May 2019

THE MARKET CALL (MAY 2019)

Macroeconomy

The expected ramp-up in infrastructure and other NG expenditures should facilitate a rebound in Q2. Softer upticks in prices of key commodities, likewise, will provide extra boost. We think that the downtrend in headline inflation and cuts in the BSP policy rates and RRR will encourage higher investment and consumer spending starting Q2. Impact of El Niño on Q2-2019 will likely be less than in Q1. Besides, we are not seeing much growth in agriculture.

Fixed Income Market

US GDP growth in Q1 rose by 3.2% SAAR, surpassing expectations, and robust job creation at 263,000 in April failed to boost US interest rates. Domestically, long-term bond yields should keep its downward trend due to the (1) weak GDP growth of 5.6% in Q1, (2) inflation rate falling below 3.0% by July, and (3) BSP policy rate cut of 25 bps on May 9, followed by 200 bps slash in reserve requirement ratio (RRR). Short-term GS yields should slide more deeply only towards the end of July when the full RRR cut takes effect.

Equities Market

Continued decline in inflation and a slowdown in GDP and money growth (M3) triggered the cut in BSP’s policy rates and in reserve requirements by mid-May. The market showed foreign selling as the MSCI rebalancing cut the weight for Philippine equities. However, local and foreign investors seemed eager to take up the slack after the fall.