MktsFocUs: GDP Blues

MktsFocUs: GDP Blues


UnionBank Publication

UnionBank Publication

177 week ago — 10 min read

BVAL rates forecast ranges: 5yr 2.496% - 2.656%     10yr: 2.806% - 2.916%

Pay short duration/Neutral on the curve’s belly/Cut long duration

Week ahead (Dec 14-18): Buy bonds particularly in and around the curve’s belly and sell in release of the 4Q20 GDP on the 28th. With market expectations forming around higher inflation risk exceeding 3% year-on-year in the near-term, the risk of BSP tightening will be an overhang. UBP staff’s projection of inflation peaking in May at 4.6% from 3.4% in Jan (latest forecasts) on food supply constraints and rising oil price risk is in sync with BSP’s higher headline inflation outlook (see recap). BSP will talk hawkish but maintain its accommodative rate stance since inflation is likely to correct back to 3% later in 2H21. We remain firm in our belief of BSP’s commitment to economic recovery by maintaining low rates and abundant liquidity this year including quasi-management of the local yield curve to enable Treasury’s cheap funding access. Amid upside inflation risk, trim the portfolio’s long duration.

Previous week’s recap:
As we closed the week, buying interest was strong in the local government securities market. Our trader noted healthy demand from end-users. Local newsflow supported biddish sentiment particularly in the short tenors up to the curve’s belly. Yields went down 2-3 bp intra-day in Thursday’s session. Lackluster infra spending in Oct-Nov and reports of ‘consolidation’ among large firms reinforced poor expectations of 4Q20 GDP and its outlook. Near-term inflation is unlikely is unlikely to ease given reports of persistent food supply constraints. This was partially validated by BSP Deput Gov. Dakila’s comments on inflation likely to drift above 3% year-on-year in 1H21 although BSP has a lot of policy tools, e.g. RRR cut, to support liquidity if needed. A steepening US treasury curve was hardly a distraction although global markets digested Biden’s stimulus package (US$1.9tn) in tandem with reset of vaccine deployment and expansion of the US Fed’s balance sheet.


USDPHP forecast range: 48.00 – 48.10
Tactical sell USD/Long-term underweight PHP

Week ahead: We don’t see BSP softening on support for 48 despite persistent USD weakness. Neither will the recurring story of a narrowing PH trade deficit (Dec), a 2020 GDP decline in the range of -8% to -10%, and an unchanged US Fed funds rate, ease or derail BSP’s reserve accumulation at 48. Our trader sees the trading range of 48.00-10 as intact. Perhaps the regulator’s concern over the PHP’s real exchange rate appreciation (or uncompetitive exchange rate) amid upside inflation risk buoyed support for USDPHP. According to BIS, the PHP’s real effective exchange rate index was highest within the ASEAN. While during the crisis, the index appreciated in sync with USDPHP’s fall.

Previous week’s recap :Weak USD persisted amid a peaceful transition of power in the US. From a one-month high of nearly 9.1, the DXY index slid to 90.2 consistent with risk-on sentiment buoyed by the new Biden administration’s US$1.9tn fiscal stimulus plan while effecting 17 executive orders to reverse controversial Trump initiatives. Incoming Treasury Sec. Janet Yellen urged lawmakers to ‘act big’ on the stimulus package. These developments neutralized disappointing US retail sales data for the 3rd straight month. Despite broad USD weakness, USDPHP traded above the critical 48 level. Bids from suspected conduit banks supported USDPHP and kept volatility to within a 5-centavo trading range of 48.03-08. Corporate demand seen nibbling at 48.05.

PSEi forecast range: 7,000 – 7,300
Buy index on correction to 7,000

Week ahead: Philippine shares are expected to move sideways due to lack of positive catalysts and foreign activity. Investors are expected to remain cautious as they await the 4Q20 GDP release and updated 2021 forecasts including EPS for index stocks. More of the same unexciting sequential gains in 4Q20 buttress our sober 2021 outlook that’s likely to fall below potential GDP growth while expecting return to pre-COVID output in 2022. Our trader expects support to remain at 7,000, while resistance may be pegged at 7,300. The core strategy remains buy on dips as foreign selling pressure intensifies.

Previous week’s recap:
PSEi lost 1.83% week-on-week in Thursday’s session as local newsflow weighted on market sentiment during the week despite return of global risk-on with the peaceful transition of power in the US on the 20th. Slumping infra spending in Oct-Nov implied 4Q20 PH GDP stuck in the negative region although better than 3Q GDP’s 2-digit drop. Consequently, another bland corporate earnings recovery to end 2020 can’t be ignored. Persistent food supply constraints led by ‘lean’ pork supply sustained elevated inflation in the near-term and ruled out BSP rate cuts. Consolidation/rightsizing issues among large enterprises, e.g., Shangri-la Makati to close down operations, implied not let up from a rising NPL situation and joblessness. Add to all these the rising daily PH virus cases recently and delayed vaccine(s) acquisition that still needs FDA approval.


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