Morning Brief: 04 July 2011

Philippine economy seen to perform faster in 2nd semester Private investments to be key growth driver, says BSP By: Michelle V. Remo Philippine Daily Inquirer The Bangko Sentral ng Pilipinas (BSP) expects the economy to expand even faster in the second half, with private investments driving up growth.According to the BSP, sustained increase in investments by the private sector, together with the usual robust consumption of households, will help accelerate growth of the economy in the second semester. In the first quarter, the economy, measured in terms of gross domestic product, grew by 4.9 percent. Most projections point to a slightly faster growth in the second quarter. But for the third and fourth quarters, the central bank said growth could be even faster, allowing it to maintain its 5- to 6-percent full-year growth target. “Business process outsourcing continues to be a promising employer. In addition, capital formation [through private investments] has really bounced back in the last few quarters,” BSP Deputy Governor Diwa Guinigundo said, expecting the trend to continue. Capital formation, which grew by 37.6 percent in the first quarter, has been registering double-digit annual growth rates since last year, coming from low, single-digit rates the previous years. Economists said this was due to renewed activity in the manufacturing sector. Also, optimism on the country’s growth prospects over the medium term has been bringing in investments, they added. Remittances are likewise seen to be significant, supporting consumption of goods and services, the BSP official said. Guinigundo said the previous goal of between 7 to 8 percent economy growth could still be attained perhaps next year. He said production capacity has already expanded, thanks to investments over the past quarters. As a result, the economy has the potential to sustain a faster rate of growth once capacity is fully utilized. The Aquino administration originally set a growth target of 7 to 8 percent for this year. However, the economic team was forced to scale down its growth forecast of 5 to 6 percent due to adverse developments abroad, such as the natural disasters in Japan and the political unrest in the Middle East and North Africa. The disasters in Japan could dampen that country’s demand for Philippine goods, while mounting strife in key oil-producing regions recently pushed global oil prices higher. “Growth of 7 percent to 8 percent is still possible. The robust growth rate [of 7.6 percent] we experienced last year was not an aberration. The economy’s capacity to grow has really gone up,” Guinigundo said.

Stocks face jobs report test NEW YORK (CNNMoney) -- Stocks are in for a major reality check this week, with the jobs report for June on tap for Friday.Stronger-than-expected manufacturing data helped stocks log the best weekly gains in two years last week. But stocks had been mired in a slump throughout May and June, as a series of economic reports showed the economy was not growing as fast as investors hoped. June's employment report will be especially crucial as investors seek a fresh snapshot of the nation's employment picture, said Tim Ghriskey, chief investment officer at Solaris Asset Management. Weekly unemployment filings, which serve as a real-time indicator for the job market, have come in above the critical 400,000 level for the past 12 weeks. That prolonged weakness has dampened hopes for June's report. Economists surveyed by CNNMoney expect the economy added 120,000 jobs last month. Typically, the economy needs to add about 150,000 just to keep pace with population growth. The unemployment rate is forecast to fall only slightly to 9%, from 9.1% in the prior month. "The May jobs report indicated that hiring was slowing, and we're hoping for a bounce, but employment numbers don't tend to turn on a dime like that," Ghriskey said. "Markets will be waiting for Friday's report to see what happened in the labor market last month." Prior to May's disappointing increase of just 54,000 jobs, payrolls rose by more than 200,000 for three consecutive months. Investors will also be on the lookout for companies to make so-called pre-announcements ahead of second-quarter earnings season. The season gets unofficially underway July 11, when Dow component Aloca (AA, Fortune 500) reports results.  Ahead of that semi-official start, companies are aiming to temper looming bad news, by warning that profits and revenues may be lower than initial expectations. "The economic recovery has weakened, and companies might remind investors that the spike in commodity prices will be making its way through the balance sheets," Ghriskey said. "That kind of news can drag on markets, especially after last week's run." On the docket Monday: All financial markets are closed for the celebration of Independence Day. Tuesday: Factory orders are due from the Commerce Department after the start of trading. Orders are forecast to have risen 1% in May, after falling 1.2% April. Wednesday: Before the opening bell, outplacement firm Challenger, Gray & Christmas will issue its report on planned job cuts for June. The Institute for Supply Management will put out its June services index after trading beings. Economists are looking for the ISM services index to fall to 54.0 from 54.6 in May. Thursday: The government's weekly jobless benefits report comes out before the start of trading, with 425,000 Americans expected to file new claims for unemployment, after 428,000 were filed in the previous week. Separately, a report from payroll services firm ADP is expected to show that employers in the private sector added 60,000 workers in June, after boosting payrolls by 38,000 in the previous month. Friday: The government will release its highly-anticipated monthly jobs report before the opening bell. Employers are expected to have added 150,000 jobs in June, after adding 54,000 jobs in May. The unemployment rate is expected to slip to 9.0%, from 9.1% in May. May wholesale inventory figures are due shortly after the opening bell. Late in the afternoon, the Federal Reserve will release its May consumer credit report.

Oil Rises in New York, Extending Weekly Gain, on Greece Loan, U.S. Economy Oil rose in New York, extending last week’s 4.2 percent rally, after Europe authorized a loan payout for Greece, easing speculation the country’s debt crisis will derail the region’s economic recovery.Futures gained as much as 0.4 percent after European finance ministers authorized an 8.7 billion-euro ($12.6 billion) loan payout to Greece July 2. Crude trimmed losses on July 1 after U.S. manufacturing unexpectedly increased. Exxon Mobil Corp. reduced production at its refinery in Billings, Montana, and shut a pipeline after oil spill. Crude for August delivery rose as much as 36 cents to $95.30 in electronic trading on the New York Mercantile Exchange and was at $95.16 at 9:16 a.m. Sydney time. The contract fell 48 cents, or 0.5 percent, to $94.94 on July 1, the first decline in four days. Prices are 32 percent higher the past year. Brent oil for August settlement was at $111.90 a barrel, up 13 cents, on the London-based ICE Futures Europe exchange. The European benchmark contract traded at a premium of $16.67 to New York-traded West Texas Intermediate. The spread reached a record $22.29 a barrel on June 15. The Institute for Supply Management’s factory index rose to 55.3 from 53.5 in May, the Tempe, Arizona-based group said July 1. Economists projected a decrease to 52, according to the median forecast in a Bloomberg News survey. Figures greater than 50 signal expansion. An Exxon team is investigating the cause of the spill that started late July 1, Exxon Mobil Pipeline Co. President Gary Pruessing said July 3. It leaked as much as 1,000 barrels of heavy crude into the Yellowstone River.

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 
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Morning Brief: 29 June 2011

Country said to have lost liquor tax dispute BRUSSELS/MANILA -- Taxes levied by the Philippines on alcoholic drinks from the European Union and United States are illegal under global rules, the world’s trade dispute body ruled on Monday, according to sources close to the case.Washington’s envoy in Manila said he welcomed the decision, while the Philippines’ tax chief -- insisting that the duty system was not discriminatory -- said it would be up to legislators to change relevant laws. Sources said that a World Trade Organization (WTO) legal panel, in a confidential report circulated to the parties involved in the dispute, had ruled that the Philippines’ taxes discriminate against brands such as Jack Daniel’s and Jim Beam as well as Spain’s Brandy de Jerez, while favoring domestic producers catering to the country’s $3-billion spirits market. The ruling is confidential until its publication in August, and trade officials for the EU and US were unable to comment on its contents. But it is being eyed keenly by Spanish brandy makers and US firms such Brown-Forman Corp. , which owns Jack Daniel’s, and Fortune Brands Inc., which makes Jim Beam. “We have long questioned the Philippines’ discriminatory tax approach. We are optimistic of a positive result from the WTO panel, which will be particularly welcomed by Spain since Spanish brandy constitutes the main EU spirits export to the Philippines,” said Jamie Fortescue, director general of the European Spirits Organization. The ruling dismissed Manila’s argument that imported whiskey and brandy do not compete with locally made alcohol and that differing taxes -- set according to the raw material used -- should therefore be legal, sources said. It found that the purpose of a lower tax on domestic alcohol that can be directly substituted for imports was to protect domestic producers, an illegal aim under WTO rules. The EU, whose annual global spirits exports amount to about 7 billion euros ($10 billion), blames the tax for halving EU spirits sales to the Philippines between 2004 and 2007 to 18 million euros. Brussels lodged a WTO challenge against the Philippines in January last year. The United States, which followed suit with a similar challenge in April last year, similarly says the Philippines’ tax system -- imposing duties 10-40 times higher on spirits not distilled from materials such as sugar cane and molasses produced in the Philippines -- means it has failed to gain more than 5% of the country’s market. In Manila, US Ambassador Henry K. Thomas said Washington welcomed the WTO’s preliminary decision. “The US looks forward to a level playing field in the country, since the consumer benefits with fair prices even from goods coming from outside the Philippines,” Mr. Thomas Jr. said at the sidelines of a Management Association of the Philippines press conference. Bureau of Internal Revenue (BIR) Commissioner Kim S. Jacinto-Henares, meanwhile, said it would be up to Congress to amend the country’s tax laws once the WTO ruling becomes final. “I will still collect excise taxes, as stated in the National Internal Revenue Code (NIRC). There will be no changes until Congress amends the law,” Ms. Henares told BusinessWorld. Under Section 141 of the NIRC, alcohol products produced from the sap of nipa, coconut, cassava, camote, buri palm or from the juice, syrup or sugar of the cane are charged an P8 excise tax per proof liter. Alcohol products not made from the identified raw materials are levied an excise tax of between P75 to P300 per proof liter Imported spirits tend to fall under this category because they are usually made of barley, wheat and grapes, Ms. Henares explained. -- reports from Reuters, Diane Claire J. Jiao and Eliza J. Diaz Debt exchange rescheduled due to approval delay A PLANNED local bond swap could be launched next week after delays in documentary approvals pushed back the offer from yesterday’s target, a treasury official said. The government had said it wanted to swap shorter-dated local bonds for new 10-year and 20-year on June 28, with the offer period to be closed in the first week of July, and settlement a week after. “We will have to reschedule the launch. If we get the approval [from the Office of the President] this week, the launch can happen next week,” Deputy Treasurer Eduardo S. Mendiola said. On Monday, National Treasurer Roberto B. Tan said the Bureau of the Treasury had obtained an opinion from the central bank supporting the planned debt exchange. First Metro Investment Corp., BPI Capital Corp, SB Capital Investment Corp and Citibank are joint deal managers of the swap, along with the Development Bank of the Philippines and Land Bank of the Philippines. Manila is taking advantage of strong investor interest in emerging markets to lengthen its debt maturity profile. Following swaps in the second half of last year, the Philippines’ average debt maturity lengthened to 8.8 years at end-December from 7.9 years in June 2010, with the average foreign debt maturity at 11.4 years. -- Reuters

U.S. Stocks Rise Amid Greek Bailout Expectations as Nike Jumps U.S. stocks rose, sending the Standard & Poor’s 500 Index to its highest level in three weeks, amid optimism European nations will take action to prevent a Greek default and after Nike Inc. (NKE)’s earnings beat estimates.Nike rallied 10 percent as higher North American sales helped the world’s largest sporting-goods company top profit projections.Caterpillar Inc. (CAT), Exxon Mobil Corp. (XOM) and Alcoa Inc. (AA) added at least 2.1 percent, pacing gains in companies most-tied to economic growth. Home Depot Inc. (HD) climbed 2.4 percent after the largest U.S. home-improvement retailer said that it is targeting about $3.5 billion in share repurchases for 2011. The S&P 500 advanced 1.3 percent to 1,296.67 at 4 p.m. in New York, rising to the highest closing level since June 3. The Dow Jones Industrial Average increased 145.13 points, or 1.2 percent, to 12,188.69 today. More than 6.1 billion shares changed hands on U.S. exchanges at 5:12 p.m., 14 percent less than the three-month average through yesterday. Treasuries Tumble as Five-Year Note Auction Demand Falls to Lowest in Year Treasuries fell, pushing five-year note yields up the most since January, as speculation Greece’s lawmakers will approve austerity measures cut demand at the $35 billion sale of the maturity to the lowest in a year. Benchmark 10-year debt pared a monthly gain, pushing the yields above 3 percent on reduced concern Europe’s debt crisis will undermine the global economic recovery. The five-year note auction’s bid-to-cover ratio, which gauges demand by comparing total bids with amount of securities offered, was 2.59, the lowest since June 2010. “It was a weak auction,” said Sergey Bondarchuk, an interest-rate strategist in New York at BNP Paribas SA, one of the 20 primary dealers obligated to participate in U.S. debt offerings. “People are not really bullish at these rates because if there are hints of improvement out of Greece, that could take yields higher.” Yields on current five-year notes increased 13 basis points, or 0.13 percentage point, to 1.58 percent at 5:14 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent securities maturing in May 2016 dropped 5/8, or $6.25 per $1,000 face amount, to 100 26/32. The five-year note yields earlier climbed 16 basis points, the most on an intraday basis since Jan. 5, to 1.61 percent, the highest level since June 15. The yields fell yesterday to 1.35 percent, the lowest since Nov. 23.

Crude Oil Rises for Second Day on Greek Vote Optimism, U.S. Stockpile Drop Oil rose for a second day in New York after a report showed U.S. crude supplies dropped for a fourth week and amid optimism Greek lawmakers will approve austerity measures to prevent a debt default.Futures increased as much as 0.6 percent after climbing the most in six weeks yesterday. Greek Prime Minister George Papandreou’s 78 billion euro ($111 billion) plan to cut spending and sell assets is set for a vote in parliament today. Crude stockpiles dropped 2.7 million barrels last week to 360.3 million, according to the American Petroleum Institute. “There’s great hope that this plan for Greek debt will help turn the corner,” said Bill O’Grady, chief market strategist at Confluence Investment Management in St. Louis. “It’s optimism that the Greeks aren’t going to default and the euro is not going to break up.” Crude for August delivery advanced as much as 51 cents to $93.40 a barrel in electronic trading on the New York Mercantile Exchange, and was at $93.10 at 8:54 a.m. Sydney time. The contract yesterday gained $2.28, or 2.5 percent, to $92.89. Prices are 23 percent higher the past year and down 12 percent in the second quarter. Brent oil for August settlement climbed $2.79, or 2.6 percent, to $108.78 a barrel on the London-based ICE Futures Europe exchange yesterday. The European benchmark traded at a premium of $15.89 to West Texas Intermediate, the U.S. benchmark grade. The spread reached a record $22.29 a barrel on June 15.

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 

Morning Brief: 28 June 2011

PPPs on track despite delays -- gov’t CONCERNS over the rollout of public-private partnership (PPP) projects have been downplayed by Cabinet officials, who nonetheless admitted that schedules for several deals had been pushed back.Secretary Cesar V. Purisima claimed that at least 10 projects -- out of an original list of 12 -- would be offered this year. "We are continually talking to investors. We can start at least 10 projects this year," he told BusinessWorld last week at the sidelines of a press briefing where he also said the government does not want to rush the implementation of the centerpiece infrastructure program. "We want to build a good, sustainable foundation. We don’t want our projects to be questioned and not stand scrutiny," Mr. Purisima said, bringing up the example of the Ninoy Aquino International Airport (NAIA) Terminal 3 project that began in 1997 but is still riddled with legal troubles and corruption allegations to this day. Public Works Secretary Rogelio L. Singson, for his part, said three of four PPP projects under his department would push through this year despite slight delays. He said the Public Works department briefed interested investors last Friday on the Daang Hari-South Luzon Expressway link and the NAIA expressway projects, priced at P1.6 billion and P10.59 billion, respectively. "We met with investors, contractors and bankers. It was a good crowd of about 100 people," he told BusinessWorld yesterday. Mr. Singson said the briefing gave investors a chance to raise comments about the general terms of reference of the two projects, adding that these views would be taken into consideration before final details are published. The National Economic and Development Authority still has to approve the Daang Hari and NAIA expressway projects -- a meeting on the matter is scheduled this week -- but Mr. Singson claimed that investors could look forward to the publication of invitation to bid within the first half of July. The government had initially promised to roll out the Daang Hari project in April and the NAIA expressway project in May. Two more projects -- the North Luzon-South Luzon expressway link estimated to cost P21 billion and the P10.5-billion Cavite-Laguna expressway -- will also be delayed, Mr. Singson said, with the former’s rollout to be pushed back to August from June and the latter to be offered next year instead of this December. PPP deals under the Transportation department could also be up for rollout changes. "The schedule of DoTC (Department of Transportation and Communications) PPP is being reviewed and updated. We’ll announce the updated schedule as soon as project preparations are firmed up," Undersecretary for Planning and Project Management Ruben S. Reinoso, Jr. said in a text message to BusinessWorld yesterday. The only PPP deal in a relatively advanced stage, the P15-billion four- to five-year maintenance and operations contract for the Light Rail Transit Line 1 and the Metro Rail Transit Line 3, has likewise been hit by delays. The government initially set a July 11 deadline for bid proposals but this was deferred to give incoming Transportation Secretary Manuel "Mar" A. Roxas II time to study the project contract. "The project was decided during the time of [outgoing Transportation Secretary Jose P. de Jesus]. [Mr. Roxas] may want a different approach, so we will give him room," Mr. Purisima said.

U.S. Stocks Advance After Regulators Issue New Banking Rules U.S. stocks rose, sending the Standard & Poor’s 500 Index higher for the first time in four days, after regulators issued new capital rules to safeguard the global financial system, offsetting an unexpected stagnation in American consumer spending.Apple Inc. (AAPL) rose 1 percent after Morgan Stanley said the company’s order cuts will ease and production of iPhones and iPads will begin “ramping aggressively.” Stanley Black & Decker Inc. (SWK) gained 1.4 percent after the tool company offered to buy Sweden’s Niscayah AB for $1.2 billion. DuPont Co. and Alcoa Inc. (AA) fell, and the S&P GSCI Index of 24 commodities sank to the lowest level since January as oil and metals prices fell. The S&P 500 rose 0.4 percent to 1,273.88 at 9:53 a.m. in New York. The Dow Jones Industrial Average gained 66.49 points, or 0.6 percent, to 12,001.07. Treasuries Drop as Record Low Yield Saps Demand at Two-Year Note Auction Treasury two-year note yields increased the most since April as speculation Greece’s lawmakers will approve austerity measures reduced demand at the U.S. government’s $35 billion auction of the securities. Indirect bidders, an investor class that includes foreign central banks, purchased 22 percent of the notes, the lowest in more than three years. Thirty-year bonds were the worst performing Treasuries, increasing the difference in yields with two-year securities to the widest since March. “A lot of people weren’t prepared for a bad two-year auction,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “Now it’s all hands on deck for tomorrow to see if we’re going to get hit again with a bad five-year note auction. I guess rates really do matter to the average investor.” Yields on current two-year notes gained seven basis points, or 0.07 percentage point, to 0.39 percent at 5:20 p.m. in New York, according to Bloomberg Bond Trader prices. The 0.5 percent security maturing in May 2013 fell 1/8, or $1.25 per $1,000 face amount, to 100 6/32. The two-year note yields advanced the most on an intraday basis since April 27, when the Federal Reserve said it would complete its $600 billion program of debt buying on schedule at the end of June. The yields fell on June 24 to 0.32 percent, the lowest level since Nov. 4, the day after the central bank said it would resume buying debt.

Crude Oil Rises From Four-Month Low in New York on U.S. Economic Outlook Oil rose in New York as speculation the U.S. economic recovery is on track prompted investors to buy contracts after prices fell to the lowest in four months.Futures climbed as much as 0.9 percent before a report today that may show a rebound in consumer confidence in the U.S., the world’s biggest oil consumer. Prices yesterday slid after Commerce Department data showed consumer spending stagnated in May. “I’m not really worried about demand growth,” said Tetsu Emori, a commodity-fund manager at Astmax Ltd. in Tokyo. “Ninety-dollars seems to be quite firm support at the moment and current fundamentals make selling below $90 too risky.” Crude for August delivery rose as much as 80 cents to $91.41 a barrel in electronic trading on the New York Mercantile Exchange. It was at $91.30 at 7:52 a.m. Singapore time. Yesterday, the contract fell 0.6 percent to $90.61, the lowest settlement since Feb. 18. Futures have gained 17 percent in the past year. The Conference Board’s index of U.S. consumer confidence, scheduled for release today at 10 a.m. in New York, will climb to 61 in June from 60.8 in May, which was the lowest in half a year, based on the median estimate of 69 economists surveyed by Bloomberg News.

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