March inflation in the US came in hotter than expected at 3.5% year-on-year (YoY) and 0.4% month-on-month (MoM), above consensus expectations of 3.4% YoY and 0.3% MoM. Upon stripping out the food and energy components, core CPI also came in with a beat as both MoM (0.4%) and YoY (3.8%) numbers were above their respective estimates of 0.3% and 3.7%. <\/p>\n\n\n\n
The primary drivers for the rise in prices were shelter (+5.7% YoY) and energy costs (+1.1%) as the latter was likely influenced by the recent rise in oil prices, while the former continued to prove sticky with experts stating that the increase was fueled by landlords continuing to drive up rents which have been below market. Following the scathing inflation report, investors will now have their eyes set on the upcoming March meeting minutes in order to get a glimpse on Powell and co.\u2019s monetary stance.<\/p>\n\n\n\n
Previous expectations of a rate cut by June were drastically pushed back, with rate futures now pricing in the initial 25bps fed rate cut to take place on September. While we think that this may partially be attributed to the market\u2019s knee-jerk reaction following the surprising numbers, it nevertheless paints the picture of increasingly grayer skies with regard to the rate cut outlook. <\/p>\n\n\n\n
Back here at home, while the BSP has stated in the past that domestic rate cut decisions will not be centered on Fed decisions, we nevertheless think that the timing of Fed cuts will still somewhat play a role given the impact that this would have on the Peso. <\/p>\n\n\n\n
Seeing as PH inflation continues to be food-driven and coupled with the rising risk of a sustained escalation in oil prices, a weakening in the currency would certainly not bode well in taming any price momentum. Nevertheless, given the downward pressure that the high-rate environment is also inflicting on GDP growth, we also think that the BSP cannot afford to delay for too long. <\/p>\n\n\n\n
As such, we are moving our rate cut expectations from June to August.<\/p>\n\n\n\n
Additionally, US inflation numbers have also caused an uptick in yields, with 10-Year rates now at the 4.55% level as of last night. While rising yields provide a headwind to our market given that more attractive treasury rates could compete with investors\u2019 money, the good news is that the market continues to remain relatively undervalued versus US treasuries. <\/p>\n\n\n\n
Based on the recent close of 6,741.07 and 2024 EPS of 588.13, the PSEi offers a forward earnings yield (EPS divided by price) of 8.7% which is 4.2ppts higher than the 4.55% 10Yr yield. <\/p>\n\n\n\n
In contrast, the 5-Year historical spread between the two comes in at only 3.9%, thereby showing that market returns remain attractive versus US yields. As such, we continue to think that any drops or short-term weaknesses in the index will present fundamentally attractive buying opportunities for investors.<\/p>\n\n\n\n