Morning Brief: 15 February 2011

S&P warns of inflation risks PATIENCE may not be a virtue for Asian central banks cautious of tightening policy, debt watcher Standard & Poor’s (S&P) yesterday said as it urged monetary authorities in the region to consider moving much more swiftly to address inflationary risks. In a report titled: "How Will Asian Sovereigns Respond Now That Inflation Is Back?", S&P warned that inflation expectations could be kindled if banks tolerated the rise in prices and increased interest rates too gradually. "The optimal policy mix to combat inflation is likely to be different in each economy," S&P said. "But we believe that monetary authorities can only succeed in taming inflation expectations if they show their willingness to tighten monetary conditions in a preemptive manner," it added. While Asian central banks were said to have been ahead of developed country counterparts in terms of tightening, S&P said the process had started just last year and rate hikes remained small compared to the sharp cuts implemented at the height of the global financial crisis. The Bangko Sentral ng Pilipinas (BSP), along with its Indonesian counterpart, was cited as among those which had delayed rate hikes to this year. Indonesia finally raised its benchmark rate last Feb. 4 after keeping it at a record low for 18 months but the BSP last week said it was not yet time to raise its own policy rate, also kept at a record low since July 2009. BSP officials were not immediately available for comment yesterday. While inflation forecasts for this year and 2012 were raised last week, monetary authorities said they remained well within the 3-5% target range set for both years. BSP Governor Amando M. Tetangco, Jr. has said that containing inflation remained the predominant policy thrust. The rise in consumer prices hit 3.5% in January, up from 3% in December. This prompted the BSP to raise its 2011 forecast to 4.4% from 3.6%, within the 3-5% full-year target. Analysts currently expect the Bangko Sentral to start tightening late in the first semester. S&P, in its report, said "Inflation expectations among consumers may rise swiftly if central banks tolerate inflation and raise interest rates too gradually, especially in economies where inflation had been high before the global slowdown." "Central banks may need to tighten monetary policy decisively to avoid this," it added. Sovereign creditworthiness could suffer if monetary authorities do not act with dispatch, the debt watcher warned, pointing to the experience of Vietnam where prioritization of economic growth above price stability led to inflation hitting nearly 30% in 2008. Among the policy options available to central bank, said S&P, are keeping nominal interest rates at sufficiently high levels to discourage expectations of higher future inflation, allowing currencies to appreciate, and even imposing capital controls. "History suggests that it’s much easier to lose consumers’ confidence in price stability than regain it," S&P said. "In the interest of macroeconomic stability, some Asian central banks may have to stand ready to react much more forcefully to emerging inflation than they have so far."

Most U.S. Stocks Rise as Egypt, China Optimism Offsets Valuation Most U.S. stocks rose, sending the Standard & Poor’s 500 Index to an almost 32-month high, as optimism about Egypt’s democratic transition plan and China’s jump in exports overshadowed concern valuations climbed too far. Schlumberger Ltd. and Freeport-McMoRan Copper & Gold Inc. rallied at least 2.3 percent on optimism about Chinese demand for commodities. Netflix Inc. jumped 7.1 percent after Caris & Co. raised its price-estimate for the DVD-rental company. Wal- Mart Stores Inc., the world’s biggest retailer, dropped 1.6 percent as JPMorgan Chase & Co. cut its recommendation on the shares. GameStop Corp. slumped 2 percent after the video-game retailer was downgraded at Piper Jaffray Cos. About seven stocks gained for every six that fell on U.S. exchanges. The S&P 500 advanced 0.2 percent to 1,332.32 at 4 p.m. in New York, the highest level since June 2008. The Dow Jones Industrial Average lost 5.07 points, or less than 0.1 percent, to 12,268.19. “This is a profit-driven recovery on top of good economic figures,” said Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, who helps manage $252 billion. “Does the overbought condition change the fundamental backdrop? I’d say not at all. China has been giving indications that growth will not slow. In Egypt, we see some relief but a lot depends on whether they do what they’re planning to do.” Treasury Two-Year Yields Approach Eight-Month High Before Economic Reports Treasury two-year note yields were within three basis points of an eight-month high as rising stocks and forecasts that retail sales and industrial production gained in January reduced demand for the safest assets. The difference between two-year note yields and the Federal Reserve’s target for overnight lending between banks was 58 basis points, after widening to 60 basis points on Feb. 8, the highest level since May. President Barack Obama is due to submit a budget to Congress today. “The indicators are signaling expansion, which is good and weighs on the Treasury market,” said Karsten Linowsky, a strategist at Credit Suisse Group AG in Zurich. “Retail sales is a key figure because the consumption component in the gross domestic product is very large.” Two-year note yields increased less than one basis point, or 0.01 percentage point, to 0.84 percent at 7:21 a.m. in New York, according to BGCantor Market Data. The price of the 0.625 percent security maturing in January 2013 dropped less than 1/32, or 31 cents per $1,000 face amount, to 99 18/32. Benchmark 10-year note yields advanced two basis points to 3.65 percent. The two-year note yield climbed to 0.86 percent on Feb. 9, the highest level since May 28. U.S. government securities maturing in more than a year have handed investors a 1.3 percent loss this month, the worst performance of 26 sovereign-bond markets tracked by the European Federation of Financial Analysts Societies and Bloomberg. The MSCI World Index of stocks have gained 2.6 percent.

Oil Falls to Lowest Level Since November on Fuel Supply, Egypt Oil tumbled in New York to the lowest level since November amid an abundance of fuel in the U.S. and as tensions eased in Egypt after the ouster last week of President Hosni Mubarak. Crude dropped 0.9 percent after the Egyptian army dissolved parliament and suspended the constitution yesterday to meet opposition demands. U.S. total fuel supplies have risen every week this year as gasoline stocks climbed to a 20-year high and oil at Cushing,Oklahoma, reached a record in January. Prices also fell after breaking technical support at $85.11 a barrel. “There’s a considerable fundamental overhang in this market, and as the geopolitical premium bleeds out, it’s going to be difficult for the market to maintain these levels,” said John Kilduff, a partner at Again Capital LLC, a New York-based hedge fund that focuses on energy. Oil below $85.11 is “back in the congestion zone from October and November of last year.” Crude oil for March delivery fell 77 cents to settle at $84.81 a barrel on the New York Mercantile Exchange, the lowest level since Nov. 30. Futures are up 14 percent from a year ago. Oil for April delivery dropped 40 cents, or 0.5 percent, to $88.73. Gasoline inventories rose 4.66 million barrels in the week ended Feb. 4 to 240.9 million, the highest level since March 1990, according to the Energy Department.

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

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Jonathan Ravelas
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2011 Must Dates for Oro Chamber

Morning Brief: 10 February 2011

Gov’t commits to targets ECONOMIC MANAGERS yesterday vowed to address inflation risks and investment barriers to ensure that growth targets will be met. The central bank chief hinted at using monetary policy in case consumer price growth exceeds the projected 3-5%, while officials at other state agencies said they were streamlining approval processes and mulling new economic zones to attract investments. These should allow the economy to hit the targeted 7-8% growth this year via job generating activity largely in agriculture, tourism and the business process outsourcing industries, officials said at a briefing on the economy. "Uncertainties ... could potentially influence inflation expectations," Bangko Sentral ng Pilipinas (BSP) Governor Amando M. Tetangco, Jr. said, citing possible commodity price volatility as recovering global demand plays against supply conditions that have been influenced by bad weather and unrest in the Middle East. "Against this global backdrop, as our economy and our country carry out its own domestic adjustments to what is happening around us, we remain watchful and ready to take action to address any emerging risk," Mr. Tetangco said. Trade Secretary Gregory L. Domingo said the National Price Coordinating Council would be meeting on Friday to decide on voluntary price ceilings, particularly for sugar, while Finance Secretary Cesar V. Purisima said the government would continue a strategy of keeping rice stocks as a buffer against price spikes. The government, however, would tend to allow market forces to determine prices, Mr. Domingo later told reporters, especially for goods where competition is tight. Inflation concerns Representatives of financial institutions yesterday similarly warned of commodity price spikes and food shortages. "The threat of inflation in global commodity prices is something we need to [address]," Banco de Oro President Nestor V. Tan said at the briefing. World Bank country director Bert Hofman was less downbeat, but nevertheless urged the government to work on food security. "The rice market internationally looks good," Mr. Hofman said, explaining that inflation rates in the country could still be manageable. "But medium-term [challenges] in ... farmers’ productivity [should be addressed]," he said. Mr. Hofman went on to point out that direct investments in the Philippines "remain too low if you want to base rapid growth on these." "Out of sync" policies between national and local government are partly to blame for investor hesitation, Philippine Chamber of Commerce and Industry President Francis C. Chua added. To address this, Mr. Domingo said the Trade department was spearheading a proposal to put up economic zones in poor provinces next year in a bid to limit local governments’ prerogatives over investment policies. "The concept is to come up with certain areas that won’t be subject to local government rules and regulations," he said. Incentives will be less generous than those granted to exporters regulated by the Philippine Economic Zone Authority and the proposal will consider inputs from the Finance department and Congress, Mr. Domingo said. The Trade department is also planning to draft a "magna carta for investors" which will be submitted to Congress, he said. Macroeconomic targets Finance Secretary Cesar V. Purisima, for his part, said: "We are mindful of the challenges ahead but we are committed on meeting our goals." He pointed to this year’s lower deficit target -- 3.2% of gross domestic product (GDP) from last year’s 3.9% -- and said this would further be lowered to 2% by 2013. "If we manage to cut our deficit to 2% of GDP, it would allow us to have a debt-to-GDP [ratio] lower than 50%," he added. The debt ratio, at 56.5% in 2010, is expected to be slashed to 56% this year. Based on data presented during yesterday’s briefing, the ratio will only dip below 50% -- at 49% from 51% the preceding year -- starting 2015. Mr. Purisima stressed that the government was "aspiring" for 7-8% growth this year, higher than 2010’s 5-6% target which was surpassed when the economy ended up expanding by 7.3%. Final targets for 2012 -- officials have said the 5-6% target adopted last year could be maintained -- will be set by the interagency Development Budget Coordination Committee when it meets this Friday. The National Economic and Development Authority (NEDA), for its part, will be detailing infrastructure priorities needed to grow the economy, Socioeconomic Planning Secretary Cayetano W. Paderanga, Jr. said. These will come on top of the 10 public-private partnership projects expected to be bid out this year. "When the medium-term Philippine development plan is finished, we will come up with the medium-term Philippine investment program where major thrusts will be implemented in the form of projects," Mr. Paderanga said. In preparation for an expected investment influx, the NEDA is "streamlining the process while making sure safeguards remain," he added. These efforts should attract investors and allow growth "to be driven by business process outsourcing, tourism and agro-industrial processes," he said. China rate hike With China having raised interest rates for the second time in six weeks last Tuesday and the Monetary Board set to meet today to discuss policy, the BSP’s Mr. Tetangco said: "We recognize the upside risk [to inflation] and we will continue to monitor but at this point there is no urgency to increase interest rates." "Looking at this development [in China], one should consider not only global developments but also country specific conditions. So based on our assessment the inflation outlook for the Philippines continues to be manageable," he added. Most analysts do not expect the Monetary Board to raise overnight borrowing and lending rates -- kept at a record low of 4% and 6%, respectively, since July 2009 -- despite inflation rising to 3.5% in January. The rise in consumer prices, higher than December’s 3%, remains within the BSP’s 2011 target range of 3-5% and under its full-year forecast of 3.6%. -- with a report from L. D. Desiderio

Dow ends higher for 8th-straight day NEW YORK (CNNMoney) -- U.S. stocks lifted from session lows Wednesday and ended a lackluster trading session mixed. The Dow inched higher for an eighth straight session, but the S&P 500 and Nasdaq finished lower as investors took a breather following four consecutive days of gains. After spending most of the day in the red, the Dow Jones industrial average (INDU)managed to add 7 points, or 0.1%, led by a 5% jump in shares of Walt Disney Co. (DIS, Fortune 500) following strong fourth-quarter earnings. The blue-chip index rose to 12239.89, the highest level since June 16, 2008. The S&P 500 (SPX) slipped 4 points, or 0.3%, and the tech-heavy Nasdaq (COMP) fell 8 points, or 0.3%. Energy and financial companies were among the biggest laggards. Chevron (CVX, Fortune 500), JPMorgan Chase (JPM, Fortune 500) and Exxon Mobil (XOM, Fortune 500) were among the Dow's biggest losers. Meanwhile, drops in shares of Southwestern Energy Co. (SWN), Cliffs Natural Resources (CLF) andWells Fargo (WFC, Fortune 500) weighed on the S&P 500. Investors directed their attention to Capitol Hill, as Federal Reserve Chairman Ben Bernanke testified before the House Budget Committee. The central bank chief said that despite a strengthening economic recovery, the unemployment rate remains high while inflation is "still quite low." Bernanke also told lawmakers that they need a "credible program" to reduce the nation's growing deficit. Treasuries Rise as 10-Year Note Sale Draws More Foreign Central Bank Bids Treasury 10-year note yields fell from the highest level since April as the government’s $24 billion auction of the debt drew the most demand on record from a class of investors that includes foreign central banks. Indirect bidders bought 71.3 percent of the notes, compared with 53.6 percent in January and an average of 46.4 percent for the past 10 sales. Yields had climbed the most in more than two weeks yesterday after the Treasury’s three-year note auction attracted the lowest indirect bids since 2007 amid concern inflation is accelerating. “The major severe selloff in the last couple of days provided some value for investors, and they came in at remarkable levels,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., one of 20 primary dealers that trades with the Fed. “This is the polar opposite of yesterday’s auction and was pretty remarkable. The biggest story is the indirect bid and dealers missed as bad as any kind off dealers can miss.” The yield on the 10-year note dropped nine basis points, or 0.09 percentage point, to 3.65 percent at 5:02 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 rose 22/32, or $6.88 per $1,000 of face value, to 91 20/32. The yield earlier touched 3.77 percent, the most since April 29. It rose 11 basis points yesterday, the most since Jan. 20.

Oil Falls as U.S. Crude, Gasoline and Distillate Supplies Gain Oil declined in New York after an Energy Department report showed that U.S. crude stockpiles rose for a fourth week and fuel inventories climbed. Oil slipped 0.3 percent after the department said inventories of crude added 1.9 million barrels to 345.1 million last week. Supplies were forecast to increase 2 million barrels, according to the median of 15 analyst projections in a Bloomberg News survey. Inventories of gasoline and distillate fuels, including diesel and heating oil, also gained. “The market is trying to digest the big builds in today’s reports,” said Carl Larry, president of Oil Outlooks & Opinions LLC in Houston. Crude oil for March delivery slipped 23 cents to $86.71 a barrel on the New York Mercantile Exchange, the lowest settlement price since Jan. 27. Futures are up 18 percent from a year ago. Stockpiles of crude oil at Cushing, Oklahoma, the delivery point for West Texas Intermediate, the grade traded in New York, fell 927,000 barrels to 37.4 million. Supplies in the week ended Jan. 28 climbed to the highest level since the department started keeping records at the storage hub in 2004. Cushing is landlocked in the central U.S. “The Cushing situation has to be turned around,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “There’s a bottleneck there which has resulted in a bizarre crack spread and WTI trading at a discount to other grades.”

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

BDO UNIBANK INC.

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001