June 2019

THE MARKET CALL (JUNE 2019)

Macroeconomy

Our expected slide in inflation to below-3.0% by June and below-2.0% by September should have an immediate impact on bond yields. But the positive sentiment it has spawned in the financial markets should spill over into the real economy in terms of more robust consumer spending and stronger investments. The expected reversal in infrastructure and other NG expenditures data, as well as positive development in inflation and money supply, supports our view of a likely rebound in Q2. Weak exports may be offset by higher gold exports (with small gold miners now exempted from taxes) and a competitive exchange rate would help counter its fragility.

Fixed Income Market

The global slowdown amidst the US-China trade war and the collapse of crude oil prices to bear market territory should push domestic inflation below 3.0% by June. 10-year T-bond yields should, thus, drop below 5.0% after June inflation gets reported and an additional 50-bps cut in reserve requirement ratio (RRR) takes effect end-June. We expect sustained activity in auctions and the secondary market leading to decreasing yields across the curve. We also expect issuance of long-term corporate bonds in H2.
 

Equities Market

With positive and negative forces balancing out, the re-entry of foreign funds would help tilt the outcome of the local bourse. Main drivers come from the monetary easing of the BSP but headwinds included the lower-than-consensus Q1 core earnings and trimming of weight allocation in the MSCI for emerging markets.