Q2 momentum seen easing a bit

We think the Fed will raise policy rates by another 25 bps in June amid robust labor market

The economy is expected to hit a brake in the second quarter but will rebound in the second half, according to a joint report by First Metro Investment Corporation or FMIC and the University of Asia and the Pacific or UA&P.

The report, released on Monday, said growth may slow to 5.8 percent year-on-year in the second year of 2023. This is due to elevated inflation, which is expected to constrain consumer spending.

“However, we expect strong gains in construction due to accelerating infrastructure work, and revenge spending on transport and storage, and accommodation and food services on the Services sector space,” FMIC and UA&P wrote.

“These sectors are expected to gain further traction in (the second half of) 2023, along with sharply lower inflation rates, which are expected to average 3.3 percent by (the fourth quarter of) 2023,” it added.

FMIC and UA&P see a return to above six percent full-year growth in 2023. However, they said that the peso will remain under pressure due to huge trade deficits and higher Fed policy rates.


Fixed income outlook

Meanwhile, FMIC and UA&P said that investor optimism surfaced in May due to improving inflation and monetary policy outlook. Crude oil prices touched below $70 per barrel in early May despite the OPEC production cuts, while US Federal Reserve chairperson  Powell has taken a slightly less hawkish stance on inflation and policy rate adjustments.

Domestically, the yield curve flattened further to only 8.5 bps as short-term bond yields catch up with the current policy rate of 6.25 percent, whereas long-term yields fell given the downward momentum of local inflation.

“Furthermore, we think the Fed will raise policy rates by another 25 bps in June amid robust labor market (employment gains in March-April above the 10-year average) and still elevated inflation (April core inflation hardly moved to 5.5 percent YoY),” FMIC and UA&P said.


Equities prospects

In terms of equities, FMIC and UA&P said that the PSEi performed second best in the Southeast Asian region with a 1.9 percent month-on-month uptick, driven by local investors which resulted in a higher trading range between 6,450 and 6,700.

Four sectors landed in the positive territory, with the financial sector leading the sectoral race as it speeded by 5.9 percent month-on-month in April, followed by the following sectors: Holdings (2.4 percent), Property (+2.1 percent), and Industrial (1.1 percent). Meanwhile, the Services and Mining and Oil sectors experienced losses of 3.5 percent and 4 percent, respectively.

FMIC and UA&P said that the PSEi may continue to move ahead of equities markets in advanced economies due to domestic inflation moving back within BSP targets (2 to 4 percent) by the fourth quarter, albeit mitigated by the mild underweighting by MSCI rebalancing.

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