Data from the US Bureau of Labor Statistics showed that the U.S. year-on-year (YoY) headline inflation for January eased to 3.1% from 3.4% the previous month, while core inflation remained unchanged at 3.9%. Both measures topped consensus estimates of 2.9% YoY for headline CPI and 3.7% YoY for core inflation. The Dow Jones Industrial Index dropped by 1.35% following the inflation print in its worst session since March 2023, while the broader S&P 500 and the tech-heavy Nasdaq slumped by 1.37% and 1.80% respectively.<\/p>\n\n\n\n
While it is expected that the rate of disinflation would eventually slow, it happened much sooner than markets expected. And while it doesn\u2019t mean that the Fed will hike rates to speed it up again, it also doesn\u2019t bode well for the prospects of a May rate cut. Swap contracts referenced to Fed policy rate changes immediately priced in the expected impact on policy, with the market pricing in a 32% likelihood of a rate cut in May, down from around 64% before the data release. <\/p>\n\n\n\n
These same contracts priced in a 60% chance of a March rate cut and a near-100% chance of a May rate cut as late as two months ago, but these hopes have been dashed by recent Fed statements and unfavorable inflation prints. CME Group\u2019s FedWatch tool, which tracks these contracts, shows that the market is now almost 50-50 on whether the first cut will happen in May or in June.<\/p>\n\n\n\n
It is highly unlikely that the Bangko Sentral ng Pilipinas (BSP) will cut rates while the Fed holds, and the most likely scenario is that the BSP will be one step behind the Fed in terms of loosening policy. Taking this into consideration, we are revising our expectations of a BSP rate cut from May\/June to June\/August. <\/p>\n\n\n\n
A June rate cut would leave the BSP room to cut rates by 1.00% until year-end, while an August rate cut would leave room for only 0.75% worth of rate cuts. This of course assumes that the BSP will cut by 25 bps per meeting and does not consider the possibility of a 50 bps cut.<\/p>\n\n\n\n
Given our revised outlook, banks would remain attractive for slightly longer, while property and capital-intensive industries such as infrastructure and power generation would be less attractive for a bit longer. <\/p>\n\n\n\n
Our long-term view on the interest rate trajectory remains unchanged, but we would recommend to take it easy on the portfolio rotation from banks to property given the recent macroeconomic developments.<\/p>\n\n\n\n