dow Jones is expected with a steady rise in [first half of 2024] until rate cuts in June that may propel the said stock market index between [44,000-45,000].

Mr. Mapa: Local financial markets will once again take their cue from global developments with the Fed rate cut cycle (once called the pivot) remains in question.

Mr. Terosa: Possible policy rate cuts in the second half of the year and lower inflation rates will shift greater activity to the equities market. Global and domestic optimism [regarding] economic growth and the slowing down of inflation this year bode well for investors in the equities market.

Mr. Tsuchiya: We think normalizing economic conditions and policy setting should help equity prices, after four consecutive years of poor performance. But with slower economic growth, the recovery will be very gradual, falling short of the pre-pandemic level even by the end of the year.

FIXED-INCOME MARKET

Bond yields particularly in the short-term are expected to be influenced by the BSP’s monetary policy signals on the back of easing domestic inflation and continued demand expansion. Risks to the outlook include possible spillovers from international bond markets, particularly from the US’ signal of maintaining higher for longer policy rate than what market expects and, as a consequence, a potential fall in asset prices. Continued conflict in Gaza and Israel, compounded by attacks in the Red Sea, ongoing war in Ukraine, and extreme weather shocks, could also result in another episode of supply shocks that could impact global recovery and hence influence trends in global financial markets.

Mr. Arogo: We believe financial markets will remain volatile due to the possibility of inflation re-acceleration in [second quarter 2024] to [third quarter 2024]. Nevertheless, average inflation in 2024 and 2025 should generally be better. This is because we assume that supply shocks will not be as severe compared to 2022 (Russia-Ukraine war) and 2023 (State of Calamity from November 2022 to April 2023 due to Typhoon

Paeng). As such, we believe that benchmark BVAL rates by end-2024 will be lower compared to end-2023 levels.

Mr. Asuncion: Even with BSP’s average inflation for 2023 way off with its target range of 2%-4%, the December inflation went down to 3.9% which marked the lowest point for the whole year in 2023. With disinflation continuing and central banks likely to follow Fed’s preference of not rushing into a premature rate cut, the market play would be caution on long-term duration bonds.

Mr. Mapa: Local financial markets will once again take their cue from global developments with the Fed rate cut cycle (once called the pivot) remains in question.

Mr. Terosa: Fixed-income securities will continue to have a positive outlook as long as interest rates remain elevated in the first quarter.

Mr. Tsuchiya: We expect long term rates to rise over the course of the year, despite subsiding inflation and easing monetary policy. This is due to the widening term spread, which is now at a historic low. As monetary policy and economic conditions normalize, the spread should start to recover, exerting a small upward pressure on the long-term rates. — Bernadette