Morning Brief: 17 November 2010

Inflation outlook seen giving room for policy flexibility INFLATION RATES will likely remain within official projections for the next two years, giving the central bank room for flexibility in its policy settings, Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. told reporters via e-mail yesterday. "Basically, full-year average inflation should be within target. Remember, we don’t look at contemporaneous inflation or even very near-term, but inflation in the medium-term (two years down the road)," his e-mail read. "Our runs show that inflation during the policy horizon will remain manageable, or likely be within target." The central bank forecasts the country’s inflation rate to hit 3.8% this year, within the full-year target of 3.5%-5.5%. For next year and 2012, the BSP has forecast inflation rate to hit 3%, and has set a 3%-5% target. Inflation rate eased to 2.8% in October from the previous month’s 3.5%, bringing the 10-month rate to 4%. "This should give us flexibility to address concerns, including real economic growth and volatilities in the exchange rate," Mr. Tetangco wrote. The Monetary Board will meet tomorrow to review key interest rates, which have remained at lows of 4% and 6% for overnight borrowing and lending, respectively, since July last year. Nine economists polled late last week had said they expect the meeting to keep those levels, noting that inflation remains manageable and that raising rates could exacerbate volatile capital inflows. The same economists said they expect the central bank to start raising rates either in the first or second quarter of next year Oct. BoP surplus at $2.7B -- Bangko Sentral document THE PHILIPPINES likely posted a balance of payments surplus of $2.7 billion in October, taking the year-to-date surplus above a 2010 forecast that was already revised up sharply only last month, Bangko Sentral ng Pilipinas documents show. The Jan-Oct balance of payments surplus of $9.259 billion, contained in a document submitted to the central bank’s policy-making Monetary Board and seen by Reuters, implied a monthly surplus for October of $2.7 billion, below September’s record $3.062 billion. The year-to-date surplus in September was $6.54 billion. Last month, the central bank more than doubled its forecast for the 2010 balance of payments surplus to $8.2 billion from $3.7 billion. -- Reuters

U.S. Stocks Drop on Concern About China Growth, Ireland Debt U.S. stocks sank, sending the Standard & Poor’s 500 Index to the biggest slump since August, amid concern that the debt crisis in Ireland and Greece is worsening and that China will act to slow its economy. Freeport-McMoRan Copper & Gold Inc. and Nucor Corp. fell at least 3.5 percent as metals plunged. Travelers Cos. dropped 3.6 percent, leading losses in the Dow Jones Industrial Average as it slipped below 11,000 for the first time in a month, after declines in municipal bonds hurt its investments. Regions Financial Corp. slumped 4.5 percent after three executives overseeing risk and souring assets at the bank quit. The S&P 500 decreased 1.6 percent to 1,178.34 at 4 p.m. in New York. The drop follows a late-day selloff yesterday triggered by growing criticism of the Federal Reserve’s plan to spur growth using a technique called quantitative easing. The Dow fell 178.47 points, or 1.6 percent, to 11,023.50. The MSCI World Index of shares in 24 developed nations slumped for a seventh straight day, the longest losing streak since January. “It will be a choppy ride before we find some footing,” said Burt White, who helps oversee $284 billion as chief investment officer at LPL Financial Corp. in Boston. “The market is really trying to get its arms around a few lingering questions -- China, Europe, or whether or not QE2 is going to work or if it’s even necessary.” Treasuries Advance as Dudley Seeks to Ease Inflation Concern Treasuries rose, recovering from the biggest two-day decline in almost two years, as two Federal Reserve regional bank presidents defended the central bank’s $600 billion asset purchase program after criticism from economists and politicians saying the program is inflationary. Benchmark 10-year yields jumped 31 basis points during the previous two trading days, the most since a back-to-back surge of 33 basis points in January 2009. Boston’s Eric Rosengrensaid he expects the central bank to buy the entire amount in a bid to reduce unemployment. James Bullard of the St. Louis said the Fed would buy less than planned under quantitative easing only after a big improvement in the economy. The central bank bought $5.4 billion of Treasuries.

Crude Oil Declines to Two-Week Low as European Debt Woes May Curb Demand Crude oil tumbled to a two-week low on speculation Europe’s deepening debt crisis and steps to cool Asia’s economic growth will reduce demand. Oil slid 3 percent as European ministers gathered in Brussels to discuss aid to Ireland’s banks. The Bank of Korea raised interest rates for the second time this year and the China Securities Journal said the Chinese government will take steps to control rising prices. The drop accelerated after U.S. wholesale costs rose less than forecast in October. “There are concerns about what the European debt crisis will mean for the economy and energy demand,” said Chris Barber, a senior analyst at Energy Security Analysis Inc. in Wakefield, Massachusetts. “There are similar concerns about what the Asian steps will mean for demand.” Crude oil for December delivery fell $2.52 to $82.34 a barrel on the New York Mercantile Exchange, the lowest settlement price since Oct. 29.

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