Morning Brief: 08 October 2010

BSP keeps key policy rates at historic low levels The Bangko Sentral ng Pilipinas Thursday maintained its key interest rates at historically low levels to sustain the country’s robust growth over the short to medium term. Following a meeting of the Monetary Board, BSP Deputy Governor Nestor Espenilla Jr. said in a press conference that there was no pressure for the central bank to reverse its current policy stance, citing the favorable inflation environment. Espenilla, who currently serves as officer in charge of the BSP, said the Monetary Board saw it prudent to keep its overnight borrowing and lending rates at 4 and 6 percent. “The Monetary Board’s decision was based on its evaluation that monetary policy settings remain appropriate as inflation forecasts continue to be within the government’s range,” Espenilla said. The record low policy rates have been in place since July 2009. The rates had been brought down to help the country avoid a recession last year when the global turmoil was said to have reached its peak. The low rates of the BSP resulted in a drop in commercial bank lending rates which, in turn, spurred demand for loans. An increase in bank loans tends to support more consumption and investment activities. BSP officials said these were factors that allowed the country to steer clear of recession. The strong recovery of the economy this year has led to speculations that the central bank would soon raise its key policy rates. The economy expanded by 7.9 percent in the first semester—the fastest pace in more than 30 years. Moreover, some economists noted that keeping interest rates too low for too long could substantially boost demand and lead to a faster rate of rise in the prices of goods and services. But central bank officials said that, despite strong growth in the first semester, there was no need to raise interest rates so soon. Inflation has so far remained benign, settling at a 10-month low of 3.5 percent in September. It is projected to stay that way over the short to medium term. According to officials, inflation has remained within benign levels, despite increasing demand, because of an unusual rise in investments, which tends to increase supply. The impact of rising demand on consumer prices is therefore offset by an increase in supply, they explained. The government aims to keep inflation within a range of 3.5 to 5.5 percent this year, and within 3 to 5 percent next year until 2014. RP reserves breach $50-B mark in September The country’s foreign currency reserves surged in September and breached the $50-billion mark mainly due to income generated from investments abroad and offshore loans the government took out earlier this year. The Bangko Sentral ng Pilipinas yesterday reported that the gross international reserves (GIR) reached $53.54 billion as of end-September, up 26 percent from $42.53 billion posted in the same period a year ago. Central bank officials said the record GIR level further raised the confidence of foreign creditors in the Philippines. A closely watched economic indicator, the GIR determines a country’s ability to engage in commercial transactions with the rest of the world. Key transactions include payment of imported goods and services and settlement of debts denominated in foreign currencies. In a statement, the BSP said the latest amount of foreign reserves would be enough to cover 9.4 months worth of the country’s usual imports. It is also worth 5.3 times more than the country’s cumulative debt maturing within a year. According to the central bank, one significant driver of the GIR in September was the government’s sale of $1 billion worth of global bonds. There were also the proceeds from various loans the government took out, including that from the World Bank. The GIR could have been higher had the government accepted more bids for the global bonds, which were highly oversubscribed. Tenders for the bonds reached $13 billion, but treasury officials said the government decided not to borrow more than what was programmed. The increase in gold prices in the world market likewise boosted the GIR, which is made up of foreign currencies as well as gold holdings. The GIR was also helped up by the BSP’s income from its investments in foreign securities, mostly US treasuries.

U.S. Stocks Decline as Shares of Commodity Producers Retreat U.S. stocks fell, sending the Standard & Poor’s 500 Index lower for a second day, as mining and energy companies fell after commodity prices erased gains and PepsiCo Inc. led consumer-staples shares lower. Chevron Corp. and Freeport-McMoRan Copper & Gold Inc. paced losses in commodity producers as a rebound in the dollar drove down oil and metals prices. PepsiCo dropped 3 percent after lowering the top end of its annual profit forecast. Marriott International Inc. slumped 5.8 percent, the biggest decline in the S&P 500, after the largest U.S. hotel chain missed earnings projections. The S&P 500 dropped 0.2 percent to 1,158.06 at 4 p.m. in New York. The index has fallen two straight days after closing at the highest level since May. The Dow Jones Industrial Average lost 19.07 points, or 0.2 percent, to 10,948.58. The Dollar Index, which gauges the currency against six major peers, rose 0.1 percent to rebound from its lowest level since January. TIPS 30-Year Inflation Rate Is Highest Since June on Fed Purchase Outlook Treasury 30-year bonds are yielding the most relative to inflation-protected debt since June as investors bet the Federal Reserve will be successful in pushing up prices with further purchases of government bonds. The difference in yields between bonds and 30-year Treasury Inflation Protected Securities, an indication of trader expectations for inflation known as the break-even rate, reached 2.294 percentage points yesterday, the widest since June 29. It touched 2.287 percentage points today. Two-year yields reached the lowest ever, setting or matching a record for a fifth consecutive day, before data tomorrow that are forecast to show a rise in the unemployment rate, pointing to a slowing recovery. “The market is starting to price in risks of higher inflation down the road, but there is still more to come,” said Michael Pond, an interest-rate strategist in New York at Barclays Plc who was the top-rated analyst of TIPS in Institutional Investor magazine’s annual poll. Barclays is one of 18 primary dealers that trade with the central bank. “The Fed is telling you they want higher inflation.” The yield on the 30-year bond rose 3 basis points, or 0.03 percentage point, to 3.70 percent at 10:24 a.m. in New York, according to BGCantor Market Data. The price of the 3.875 percent security due in August 2040 fell 18/32, or $5.63 per $1,000 face amount, to 103 1/8. Benchmark 10-year note yields slipped 1 basis point to 2.38 percent. They reached 2.3552 percent yesterday, the lowest level since January 2009. The two-year note yield fell 2 basis points to 0.3591 percent and touched 0.3513 percent, the lowest ever.

Crude Oil Futures Slip From a Five-Month High in New York as Dollar Gains Crude oil tumbled from a five-month high after the dollar rebounded versus the euro and U.S. equities declined, wiping out an early advance. Oil fell the most in three weeks as the greenback climbed against the common currency for the first time in three days, reducing the appeal of commodities as an alternative investment. The Standard & Poor’s 500 Index slipped for a second day as raw- material prices dropped, sending producer shares lower. “The dollar and equities are the main drivers,” said Kyle Cooper, director of research for IAF Advisors in Houston. “What happens with inventories and demand isn’t that important.” Crude oil for November delivery fell $1.56, or 1.9 percent, to settle at $81.67 a barrel on the New York Mercantile Exchange. It was the biggest decrease since Sept. 16. Oil reached $84.43 earlier today, the highest level since May 4. Futures are up 17 percent from a year ago

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001

Philippines Markets: 07 October 2010

07 October 2010

USD/PhP: 43.30 - 0.205 PSEi: 4245.05 + 48.26
USD/JPY: 82.40 PFINC: 957.52 + 5.62
EUR/USD: 1.3987 BDO: 60.50 - 0.50
GBP/USD: 1.5907 BPI: 55.35 unch
PDSTF3M: 4.0788 MBT: 75.00 + 1.60
Prices as of 4:00pm Source: Bloomberg, Reuters


RP stocks soar higher

Local stocks rallied to a new all-time high to breach the 4,200 level on Thursday as investors continued to seek better yields amid record-low interest rates.

The main-share Philippine Stock Exchange index racked up 48.26 points or 1.15 percent to 4,245.05.

The upswing was led by the holding firms and services counters which surged by 1.9 percent and 1.2 percent, respectively.

Value turnover, however, was relatively thinner at P5 billion compared to an average of over P6 billion since mid-September.

There were 54 gainers against 70 decliners and 56 unchanged stocks.

Source: www.inquirer.net

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001

Morning Brief: 07 October 2010

IMF further raises growth forecasts for RP The International Monetary Fund has again raised its growth forecast for the Philippines for 2010 and 2011, citing improving domestic demand and business sentiment in the country and the rest of Asia. For this year, the IMF raised its growth projection to 7 percent from the 6 percent forecast made in July and the 3.6 percent announced in April. For 2011, the country is now expected to grow by 4.5 percent, better than the original projection of 4 percent. In its latest outlook on economies across the globe, the IMF said the revised projection for the Philippines mirrored the improved outlook for other economies in Asia. So far this year, IMF said, Asian countries showed faster-than-expected rebound from last year's global turmoil. "Asia entered the global crisis on a strong footing and is continuing to lead the global recovery," the IMF said. In the case of the Philippines, the domestic economy grew by 7.9 percent in the first half, beating most expectations. This prompted the government to believe that even its official growth target for the year -- set at 5 to 6 percent -- was already conservative. The IMF said a robust increase in domestic demand had to do with sharp expansion of the Philippine and other Asian economies in the first half. "In most parts of the region, resilience in domestic demand—thanks in part to proactive policy stimulus—has offset the drag from net exports," the IMF said. Exports by the Philippines and other Asian countries have so far rebounded this year after last year's contraction. However, economists said, the growth was still short of making export revenues revert to the pre-crisis levels. This is because recovery of the United States and Europe, major export markets, from the recession in 2009 was only moderate. Demand from these countries, although improving, thus remains volatile. Still, IMF said Asian countries have become less dependent on Western economies, given that their domestic demands have been growing. Moreover, rising investments in Asian countries are helping sharpen their rebound. Capital controls not being considered by central bank THE CENTRAL BANK is not blocking the fundamental strength of the peso and is not contemplating capital controls because inflows are manageable, an assistant governor yesterday said. The Bangko Sentral ng Pilipinas (BSP) was however smoothing sharp moves in the peso, which has risen more than 6% this year to its strongest against the dollar in more than two years, Cyd Amador told Reuters in an interview. "We are not countering any fundamental shift of trend in the movement of the peso," Ms. Amador said. "We will stay true to our fundamental principle insofar as intervention in the foreign exchange market is concerned, mainly just to smoothen destabilizing fluctuations but not running against the trend movement of the exchange rate." The peso strengthened to P43.50 per dollar after the comments, its strongest since June 2008. It closed at P43.505 yesterday, up from Tuesday’s P43.76. (Story on S2/1) Investors have been chasing returns in fast-growing emerging markets, and the inflows have resulted in currency appreciation in Asia and Latin America. In response, some central banks have intervened to cap currencies to protect exporters, and some have taken steps to control inflows. Brazil, whose finance minister has warned of an international "currency war," on Monday doubled a tax on foreign investors buying local bonds to 4% to curb a strong real currency. "The global financial system is flush with liquidity. It has to find somewhere to go. With the lackluster performance of the advanced economies, the funds would naturally gravitate towards those with brighter growth prospects in the emerging markets," Ms. Amador said. The BSP was not looking at capital controls at the moment, she said, as it had other tools to manage inflows and currency strength, such as early payment of foreign debt, prudent reserve management and foreign exchange regulatory reforms. "It is not something that is being discussed," she said. "Some of the flows that are driving the peso strength is something that we think could be a stable feature, like remittances," she said, adding portfolio flows and direct investments appeared to be at respectable levels. Foreign investor buying has helped drive the stock market to a run of record highs, and latest data shows foreign portfolio fund inflows hit a 15-month high in August. The stock market has risen by 37.5% this year, including a 15% gain in September. The central bank expects remittances from Filipinos overseas to grow by 8% this year from 2009’s record $17.3 billion. "When we look at measures based on our studies that we have been making on whether there are initial signs of overheating or misalignments in the asset market, we don’t think we are seeing this," Ms. Amador said. "We are watchful and attentive, but at the moment we don’t think there should be any significant departure from the way we are handling liquidity flows." The Philippines expects the economy to grow faster than a target of 5-6% this year, supported by a recovery in trade and remittances, and then increase to 7-8 percent in 2011. The central bank also expects inflation to remain benign, giving it flexibility in setting monetary policy. The central bank is expected to leave its policy rate at record low of 4.0% at a policy review today. The policy rate has been at 4.0% since July 2009, with the Philippines one of the few countries in Asia not to have raised rates since the global financial crisis.

Most U.S. Stocks Retreat on Technology Slump, Unexpected Decrease in Jobs Most U.S. stocks fell, a day after the Standard & Poor’s 500 Index rallied to an almost five-month high, after a report showing an unexpected decrease in private payrolls undermined confidence in the economic recovery. Equinix Inc. plunged 33 percent after sales at the operator of Internet data centers trailed estimates. M&T Bank Corp. dropped 5 percent as Allied Irish Banks Plc said it will start selling its stake in the Buffalo, New York-based lender. General Electric Co. rose 2.4 percent after buying oilfield-equipment maker Dresser Inc. for $3 billion. Alcoa Inc. gained 1.9 percent before reporting quarterly earningstomorrow. More than four stocks declined for every three that rose on U.S. exchanges. The S&P 500 fell 0.1 percent to 1,159.97 at 4 p.m. in New York, after surging 2.1 percent yesterday. The Dow Jones Industrial Average rose 22.93 points, or 0.2 percent, to 10,967.65. Treasury Yield Curve Flattens Amid Job Losses, Prospects for Fed Purchases Treasuries rose, narrowing the gap between yields on 2- and 10-year notes to the least in five weeks, as a report showing an unexpected decrease in U.S. jobs fueled speculation the Federal Reserve will buy more debt. Five-year yields reached their lowest ever after ADP Employer Services data showed employers cut 39,000 positions, spurring speculation a payrolls report Oct. 8 also may be weaker than expected. Yields slid this week as investors bet the Fed will follow the Bank of Japan in buying more bonds, a strategy known as quantitative easing. “It’s a continuation of the bullish trend seen as the market continues to price in a growing anticipation of QE,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “If one were on the fence of expecting QE in November versus December, a weak employment report could bring one’s expectations closer.” Five-year yields fell 4 basis points, or 0.04 percentage point, to 1.15 percent at 4:45 p.m. in New York, according to BGCantor Market Data. The 1.25 percent security due in September 2015 rose 6/32, or $1.88 per $1,000 face amount, to 100 15/32. The yield touched 1.1206 percent, the lowest level on record. The two-year note yield slid 2 basis points to 0.38 percent and touched an all-time low of 0.3750 percent. The yield, which has set or matched record lows for four consecutive days, was 0.9043 percent a year ago. The 10-year security’s yield dropped 8 basis points to 2.39 percent and reached 2.36 percent, the lowest level since January 2009. Thirty-year bond yields touched 3.63 percent, the lowest level since Sept. 2.

Crude Oil Increases to Five-Month High as Dollar Drops on Fed Speculation Crude oil rose to a five-month high as the dollar declined on speculation the Federal Reserve will act to revive the U.S. economy by buying bonds. Oil climbed 0.5 percent as the U.S. currency slipped to a 15-year low against the yen, bolstering the appeal of commodities to investors. Fed Chairman Ben S. Bernanke said Oct. 4 that restarting large-scale asset purchases would probably spur growth. A government report showed that U.S. crude stockpiles increased last week as fuel supplies fell. “This dollar situation is really at a critical point, and there’s increasing talk of it extending its move lower, which is starting to feed directly into this crude rally,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund focusing on energy. The fuel supply drop will provide “a fundamental narrative and support us going higher,” he said. Crude oil for November delivery rose 41 cents to $83.23 a barrel on the New York Mercantile Exchange, the highest settlement price since May 3. Futures are up 17 percent from a year ago.

Sources: Bloomberg, Reuters, www.inquirer.net, www.philstar.com, www.bworldonline.com, www.cnnmoney.com

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001