Morning Brief: 06 June 2011

Inflation likely topped 5% INFLATION likely breached the central bank’s 2011 target of 3-5% last month, analysts said, raising the prospect of policy rates being raised anew next week. A BusinessWorld poll led to a median forecast of 5.05%, just above the midpoint of the Bangko Sentral ng Pilipinas’ (BSP) 4.5-5.5% outlook for the month. Inflation accelerated to 4.5% in April, from 4.3% a month earlier. Official data for May will be released tomorrow. Five out of the nine analysts polled expect the rise in consumer prices to breach 5% while the remainder had projections ranging from 4.5-5%. They pointed out that the impact of lower global commodity prices had yet to trickle down to the local market. "Price levels remain buoyed by the delayed impact of higher oil prices, while rising service costs will keep CPI (consumer price index) elevated," Standard Chartered economist Vincent Tsui said in an e-mail. "Given food prices have been the key driver of inflation in this cycle, with the recent drought in the northern hemisphere, inflation expectations are yet to be well-anchored," he added. Metropolitan Bank and Trust Co. research head Ildemarc C. Bautista concurred, saying in a telephone interview: "Currently, global commodity prices are going down but these need to feed into the system." The BSP has said inflation would likely exceed 5% in the second and third quarters. It remains confident, however, that the full-year average will be "well within" the 3%-5% target. Mr. Tsui forecast a 5.1% result for May, which"should prompt the BSP to hike policy rate by another 25 bps (basis points) to 4.75% in its 16 June meeting." HSBC economist Sherman WK Chan concurred: "We expect the headline reading to have breached the central bank’s target band in May and remain elevated for several months. The BSP is likely to hike the policy rate again at the upcoming meeting on June 16." Other analysts, however, said the BSP could hold off from a third consecutive rate hike given the economy’s first-quarter showing. Rizal Commercial Banking Corp. Senior Vice-President Marcelo E. Ayes, who forecast 5.0%-5.2% inflation for May, said second-quarter growth data should be awaited. The economy expanded by 4.9% in the first quarter, down substantially from 8.4% a year earlier, due to lackluster trade and state underspending. The BSP has so far raised key rates twice this year -- by 25 bps each on March 24 and May 5 -- and officials said the move was necessary as the 3-5% inflation target was at risk. -- Antonio Siegrid O. Alegado

Stocks: Investors brace for turbulence NEW YORK (CNNMoney) -- Stocks could be volatile this week as the economic fallout of Friday's jobs report will continue to weigh heavily on investors' minds. This week's trading agenda is thin on economic reports and corporate earnings. Notable pieces of data include the Federal Reserve's "Beige Book" on Wednesday and weekly jobless claims on Thursday. But last week's bad news will likely set the tone for investors. May's jobs report fell way short of expectations, and other data, such as the Institute for Supply Management's closely-watched manufacturing survey, have also disappointed. The Dow fell nearly 3% last week. Portfolio managers said with this recent wave of bad economic data and a sparse agenda ahead, now is not the time to be putting risk into a portfolio. "We need to digest the past couple of weeks and debate the reasons why we're seeing this slowdown," said Bob Doll, chief equity strategist with the large investment and advisory firm BlackRock. "Is this slowdown temporary, or is there something more fundamental that should be a cause of concern?" The Dow fell for a fifth-straight week last week, its longest week-over-week decline since July 2004. But despite the drop, the market still has some resiliency left, with the Dow up slightly less than 5% for the year and the S&P 500 up 3.4%. Ongoing developments out of Europe could also impact trading. News reports Friday said Greece may be in line to receive additional aid from its European Union partners, after credit agency Moody's downgraded Greece's debt last week. "If the news in Europe flares up, we could see increased volatility, especially when we're light on economic data this week," said David Levy, portfolio manager with Kenjol Capital Management. But there is still reason to be optimistic about the long-term potential for stocks this year, since corporate earnings have far outpaced the economy, Doll said. "The investors need to focus on the U.S. stock market, which you can see has done a whole heck of a lot better than the U.S. economy," he said. With earnings season next month, the next couple weeks are typically the time companies warn investors that their results may come in above or below expectations. Monday: Technology investors will be monitoring Apple (AAPL, Fortune 500) CEO Steve Jobs' keynote speech at the Worldwide Developers Conference in California, scheduled to start at approximately 1 p.m. ET. Jobs is expected to unveil a new Apple cloud computing music service and possibly a new version of the iPhone. Tuesday: On Tuesday is the Federal Reserve's April consumer credit report, released at 3 p.m. ET. Wednesday: The Federal Reserve will release its "Beige Book" at 2 p.m. ET on Wednesday. The book is a collection of economic anecdotal observations by the Fed's 12 regional banks and is used by the central banks as part of their decision making regarding interest rates. Thursday: The Labor Department will release its weekly initial jobless claims report at 8:30 a.m. ET, which investors said will likely be the closest-watched piece of economic data this week. Economists are looking for jobless claims to rise slightly to 423,000. Also out on Thursday is the U.S. April trade balance figures, which are expected to show a $48.7 billion trade deficit, and April wholesale inventory figures. Economists expect wholesale inventories rose 0.9%, according to Briefing.com Friday: Investors will get May's import and export prices from the Commerce Department at 8:30 a.m. ET. Economists expect import prices rose 0.6% last month while export prices rose 1%.

OPEC Overshadowed by Qaddafi in Most-Hostile Meeting Since 1990 Gulf War OPEC ministers meeting in Vienna this week will find themselves supporting opposing camps of a military conflict for the first time in 21 years, with hostilities in Libya complicating an agreement on oil quotas. Not since Saddam Hussein invaded Kuwait in 1990 has the producer group gathered with some nations giving financial and military support to a movement seeking to topple the government of a fellow member. While Libyan leader Muammar Qaddafi is trying to quash a rebellion in a country that holds Africa’s largest crude reserves, Qatar, Kuwait and the United Arab Emirates are backing the insurgents. The stand-off underlines the difficulties the 50-year-old organization that accounts for about 40 percent of the world’s oil may have in deciding production levels. Oil has gained 9.5 percent this year to trade at about $100 a barrel just as signs emerge that the pace of the global economic recovery may be slowing. The Organization of Petroleum Exporting Countries will probably leave its output target unchanged on June 8, according to a Bloomberg survey of 30 analysts conducted May 24-31. “Amid issues surrounding representation of Libya and oil prices correcting towards $100 a barrel, OPEC is likely to sit on the fence, deferring a decision on quotas for later,” Harry Tchilinguirian, the head of commodity-markets strategy at BNP Paribas SA in London, said in an interview on June 1. “This does not mean individual countries may not take discretionary steps to increase output. OPEC has yet to fill the gap in the market left by Libya.” Crude Oil Declines as U.S. Jobless Rate Climbs to Highest Level This Year Crude oil fell, capping the biggest weekly decline in a month, as the U.S. jobless rate climbed to the highest level this year, adding to concern that a slower economic recovery will curb oil demand. Oil dropped 0.2 percent after the Labor Department said payrolls rose by 54,000 in May, the smallest gain in eight months. The median forecast in a Bloomberg News survey called for a 165,000 increase. The unemployment rate advanced to 9.1 percent from 9 percent a month earlier. “The economy is slowing down, so oil demand is going to slow down,” said Carl Larry, director of energy derivatives and research at Blue Ocean Brokerage LLC in New York. “That’s going to be your main concern.” Crude oil for July delivery fell 18 cents to settle at $100.22 a barrel on the New York Mercantile Exchange. Prices declined 0.4 percent this week, the biggest drop since the five days ended May 6. Brent crude for July delivery rose 30 cents, or 0.3 percent, to $115.84 a barrel on the London-based ICE Futures Europe exchange. The European benchmark contract traded at a premium of $15.62 a barrel to U.S. futures, up 48 cents from yesterday. The difference between front-month contracts in London and New York reached a record $19.54 on Feb. 21. The spread averaged 76 cents last year.

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

Philippine Markets: 03 June 2011

03 June 2011

USD/PhP: 43.205 -0.068 PSEi: 4297.62 - 27.36
USD/JPY: 80.64 PFINC: 962.29 + 5.73
EUR/USD: 1.4478 BDO: 58.75 + 0.05
GBP/USD: 1.6451 BPI: 57.70 + 0.30
PDSTF3M: 2.5808 MBT: 71.75 + 1.20
Prices as of 4:00pm Source: Bloomberg, Reuters


Philippine Interest Rate Outlook

Secondary money market rates moved sideways week on week as market liquidity remained abundant. Expectations for May inflation is within the 4.5-5.0 percent range, as some seasonal price adjustments are seen due to the start of the school season in June, as well as the fact that commodity prices remained elevated.

With the expectations that monetary authorities will still hike benchmark rate during its next policy meeting in 16 June, continue to expect rates to move sideways to up in the coming weeks.

Philippine Equity Outlook

Local equity market prices rose 0.54 percent week on week to 4297.62 as some local investors took advantage of the recent decline to bargain hunt on selected issues. This caused the market to rally to as high as 4,320.60. However, the market appears to be encounterd some selling towards the end of the trading week causing the index to close the trading week below the 4,300 levels.
Local investor sentiment is being clouded by the developments in the global markets.

Chartwise, the the week's close at 4297.62 highlights the market's vulnerabilty. If a break above the 4,300 fails to materialize, expect further weakness toward test the 4,150 - 4,250 levels in the near-term.

Philippine Peso Outlook

TThe local currency regained its footing agains the greenback by 0.38 percent week-on-week to 43.205 as US dollar weakened against the major currencies, particularly agaist the Euro. The recent dollar weakness is viewed as a technical correction.

Continue to expect the currency to range between the 43.15 - 43.30 levels in the week ahead. Immediate support and resistance is seen at 43.25 and 43.50 levels, respectively.


BDO UNIBANK, INC.

Jonathan Ravelas
Chief Market Strategist
(632) 858-3145

Rhys Cruz
Junior Researcher
(632) 858-3001

Morning Brief: 03 JUNE 2011

North Harbor refurbishment set to begin By: Paolo G. Montecillo FACELIFT WORK STARTING SOON The Manila North Harbour Port Inc. will present to the Philippine Ports Authority board the North Habor’s modernization master plan this week and once it is approved, refurbishment work may start. Jay Morales/Malacañang Photo Bureau The modernization of the Manila North Harbor may finally begin more than a year since the port had been turned over to its private concessionaire. Philippine Ports Authority (PPA) assistant general manager Raul Santos said that plans for the refurbishment of the facility had been drawn up by Manila North Harbour Port Inc. (MNHPI), owned by the Romero family, and would be presented to the PPA board before the end of the week. Once the master plan is approved, the MNHPI may begin to upgrade North Harbor, the country’s busiest port. The terms of the modernization plan contract “are compliant with the contract,” Santos told reporters. Santos is also chairman of the PPA committee formed to work with MNHPI on the master plan for North Harbor. The PPA board is made up of representatives from the National Economic Development Authority; and the Departments of Transportation and Communications, Finance, Trade and Industry, Public Works and Highways, and Environment and Natural Resources. Also represented on the board are the Maritime Industry Authority and a member of the private sector. The PPA said that although the 25-year contract to modernize the port had already been given to MNHPI, the designs for the new facilities to be built would still have to pass government scrutiny. MNHPI plans to increase the port’s capacity to 5 million twenty-foot equivalent units (TEU) of cargo a year from the current 1.5 million. One TEU is the size of a standard steel container van. Under its contract, MNHPI is supposed to spend half of its P14-billion modernization budget in the first six years following its takeover of the port. Management of the facility was handed over to MNHPI by the government earlier this year. MNHPI is controlled by Reghis Romero II’s Harbour Centre Port Terminal Inc. The group had originally partnered with Metro Pacific Investments Corp. headed by Manuel V. Pangilinan. MPIC later backed out of the project and was replaced by San Miguel Corp. Peso dragged by negative outlook on US economy By: Michelle V. Remo MANILA, Philippines – The peso snapped the appreciation seen in the previous days as unfavorable reports about the US economy dampened sentiment of investors for emerging markets like the Philippines. With outlook for the US economy deteriorating, expectations mounted that developing Asian countries like the Philippines might suffer the ill-effects of lower earnings from their exports to the United States, traders said. The local currency closed at 43.27 against the US dollar on Thursday, down by 13.5 centavos from previous day’s finish of 43.135:$1. Intraday high hit 43.16:$1, while intraday low settled at 43.27:$1. Volume of trade fell to $768.85 million from $995.94 million.

U.S. Stocks Decline a Second Day as Investors Await Government Jobs Report By Rita Nazareth U.S. stocks retreated, a day after the biggest slump for the Standard & Poor’s 500 Index since August, as investors awaited the Labor Department’s monthly report on employment in the world’s largest economy. Limited Brands Inc. and Gap Inc. (GPS) paced losses among chain stores, falling at least 2.1 percent. Goldman Sachs Group Inc. retreated 1.3 percent after two people familiar with the matter said it received a subpoena from the Manhattan District Attorney regarding the bank’s activity leading into the credit crisis. Joy Global Inc. (JOYG)gained 5.4 percent, spurring a rally in industrial companies, after the mining-equipment maker reported profit that beat analysts’ estimates. The S&P 500 fell 0.1 percent to 1,312.94 at 4 p.m. in New York. It slumped 2.3 percent yesterday, the most since August, after data showing slower-than-forecast job growth spurred concern that tomorrow’s Labor Department report will trail estimates. The Dow Jones Industrial Average dropped 41.59 points, or 0.3 percent, to 12,248.55 today. “Nobody is going to jump in with strong conviction before the jobs report,” said Peter Jankovskis, who helps manage about $2.7 billion at Oakbrook Investments in Lisle, Illinois. “We’ve been experiencing fairly weak economic figures. Investors need more evidence that this is a temporary slowdown.” The S&P 500 tumbled to a six-week low yesterday following ADP Employer Services’ jobs report and separate data from the Institute for Supply Management that showed manufacturing expanded at the slowest pace in more than a year. Citigroup Inc.’s U.S. Economic Surprise Index, which tracks the rate at which data are beating or missing estimates, turned negative in May and has since fallen to the lowest level since January 2009. Factory Orders Stocks fell today as data showed the economic recovery is slowing. Orders placed with U.S. factories fell in April by the most in nearly a year as demand for aircraft waned and Japan’s earthquake restrained auto-related supplies. A separate report showed that more Americans than forecast filed applications for unemployment benefits last week, signaling the job market is weakening as employers trim staff to cut costs. “There are so many worries that hit the screen that investors don’t know where to focus on first,” said Bruce McCain, who oversees $22 billion as chief investment strategist at the private-banking unit of KeyCorp inCleveland. “There’s sluggish growth, the European crisis, fiscal issues, high commodity prices. It’s not like we’ll suddenly go over the edge and into an abyss. Still, those are uncertain times. That is reflected in global markets.” U.S. Government Rating Moody’s Investors Service said that if there is no progress on increasing the statutory debt limit in coming weeks, it expects to place the U.S. government’s rating under review for possible downgrade, due to the very small but rising risk of a short-lived default. Moody’s said if the debt limit is raised and default avoided, the Aaa rating will be maintained. Lack of an agreement could prompt Moody’s to change its outlook to negative on the Aaa rating. Limited Brands, Gap and other U.S. retailers reported May sales that trailed analysts’ projections as increasing prices and surging gasoline costs deterred budget-conscious shoppers. Limited, operator of the Victoria’s Secret chain, posted a gain of 6 percent in same-store sales, missing the 7.4 percent average of analysts’ estimates compiled by Retail Metrics Inc. Sales at Gap, the largest U.S. apparel chain, fell 4 percent, more than five times the rate analysts projected. Surging Commodity Prices Surging costs for cotton, oil and labor in Asia have forced some apparel chains to pass costs on to consumers, with several saying hikes will accelerate this year. Some shoppers are scrimping on trips to stores because they can’t keep up with the price of fuel. Limited Brands slumped 2.2 percent to $37.87. Gap dropped 4.1 percent to $18.12. Goldman Sachs Group Inc. (GS) slid 1.3 percent to $134.38. The fifth-biggest U.S. bank by assets received a subpoena from the Manhattan District Attorney’s office seeking information related to a Senate subcommittee report on Wall Street’s role in the housing market collapse, according to two people familiar with the matter. Joy Global gained 5.4 percent to $90.51. The mining- equipment maker reported second-quarter profit of $1.52 a share. Analysts surveyed by Bloomberg had estimated earnings of $1.35 a share on average. Education Companies Rally For-profit colleges rallied as the U.S. Education Department gave the industry more time to comply with rules that will cut off federal aid to institutions whose students struggle the most to repay their government loans. Corinthian Colleges Inc. (COCO) gained 27 percent to $5.06. Apollo Group Inc. (APOL) advanced 11 percent to $46.90. More than $578 billion has been erased from U.S. equity markets since the S&P 500 peaked at 1,363.61 on April 29, pushing the index’s valuation to 13.3 times estimated profit for 2011 from 13.8 times. The drop is creating a buying opportunity for investors willing to withstand declines that may reach 10 percent, according to Blackstone Group LP’s Byron Wien. Wien, who estimates earnings for companies in the gauge will climb about 12 percent in 2011, says shares will prove a bargain and the index will rally. “Investors should be looking for buying opportunities,” said Wien, the vice chairman of Blackstone Advisory Partners, whose parent, New York-based Blackstone Group LP, is the world’s largest private-equity firm. “The economy is not as bad as it looks right now. Corporate profits will be good, very good. People are asking me, ‘Do you still think the market can get to 1,500 by the end of the year?’ I do.” Treasuries Head for Third Weekly Gain as Data Signals Slowing Job Growth By Wes Goodman Treasuries headed for a third weekly gain before a U.S. report that economists said will show employers hired fewer workers in May. Government securities snapped yesterday’s steepest decline in three months, which was driven by Moody’s Investors Service’s announcement that it will put the U.S. Aaa rating under review for a downgrade unless the government makes progress on increasing the debt limit. Signs of slowing in the world’s biggest economy have kept benchmark 10-year yields within seven basis points of this year’s low. "The U.S. is going through a soft patch," said Jaemin Cheong, a bond trader in Seoul at Industrial Bank of Korea, the nation’s largest lender to small- and mid-sized companies. "Most investors prefer the quality of Treasuries. The rally can go on." Ten-year yields were little changed at 3.01 percent as of 9:28 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 3.125 percent note maturing in May 2021 traded at 100 30/32. The rate has fallen 16 basis points in three weeks. The decline was interrupted yesterday when the yield increased nine basis points, or 0.09 percentage point, the most since Feb. 8. The 2011 low was 2.94 percent on June 1. Payrolls rose by 165,000, the smallest gain in four months, after increasing 244,000 in April, according to the median of 89 estimates in a Bloomberg News survey of economists. The jobless rate fell to 8.9 percent from 9 percent, the survey shows. Debt Ceiling Treasury Secretary Timothy F. Geithner has warned that a failure to raise the debt ceiling by Aug. 2, the date he now projects the borrowing authority will be exhausted, may have catastrophic effects on the U.S. economy by raising borrowing costs. Republican lawmakers are using the debt-ceiling talks to press for cuts in government spending. "If the negotiating stances of the two parties continue to be where they are now, in other words very far apart, and an agreement on the raising of the debt limit continues to look remote, probably by mid-July we would consider putting the rating on review for downgrade," said Steven Hess, senior credit officer at Moody’s in New York. In April, Standard & Poor’s put the U.S. government on notice that it risks losing its AAA rating unless policy makers agree on a plan by 2013 to reduce budget deficits and the national debt. Traders cut bets on inflation as reports showed the U.S. economy is waning. Data this week signaled that manufacturing and hiring are slowing. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, has narrowed to 2.27 percentage points from this year’s high of 2.67 percentage points in April. The 10-year average is 2.10 percentage points.

Oil Heads for Weekly Decline on U.S. Economy; Crude Stockpiles Increase By Ben Sharples Oil traded near $100 a barrel in New York, heading for a weekly drop, before a report that will indicate the strength of the U.S. economy and as OPEC prepares to meet in Vienna next week to decide output quotas. Futures are down 0.1 percent from a week ago amid signs of lower U.S. fuel demand after fluctuating from $98 to $103 a barrel. A report today will show U.S. employers added fewer jobs in May, according to a Bloomberg News survey. The Organization of Petroleum Exporting Countries will respond if more crude is needed, Saudi Arabian Oil Minister Ali Al-Naimi said before the group meets June 8. “The market has defined a range as we head toward the unemployment rate tonight,” said Jonathan Barratt, managing director of Commodity Broking Services Pty in Sydney, who predicted oil will average $100 this year. “It might get good numbers. It’s a volatile market.” Crude for July delivery traded at $100.38 a barrel, down 2 cents, in electronic trading on the New York Mercantile Exchange at 12:30 p.m. in Sydney. It earlier rose as much as 47 cents to $100.87 a barrel. The contract yesterday gained 11 cents to $100.40. Prices are up 35 percent the past year. Brent crude for July delivery dropped 14 cents to $115.40 a barrel on the London-based ICE Futures Europe exchange. The contract yesterday rose $1.01, or 0.9 percent, to $115.54. U.S. Jobs, OPEC The European benchmark contract traded at a premium of $15.06 a barrel to U.S. futures, little changed from yesterday. The difference between front-month contracts in London and New York reached a record $19.54 on Feb. 21. It averaged 76 cents last year. U.S. jobs growth slowed to 165,000 new employees in May from 244,000 in April, according to estimates in a Bloomberg News survey of economists before Labor Department figures due today. OPEC will probably maintain production levels for an eighth consecutive meeting, resisting calls to ease the pressure of $100-a-barrel oil on the global economy, according to a survey of analysts by Bloomberg News. “Speculation on what the future may hold” is the main reason for the current oil price, Saudi Arabia’s Al-Naimi told reporters in Poland yesterday. “There is no such thing as a fair price.” Oil fell in intraday trade yesterday after a U.S. Department of Energy report showed crude stockpiles climbed 2.88 million barrels to 373.8 million last week, the highest since May 2009. Supplies were projected to fall by 1.6 million barrels, according to the median of 13 analyst estimates in a Bloomberg News survey. Gasoline inventories increased for a fourth week, climbing by 2.55 million barrels to 212.3 million, the report showed. Analysts expected a gain of 900,000 barrels, according to the Bloomberg survey. Demand increased 4.5 percent to 9.43 million barrels a day.

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