The bond market is what runs the world. Always has. Therefore, even in 2017 this idea the global economy was about to take off was never more than wishful thinking. If the bond market was against it, that skepticism was always the base case in reality. The bond market in addition to being much larger than stocks could ever hope of being, it is made up of agents whose actual practice (and survival) brings them in close contact to the real money of the real economy—Jeffrey P. Snider
In this issue
Despite the BSP’s RRR and Policy Rate Cuts, Treasury Yields in Free Fall as Curve Inverts by More! Diverging Property and Bank Stocks Persists!
-May CPI Bounces to 3.2% After a 7-month 3.69% Crash: a Floor or a Pause?
-Treasury Yields in Free Fall as Curve Inverts by More! The Interest Rate Fallacy in Motion?
-Despite the BSP’s RRR and Policy Rate Cuts, Tight Money Rules! Nothing Impossible in Convoluted Markets!
-Asymmetric Perception: Prospects of Easy Money Pumps Property Stocks as Banks Snub BSP Easing
Despite the BSP’s RRR and Policy Rate Cuts, Treasury Yields in Free Fall as Curve Inverts by More! Diverging Property and Bank Stocks Persists!
May CPI Bounces to 3.2% After a 7-month 3.69% Crash: a Floor or a Pause?
The Philippine Statistics Authority (PSA) reported a slight bounce on the May CPI to 3.2% from 3.01% a month ago. May’s CPI represents the first monthly uptick following a 3.69% plunge from a high of 6.7% in seven consecutive months.
Only three of the eleven CPI components reported an increase. However, with an aggregate share weight of 58.91%, increases of the minority segments had been enough to push CPI higher.
Though the food and non-alcoholic beverage CPI had been responsible for the gist of the headline’s CPI increase, the Core CPI component, mainly from housing, water, electricity, and other fuels also contributed to this.
Core CPI rose to 3.49% in May from 3.4% a month ago even as the international price of oil, benchmarked by US West Texas Intermediate Crude (WTI), was down by 20.2% to $ 53.5 per barrel from $63.9 a barrel a month ago. (figure 1, upper window)
The Food and Beverage CPI, which carried the most weight of the CPI basket with 35.46%, was up 3.38% in May from 3.05% in April.
Housing, water, electricity, and other fuels, a component of the Core basket climbed to 3.27% in May from 3.18% last April. Housing, water, electricity, and other fuels have the second largest share weight of the CPI basket with 22.04%.
Figure 1
Was the increment in May’s CPI an outcome of the mammoth revision of the BSP's data on consumer loans and M3 data? (figure 1, lower pane)
Put bluntly, was May’s CPI a consequence of increased (statistically inflated) spending of consumers financed by expanded access to the banking system’s credit in April? Has part of these been from the BSP easing? The BSP cut policy rates effective May 10th. Or could these have been a supply related dynamic?
The next question is, has the rebound in May’s CPI signified a floor from the current streak of declines or a pause?
The surprise uptick in the country’s inflation rate in May, reported the Business Mirror, will not derail the Bangko Sentral ng Pilipinas’s (BSP) monetary-policy course in the policy horizon, said the BSP Chief.
Treasury Yields in Free Fall as Curve Inverts by More! The Interest Rate Fallacy in Motion?
Figure 2
Local currency Philippine Treasury yields went into a free fall across the board! (figure 2, upper window) Or, Philippine Treasury prices following global bond markets surged!
On the surface, cascading yields translate to another short-term bonanza for financial assets and liquidity reprieve for banking system!
However, instead of steepening, the Philippine bond boom caused spreads of the seven out of the nine maturities against the 10-year BVAL benchmark to turn negative (as of June 7)! (figure 2, lower window)
In other words, instead of easing, lower rates have signaled even more tightening of domestic financial conditions as expressed by the Treasury curve!
Such incredible developments seem to confirm, the late Nobel Prize winner, Milton Friedman’s Interest Rate Fallacy.
Quoting Dr. Milton Friedman from “Reviving Japan”, published on the Hoover Institution: Initially, higher monetary growth would reduce short-term interest rates even further. As the economy revives, however, interest rates would start to rise. That is the standard pattern and explains why it is so misleading to judge monetary policy by interest rates. Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy.
The BSP’s banking and liquidity data of May should give us a clue as to whose direction the market will respond to; Dr. Friedman or BSP Chief Ben Diokno.
Despite the BSP’s RRR and Policy Rate Cuts, Tight Money Rules! Nothing Impossible in Convoluted Markets!
Figure 3
As far as the Treasury market is concerned, the negative rate subsidy to the National Government (NG) has vanished since November.
In my representation, the difference between the yield of 1-year Treasury notes and the PSA’s CPI of a given month constitutes real rates.
And instead of turning lower, positive real rates have increased by more and have even gone past the 2015 highs in April as bank lending continues to cascade! (figure 3, upper window)
Figure 4
And such numbers reveals to us why the BSP Chief has been hell-bent in calling for lower interest rates! (figure 4, Bloomberg Tweet)
Naturally, tight money would be an obstacle to the administration’s obsession with its bold and aggressive “build, build, and build” programs. Therefore, with the architect of the grand fiscal stimulus projects at the helm, the BSP’s objective has now shifted to do whatever it takes (pro-growth) to ensure access to cheap funding for “build, build, and build” from promoting and preserving price and monetary stability.
And could it be that the BSP’s constant clamor for more easing has coincided with credit rating agencies’ thumbs up of the NG’s credit rating profile in spite of an inverted curve? The S&P upgraded the NG’s credit rating last April while Fitch Rating affirmedthe nation’s current credit profile a week ago. Have all these been designed to drum up demand for Philippine credit?
‘Sound macro fundamentals’ characterize the Philippine economy, hollers the establishment. If so, why would the BSP chief be in a rush to chop rates? Can the Philippines not cope with the current level of policy rates, which are still at historic lows?
With emergency measures (record low rates and QE) instituted by the BSP to shield against the Great Recession still in place,why can’t the Philippines wean away or normalize policy rates?
If a panic buying spree out of recession concerns has hounded the global bond markets, why have yields of 10-year Philippine bonds been falling faster than its US Treasury equivalent???? (figure 3, lower window)
With the uptick in May’s CPI, why hasn’t the domestic bond markets been responding to the prospects of more imposing actions from the BSP chief? Shouldn’t the curve be steepening at this juncture?
Has it been because global bond markets have become so dislocated, such that Greece bonds posted LOWER yields than its US equivalent? (figure 4, lower window)
There is nothing impossible indeed in vastly convoluted markets!
And because the currency markets palpably see a tighter financial-monetary environment in the Philippines than the US, the USD peso has remained rangebound in contrast to the wishes of the BSP chief of a weak peso. (figure 3, lower window)
The outcome of the current tight financial environment in the face of BSP’s forced easing and money printing should lead to stagflation.
The BSP Chief shall get his desired peso weakness but not under the economic environment which he projects.
Asymmetric Perception: Prospects of Easy Money Pumps Property Stocks as Banks Snub BSP Easing
Figure 5
The prospects of a loose money environment have fired up key property stocks to push the property index to record highs. (figure 5, upper window)
Last week’s record highs by Ayala Land and Megaworld backed by SM Prime’s drift towards its May apex and a sharp rally by Robinsons Land had been instrumental for the milepost of the property index.
Interestingly, while the property index hit a landmark, banks have barely budged.
Year-to-date, the Property Index has returned a scintillating 19.45% while the Bank/Financial Index posted a 2.2% loss over the same period. As a result, torn by mixed signals, the PhiSYx has generated 6.94% returns, despite massive marking-the-closes (pumps and pumps and dumps), and has yet to break its February high of 8,144.16. (figure 5, lower window) It is a dynamic that has dominated 2019.
[This Time is Different! PSE’s Property Index Soars to Record Highs as the PhiSYx Lags! April 28, 2019]
So while property investors drool over the prospects of more credit expansion in pumping share prices and the industry’s "fundamentals", banks, the principal providers of credit, have snubbed the RRR and policy rate cuts! It’s been a month since the first interest rate cut and a week after the RRR cuts.
The ferocious rally of Philippine Treasuries may temporarily boost bank profits and assets as in the 1Q*, but such dynamic is unlikely to last under the current tight money conditions.
[*Banking System Woes: BSP’s RRR and Policy Rate Cuts To the Rescue?! 1Q 2019: Bank Profit, Bank Borrowing Boomed as Deposit Growth Tumbled May 19, 2019]
However, when economic slowdown becomes apparent, yields of Philippine treasuries will begin to price in credit risk issues.
Nevertheless, the asymmetric performance between property and bank stocks showcases the significant disparities (confused state) of the market’s perceptions, in the same fashion as rallying bonds in the face of more cuts, which has inverted the sovereign curve by even more!
Recessions or crisis has been associated or chained with the year of the pig. For instance, the Great Recession was dated in December 2007 while the Asian Crisis came in July 1997, a year and a half past 1995 (year of the pig). 2019 looks no different.
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