There are two kinds of statistics, the kind you look up and the kind you make up—Rex Stout from Death of a Doxy
The Yield Curve Takes Control: Philippine CPI Increases to 1.3% in November
The Forecasting Prowess of the Yield Curve; the CPI Cycle
The yield curve of the Treasury Markets, as I have been saying, presages statistical inflation.
On the left of this chart is the 2012 based Consumer Price Index (CPI). On the right is the yield differential of the 10-year T-bond and the 1-year T-bill, as well as, the variance between the 1-year T-Bill and the CPI or the real yield.
The spread of the 10- and the 1-year curve has accurately foretold the direction of the 2012 CPI since the latter came to replace its 2006 predecessor in 2013.
The curve began to flatten ahead of the CPI in 2013 before the BSP raised rates in 2014. It commenced on steepening in 3Q 2015, a few months before the BSP opened the QE floodgates, pushing the CPI to reach a climax in 3Q 2018. The curve started to flatten anew before the BSP hurriedly raised policy rates beginning the 2Q 2018, whereby the CPI soon followed with a plunge. The flattening morphed into an inversion, a sign of extraordinary financial tightening, antecedent to the BSP’s chopping of policy rates, which started in the 2Q 2019. Such yield curve inversion, the first since at least 2000, is an indicator of heightened risks of a recession.
Not only the CPI cycle, but the Philippine treasury yield curve seems to have even been predicting the crucial shift in BSP’s policy trends!
But the soothsaying prowess of the yield curve can be seen in a different light.
The yield curve, instead, projects the incumbent policies of the BSP, which drives the CPI cycle. And once the curve reaches a certain point from which the CPI follows with a time lag, treasury investors foresee and prices a turnaround on the BSP policies in response to such dynamic. The yield curve’s inflection points, thereby, represent the treasury market’s anticipation of the denouements of the peak and troughs of the CPI cycle.
Here is a truncated backstory.
In response to the tightening by the BSP in 2014, the CPI downshifted, after peaking in August 2014, for 14 straight months until it recorded two months of deflation in September and October 2015. The sharp and speedy decline of the CPI prompted the flattening dynamic of the curve to reverse in July 2015, reflecting the Treasury market’s expectation of the revival of the CPI from the BSP’s easing.
The BSP’s tightening process indeed ended with the opening of the QE spigot in the 4Q of 2015. This financial easing was supported by the record drop in its policy rates, which was implemented by the BSP in June 2016, presented under the camouflage of the adaption of the Interest Rate Corridor (IRC) System.
The yield curve steepened until it climaxed in January 2018, and four months later, in response to the surging CPI, the BSP began its 175 bps series of hikes implemented within 7-months. The CPI, meanwhile, hit a multi-year high of 6.7% in September 2018, 8-months after the curve began to flatten.
That January 2018 flattening cycle culminated with an inverted yield curve in March 2019, which from this milepost has sharply steepened to manifest the Treasury markets’ expectations of a resurgent CPI.
The BSP responded to the liquidity squeeze with a series of rate cuts, totaling 75 bps thus far, which started in May 2019, as anticipated by the curve. RRR cuts of 400 bps had also been used to ease financial tightness.
Nevertheless, because of radical political responses to the 2018 rice crisis, and statistical anomalies, if not skullduggery, the headline CPI still plunged to a 42-month low last October.
And because of the tenacious widening of the curve, which has clashed with the artificially depressed statistical inflation, confronted with a credibility dilemma, the National Government relented to publish a higher CPI last November.
Action Speak Louder than Words: Economists See No Inflation, Traders Price in Higher Inflation
The Philippine capital markets have a very thin participation rate from the general population. Like the stock market, the treasury market has been dominated by the financial institutions and also government financial institutions. But unlike the stock market, foreign participation may not be as significant. [Nota Bene: I’m sorry. I have no access to latest data, except to rely on old reports. Example in 2011, non-residents account for 10% share of local government bond]
As the Asian Bond Online reported in its 3Q 2019 Asian Bond Monitor: “Banks and investment houses remained the largest investor group in the Philippine LCY government bond market in Q3 2019, with an investment share slightly rising to 42.6% at the end of September from 41.9% a year earlier. Contractual savings institutions (including the Social Security System, Government Service Insurance System, Pag-IBIG, and life insurance companies) and tax-exempt institution (such as trusts and other tax-exempt entities) were the second-largest holders of government bonds. However, their share fell to 23.9% from 27.2% during the same period. The share of brokers and custodians was almost at par at 11.5% during the review period, while that of funds managed by the BTr inched up to 10.0% from 9.4%”
The treasury markets reveal the demonstrated preferences of the institutional participants or ‘action speaks louder than words’. What in-house economists and experts from financial institutions say has starkly been different compared with what their treasury departments do. Experts tell media that CPI should remain muted, but paradoxically, traders of treasury departments from these establishments don’t believe what their analysts have been saying!
And from this view, traders from various treasury departments have some indirect influence on the BSP’s policies.
November CPI Expands to 1.3% as Divergences Persist
The Philippine Statistics Authority reported that a jump in November’s CPI to 1.3%.
Curiously, despite the sustained significant deflation in the rice (-8.3%) and bread (-2.2%) CPI (-5.6%), which led to a slight -.2% deflation in Food CPI, the headline CPI still climbed! Add to this the irony of deflation in Transport CPI (-2.4%). The previous drivers of the suppressed CPI have failed to influence more downside on the headline!
What segments pushed the higher the CPI in November? According to the BSP: “The uptick in November headline inflation rate was traced mainly to higher prices of selected food items. Inflation rates for meat, fish, vegetables, as well as milk, cheese, and eggs increased in November compared to year-ago levels. At the same time, year-on-year inflation rates for rice, corn, as well as sugar, jam, honey, chocolate, and other confectionery were also less negative during the month. Meanwhile, year-on-year non-food inflation was unchanged in November as higher actual rentals for housing and upward adjustments in electricity rates due to the increase in generation charge were offset by the lower transport inflation during the month.”
As the headline inflation rose, the Core CPI slipped, the result of which has been to diminish the record divergence. Pls. see my past explanations.
[see 3Q CPI Fall to 42-Month Low as Divergences in Component CPIs Widen; Flawed CPI—the Shakey’s Pizza Evidence November 10, 2019
or here
Headline CPI at 40-month Low Diverges with the CORE; Plummeting M2’s Savings Deposits Should Spur the BSP to Relaunch QE Soon October 13, 2019]
The headline CPI’s November advance has been a product of the increases in its subsectors, particularly, alcohol (+17.6%), household utilities (+1.2%), furnishings (+2.8%), health (+3.1%) and communication (+.3%) relative to the previous month.
However, the bizarre disconnect between the food CPI and the restaurant CPI persisted in November.
While the food CPI was less deflationary (-.2%), restaurant CPI (+2.7%) was unchanged. Hence, the record spread had narrowed slightly.
Such statistics tell us that consumers exist in a vacuum. Consumption of food at home and food at restaurants has little human and economic connection between them.
These statistics have little relevance to the real world.
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