US elections, rate cuts, RRR reduction rock the markets in Q3

By Charles Worren E. Laureta

UNITED STATES presidential elections, policy rate cuts, and reserve requirement ratio’s (RRR) reduction rocked the Philippines’ financial markets in the third quarter.

The Philippine Stock Exchange Index (PSEi) – the country’s barometer for the stock market — closed at 7,272.65 in the third quarter, a 13.4% increase quarter on quarter, while the index also inched up by 15.1% from 6,321.24 finish in the third quarter last year.

On the other hand, the peso closed at P56.03 against the dollar in the third quarter, appreciating by 4.4% from the second quarter’s P58.61 to a dollar. Year on year, the local unit strengthened by 1% from P56.58 finish in the third quarter last year, according to data from Bankers Association of the Philippines.

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Meanwhile, demand for Treasury bills (T-bills) auctions saw a total subscription reaching to P796.53 billion with P293 billion total offered amount in the third quarter.

Moreover, the oversubscription of P503.57 billion was higher than the P401.43 billion in the second quarter.

The demand for Treasury bonds (T-bonds) inched up to P896.18 billion from P611.84 billion in the second quarter. This demand was also higher than the aggregate offered amount of P370 billion in the third quarter.

At the secondary bond market, domestic yields decreased by 78.28 basis points (bps) on a quarterly average, according to the data from the PHP Bloomberg Valuation (BVAL) Service Reference Rates on the Philippine Dealing System’s website.

The yields also inched down by 68.73 bps on a year-on-year basis.

The Bangko Sentral ng Pilipinas (BSP) said that the US Federal reserve decision to cut the policy rate by 50 bps last September affected the movement of the financial market in the third quarter.

“For third quarter 2024, local financial markets have shown signs of recovery. This recovery was underpinned by the US Federal Reserve’s decision to reduce its policy interest rate by 50 bps in September, supported by indications of moderation in US economic activity, an improving inflation environment, and easing labor market conditions,” the Philippine central bank said.

Michael L. Ricafort, chief economist at Rizal Commercial Banking Corp., said in an e-mail that the Federal Reserve cut that could be matched locally would lead to a lower financing and borrowing cost, resulting to a higher demand for loans and credit that would bring more investments, global trade, employment, and other business and economic activities, leading to a faster gross domestic product (GDP) growth.

“The BSP started lowering policy rate reducing borrowing costs by a total of 50 bps since August boosting fixed-income markets by supporting bond prices, but the rate cuts were cautious due to inflation concerns, meaning limited immediate impact on equities,” John Paolo R. Rivera, senior research fellow at Philippine Institute for Development Studies (PIDS), said in a Viber message.

Last August, BSP cut the target reverse repurchase (RRP) rate by 25 basis points (bps) to 6.25% from over 17-year high of 6.5% for the first time in four years amid improving inflation outlook.

A month later, the Federal Reserve cut interest rates by half of a percentage point, kicking off what is expected to be a steady easing of monetary policy with a larger-than-usual reduction in borrowing costs that followed growing unease about the health of the job market, according to Reuters report.

The BSP made another 25-bps interest rate cut last October, since the price pressures remains manageable, according to BSP Governor Eli M. Remolona, Jr.

Meanwhile, Nicholas Antonio T. Mapa, senior economist at Metropolitan Bank & Trust Co., said that the US elections impacted the financial market, alongside with Federal Reserve policy stance, and tension in the Middle East and North African region.

Sunny Liu, lead economist at Oxford Economics’ Macro Forecasting and Analysis, said that the US elections had significant impact on Philippine financial market.

“For example, the peso has been under pressure since October, and Trump’s victory sent the peso to near-historical lows. Also, the 10-year government bond yield increased during the same period. These movements were largely due to market expectations regarding the US rate outlook in response to Trump’s likely fiscal stimulus and tariff plans,” Ms. Liu said in an email.

US President-elect Donald J. Trump recaptured the White House with a sweeping victory as tens of millions of Americans looked past his criminal charges and divisive rhetoric to embrace a leader who, if he carries out his campaign promises, will test the limits of presidential power.

Moreover, BSP said that the uptrend in financial markets were driven by BSP’s decision to reduce the policy rate by 25 bps and the announcement of a 100- to 250-bps reduction of the banks’ RRR, effective on Oct. 25.

“Another unique positive factor for the Philippines: latest cut in banks’ RRR announced on Sept. 20, 2024, effective Oct. 25, 2024 that infused about P400 billion into the financial system that would increase banks’ loans, investments such as in bonds and fixed income instruments, equities and stocks, and other investments; there would also be more pesos in the banking system that could be used to purchase US dollar and other foreign currencies.” Mr. Ricafort said.

Last September, BSP announced that it would reduce the RRR for big banks and nonbank financial institutions with quasi-banking functions by 250 bps to 7% from 9.5% on Oct. 25.

This will also reduce the ratio for digital banks by 200 bps to 4%; thrift banks by 100 bps to 1%; and rural banks and cooperative banks by 100 bps to 0% to promote better pricing for financial services and lower intermediation costs.

INDICATORS TO WATCH FOR
BSP said that developments in the timing and pace of US monetary policy easing, results of the US presidential elections, prospects on global economic growth, and geopolitical concerns are expected to influence movements in domestic financial markets in the last quarter of 2024 and next year.

Mr. Mapa also said that investors will be trained on president-elect Trump’s economic and geopolitical impact on the world economy, after recapturing the White House.

“The Federal Reserve’s policy stance will still be in focus with the Trump win set to impact the targeted path for Federal Reserve policy,” Mr. Mapa said in an e-mail.

Mr. Ricafort said that market players should look into possible protectionist policies by Mr. Trump.

“Higher US inflation: amid possible more protectionist policies and trade war that could lead to higher tariff rates on imports from China and other countries, tighter immigration rules that could increase US labor costs,” Mr. Ricafort said.

“Of course, all eyes are on what Trump will do and how it will affect global trade in general,” Kervin Laurence Sisayan, head of research at Maybank Securities Philippines, Inc. said in an e-mail.

Last November, the Federal Reserve cut interest rates by a quarter of a percentage point as its policy makers began taking stock of what could become a more complex economic landscape when President-elect Donald Trump takes office next year, according to Reuters report.

Mr. Sisayan also said that market players should look into further rate cuts that could lead to the movement of the peso.

“I think exchange rate developments will be a key indicator for market players to watch for the rest of the year. If the peso continues to depreciate significantly, it could raise concerns for the BSP in considering future rate cuts,” Ms. Liu said.

On Nov. 21, the peso hit a record-low of P59-a-dollar level for the first time in more than two years.

This marked the first time the peso returns to the P59 level against dollar since Oct. 17, 2022, as dollar continued its rally.

RATE CUT
Mr. Mapa said that BSP will continue its rate-cutting cycle in the future with inflation expected to stay within target this year, next year, and in 2026.

“There is little in the bag to justify keeping rates at these elevated levels,” Mr. Mapa said.

For Mr. Ricafort, the BSP could still match future Federal Reserve rate cuts, provided that local inflation remains within the BSP target of 2-4%, and the US dollar and peso exchange rate remains stable.

“We still expect BSP to continue its easing cycle since we expect inflation to remain within the target range 2-4%,” Ms. Liu said.

“Although headline inflation began easing in third quarter, it remained elevated due to typhoons, high food and energy costs. Persistent inflation kept bond yields high, as investors sought compensation for inflation risk, impacting fixed-income securities,” Mr. Rivera said.

BSP said that it will continue to shift to a less restrictive monetary policy due to well-anchored inflation expectation and within-target inflation outlook.

“Given the usual lags of monetary policy transmission, we are now paying closer attention to what may happen in 2025 and 2026. We remain mindful of the upside risks to inflation,” BSP said.

The central bank also inclined to reduce the policy rate at a measured pace to facilitates a smoother transmission of monetary policy to market interest rates.

Although Mr. Remolona already signaled the possibility of another 25-bp cut at the monetary board’s last meeting for the year on Dec. 19, he said that a 50-bp cut was unlikely since it is too aggressive.

FIXED-INCOME MARKET
Mr. Ricafort: One of the biggest market catalysts for third quarter 2024 are the first rate cuts in nearly four years by the BSP (by -0.25 on Aug. 15, 2024 and another -0.25 effective Oct. 17, 2024) and also by the US central bank/Federal Reserve (by -0.50 on Sept. 18, 2024 and another -0.25 effective Oct. 17, 2024) that led to gains in the local and US/global financial markets; as Federal Reserve rate cuts that could be matched locally would lead to lower financing costs/borrowing costs that would lead to higher demand for loans/credit that, in turn, would lead to more investments, global trade, employment, and other business/economic activities, thereby leading to faster GDP/economic growth.

Mr. Mapa: [We] Should see the yield curve steepen slightly with shorter dated yields easing on projected BSP rate cuts.

EQUITIES MARKET
Mr. Ricafort: The markets recently priced in Trump US presidency with possible protectionist policies and appointments that could lead to trade wars especially with China and could slow down global trade and overall economic growth, higher tariffs on US imports from China and other countries as well as tighter immigration rules could lead to higher US inflation, thereby could lead to few Federal Reserve rate cuts; amid some cautious signals from most Federal Reserve officials recently on future Federal Reserve rate cuts; net foreign selling in the local stock market over the past three weeks.

Mr. Sisayan: We have an optimistic outlook that Philippine Equities will do well next year on a backdrop of easing inflation, declining rates and steady consumer domestic growth. It also helps that Philippine valuations are attractive at current levels.

FOREIGN EXCHANGE MARKET
Mr. Ricafort: The markets continued to price in Trump US presidency with possible protectionist policies and appointments that could lead to trade wars especially with China and could slow down global trade and overall economic growth, higher tariffs on US imports from China and other countries as well as tighter immigration rules could lead to higher US inflation, thereby could lead to few Federal Reserve rate cuts; amid some cautious signals from most Federal Reserve officials recently on future Federal Reserve rate cuts.

Mr. Mapa: Philippine peso to stay pressured during bouts of risk off episodes connected to Donald Trump’s projected tariffs. Philippine peso should also face pressure on renewed Dollar demand as private investment recovers now that the BSP has started to ease.

Ms. Liu: Regarding the foreign exchange market, we expect the peso to depreciate further against the USD, given that the dollar is expected to be supported by higher long-term yield in the US.