The additional “green shoots” of the economy— higher employment, slight increase in tax revenues of the Bureau of Internal Revenue, and Manufacturing PMI at 52.2 for second consecutive month—have boosted optimism in the economic recovery. The latter, however, will likely depend much on how fast the population gets inoculated with COVID-19 vaccines and the confidence of firms (to produce) and consumers to (go out and) spend as daily cases have soared beyond earlier records. Another headwind is the ECQ in Metro Manila+. With still a weak economy, BSP will likely keep policy rates unchanged in H1, unless the new ECQ significantly slows the economy further, which may merit a rate cut.
Fixed Income Outlook
Even before U.S. 10-year T-bond yields breached 1.6% by mid-March (+50 bps since end-January), investors positioned themselves at the shorter end of the curve, especially after the February inflation accelerated to 4.7%. The surge in local bond yields got mirrored in the secondary market as volume tumbled by -32.8%. Inflation will likely reach 4.9% by March and may take some time to return to below 4.0% range. Thus, with elevated inflation and high U.S. 10-year yields, long term papers will remain unattractive in H1.
With PH 10-year bond yields surging close to 4.5% by mid-March due to accelerating inflation and U.S. 10-year T-bond yields soaring beyond 1.6%, local equities look weak and may hover around mid-6,000, and thereafter trade sideways in Q2. The scarcity of positive economic news and unexciting earnings contribute to its weakness. Buying opportunities for selected stocks, however, will likely surface.