The Fed\u2019s move is a win-win for the Philippines, in the sense that it can either inspire the Bangko Sentral ng Pilipinas (BSP) to be more aggressive in easing its policy or the BSP can hold its course and allow the interest rate differential with the US to widen back to \u201cnormal\u201d levels of between 2.00-3.00%. The first scenario would be a big win for equities and the broader economy, while the second scenario would be a big win for the peso and net importers.<\/p>\n\n\n\n
Medium-term, we expect the Fed\u2019s move to be a positive for the markets. However, we acknowledge that we might see some sell-on-news action as well, especially with the PSEi trading near resistance levels.<\/p>\n\n\n\n
The Fed kicks off its easing cycle with \u201cjumbo\u201d cut<\/strong><\/p>\n\n\n\n The Federal Open Market Committee (FOMC) kicked off its rate cut cycle with a 50bps (0.50%) cut, deviating from the \u201ctraditional\u201d cut of 25bps (0.25%). However, the move was not much of a surprise, as markets have been pricing in the probability of a 50bps cut since late last week. <\/p>\n\n\n\n The US stock market initially reacted positively, with the Dow Jones gaining as much as 375.79 following the decision, before succumbing to sell-on-news pressure and closing lower by 103.08 pts (-0.25%) to end at 41,503.10. Yields on the short-end of the curve dropped while the long-end edged higher, taking the yield curve a bit closer to reversing its inversion. )NOTE: An inverted yield curve is where short-term yields are higher than long-term yields and it\u2019s typically considered as a signal of economic uncertainty.)<\/p>\n\n\n\n Dispelling the myth of bearishness after a cut<\/strong><\/p>\n\n\n\n There has been some noise about historical instances of market downturns following monetary policy pivots. However, we find that this belief is based on the improper assumption that this pivot is similar in nature to previous ones. Previous rate cuts were done in response to crisis events (GFC 2008, COVID 2020) and in an attempt to avert the looming risk of a recession. <\/p>\n\n\n\n These pivots also came at a time when interest rates are at \u201cneutral\u201d levels. This time, the rate cut is being done to normalize interest rates, signaling that the central banks are declaring the end of their war with inflation. With this in mind, we are optimistic that markets will receive this policy pivot in a more positive manner than the previous ones.<\/p>\n\n\n\n