Philippine November 2023 CPI Plunged to 4.1%, T-Bill Rates Fell Further, Steepened the Treasury Curve as the BSP Downplayed Rate Cuts

  

The market prices bring supply and demand into congruence and determine the direction and extent of production. It is from the market that the capitalist economy receives its sense. If the function of the market as regulator of production is always thwarted by economic policies in so far as the latter try to determine prices, wages, and interest rates instead of letting the market determine them, then a crisis will surely develop—Ludwig von Mises 

 

In this issue 

Philippine November 2023 CPI Plunged to 4.1%, T-Bill Rates Fell Further, Steepened the Treasury Curve as the BSP Downplayed Rate Cuts 

I. The Treasury Markets versus the BSP:  The 2022 Rate Hikes 

II. The Treasury Markets versus the BSP: The BSP’s Shifting Goal Posts and Credit and Liquidity Drive Inflation 

III. T-Bill Rates Dive Further after the November 4.1% CPI Print 

IV. BSP’s Ambivalence is a Reflection of its Conflicting Policies 

V. November’s Broad-Based CPI Decline; Second Countercyclical Phase of the Inflation Cycle; Excess Volatility Confirmed the Cyclical Downturn 

VI. Relative Strong Peso, Weak Oil Prices Helped Eased the CPI; Redux: the BSP is about to Ease Soonest  

Philippine November 2023 CPI Plunged to 4.1%, T-Bill Rates Fell Further, Steepened the Treasury Curve as the BSP Downplayed Rate Cuts 

 

Philippine November CPI plummeted to 4.1%.   Departing from the BSP 'hawkish' rhetoric, T-bills plunged, and the Treasury Curve steepened.  Who will be right: the market or the monetary bureaucracy? 

I. The Treasury Markets versus the BSP:  The 2022 Rate Hikes 

 

Does the Treasury Markets influence the interest rate policies of the BSP? 

 

Before the BSP went into its historic rate hikes in 2022, the following news quotes should give us a clue. (bold highlights mine)

 

Inquirer.net, March 18, 2022: The Bangko Sentral ng Pilipinas (BSP) does not have to raise its policy rates just because the US Federal Reserve did, as such decisions will depend on the domestic situation, BSP Governor Benjamin Diokno reiterated on Thursday. Diokno was reacting to a question about whether the BSP will follow the US Fed, which in effort to slow down inflation raised the benchmark federal fund rate by 25 basis points to 0.5 percent 

 

Inquirer.net, March 23, 2022: The Bangko Sentral ng Pilipinas (BSP) intends to keep key rates low even as it expressed concern that the ripple effects of the conflict between Russia and Ukraine would reach the Philippines’ financial system. 

 

ABS-CBN News, April 5, 2022: Bangko Sentral ng Pilipinas Governor Benjamin Diokno on Tuesday said the central bank is "prepared" to take action to keep inflation expectations in check. The BSP in March kept the key borrowing rate at 2 percent. However, recent data suggests that inflation could remain elevated in the coming months, Diokno said during Tuesday's Philippine Economic Briefing. 

 

Inquirer.net, April 27,2022: The Monetary Board (MB) may consider raising its key policy rate in June if the Philippine economy grew by 6 percent to 7 percent in the first quarter, according to MB chair and Bangko Sentral ng Pilipinas (BSP) Governor Benjamin Diokno. 

ABS-CBN News, May 18, 2022: A day before the Bangko Sentral ng Pilipinas decides on whether to adjust or hold interest rates steady, the head of the central bank hinted that it was getting harder to keep rates low.  The BSP Monetary Board is set to meet again on Thursday. It has kept the policy rate at a historic low of 2 percent since November 2020 to prop up the pandemic-battered economy.  

Figure 1 

 

Like today, the BSP continued to move its goalpost.  First, it foresaw its first hike in 2H 2022, then moved it to June 2022, citing the GDP. [Figure 1, upper chart] 

 

Next, it argued against the impact of the Fed rate increases, which, unlike today, has been used as a reason to keep rates at a multi-decade high. 

 

Altogether, in the preference to "keep rates low," the BSP had deep misgivings or had been reluctant about rate increases.    

 

Yet, the BSP abruptly commenced its "baptism of fire" of rate hikes on May 19, 2022.  

 

Though inflation moored the BSP's actions, the Philippine Treasury markets projected its rise.   

 

T-bill rates ascended even as the BSP dithered in public over its proposed shift in policy stance.  After the first salvo, T-bill rates rose faster, forcing the BSP to respond with rapid increases. 

 

The Philippine curve steepened sharply through June 2022 to broadcast the coming inflation storm with about a one-year time lag.   

 

Subsequently, the flattening slope presaged the concurrent disinflation wave from a build-up of excess capacity on top of the monetary tightening.   We used the spread of the 10- and 1-year yield as a barometer of the curve. [Figure 1, lower graph] 

 

In the meantime, the same treasury benchmarks, represented by the yield spread and T-bill rates, coincided with the 2018 rate cuts and the historic bottom of 2020.  

 

Be that as it may, the treasury markets directed the hands of the BSP than popularly perceived. 

 

II. The Treasury Markets versus the BSP: The BSP’s Shifting Goal Posts and Credit and Liquidity Drive Inflation 

 

Fast forward to 2023.  

 

Last July, the BSP initially proposed to cut rates when the CPI would fall into its target range of 2-4%. 

 

GMA News, July 6, 2023: The Bangko Sentral ng Pilipinas’ (BSP) policy-setting Monetary Board is likely to consider cutting interest rates within the year if inflation rate falls to 4%, the central bank’s new governor, Eli Remolona, said. 

 

The BSP continued to shift its channel signaling to the public from dovish to hawkish to neutral back to hawkish.  

 

Interestingly, last week, the BSP resisted the notion of rate cuts. 

 

Businessworld, December 8 2023: BANGKO SENTRAL ng Pilipinas (BSP) Governor Eli M. Remolona, Jr. said it is premature to discuss policy easing in 2024, with the Monetary Board still prepared to hike borrowing costs if needed to make sure inflation returns to the 2-4% target range…Mr. Remolona said the BSP remains hawkish as frequent supply shocks could lead to higher inflation expectations and second-round effects.  

 

How logically incoherent.  How does raising interest rates (a demand management tool) curb a "supply-side" driven inflation?   

 

Inflation expectations and second-round effects?  An unfettered pricing system resolves supply-side inflation.  As an economic aphorism goes, the best cure for high prices is high prices.  Remember the law of demand?   

 

In this plane, with fixed money, increased demand for some goods will result in lower demand for others.   So, how should this create a "general price increase" unless supported by an increase in money? 

Figure 2 

Therefore, "too much money chasing too few goods" results in higher inflation expectations through lower demand for the money (the peso) in favor of goods and services.  Why hold onto a currency that has been eroding its purchasing power? 

 

As evidence, the BSP's money supply as a % share of the GDP surged from 2013 onwards and rocketed to HISTORIC levels (68% M2 & 70% M3 in Q3), principally from the BSP's record Php 2.2 trillion liquidity injections in 2020-21.  [Figure 2, topmost diagram] 

 

In two years, the CPI peaked.  How is this supply side driven?  Or, the relationship between the uptrend in the money supply-to-GDP (since 2013) and the present inflation cycle has barely been a coincidence but a causal one. 

 

The data also reveals that credit and liquidity activities rather than productivity have driven the GDP, rendering the economy vulnerable to inflation and boom-bust cycles. 

 

III. T-Bill Rates Dive Further after the November 4.1% CPI Print 

 

Circling back to the Treasury markets and the BSP.  

 

When the BSP raised the possibility of cuts last July, T-Bill rates remained rangebound and even rose ahead of the October hike to 6.5%.  

 

Surprisingly, since mid-November 2023, T-bill rates have melted down.  

 

Though not a "surprise," the 4.1% November CPI "beat" the consensus estimates (4.3% Reuters).  It nestled at the lower spectrum of the BSP's target of 4.8% to 4%.  

 

But instead of steadying, T-bill rates fell even more after the CPI announcement this week.  Figure 2, middle window] 

 

Since the rest of the curve was at a standstill (little changed), the plunge in T-Bill rates magnified the "bullish steepening"—a harbinger of rate cuts! [Figure 2, lowest chart] 

 

Treasury markets may have dismissed the CPI number as an understatement or see further weakness in the coming months for it to pressure the BSP to respond with rate cuts!   

 

Sure.  The BSP may stall in 2023 and defer the cuts to early 2024.  

 

However, as long as the yield curve steepens from the softening T-bill rates, this will BSP prompt the eventual easing moves—as economic strains surface.  

 

And once the BSP does ease, a further steepening of the curve implies a comeback of inflation over time.  

 

IV. BSP’s Ambivalence is a Reflection of its Conflicting Policies 

 

The BSP's ambiguous policy stance is partly a result of its asymmetric and conflicting policies.  

Figure 3 

Sure, policy rates are at multi-year heights, but credit card subsidies have powered consumer demand, even as industry loan growth has stumbled.   

 

Though the record streak of credit card debt levels (in peso) continued in October, its blistering growth rate seems to have peaked, fluctuating 29% to 30% YoY throughout 2023. [Figure 3, top and middle windows] 

 

Further, banks continue to finance the modest increases in fiscal (deficit) spending, resulting in a rebound in the money supply.  M3 rose from 6.8% in August to 7.9% in September 2023.  [Figure 3, lowest graph] 

Figure 4 

 

Meanwhile, the banking system's net claims on the central government (NCoCG) surged by 19.25% to a record Php 4.8 trillion in September. [Figure 4, upper chart] 

 

Notwithstanding, the general slowdown in systemic liquidity (public debt plus universal commercial bank loans) has weighed on the CPI.  Systemic debt growth eased from 8.9% in August to 6.03% in September.  [Figure 4, lower graph] 

 

So, the BSP appears to be banking on the sustained and relentless rise of consumer credit and bank financing of deficit spending for its "hawkish" policy stance in the face of worsening liquidity strains.    

 

Here is the thing.  The BSP seems to be making its policies up as things unfold, or they have a negligible handle on the present developments. 

V. November’s Broad-Based CPI Decline; Second Countercyclical Phase of the Inflation Cycle; Excess Volatility Confirmed the Cyclical Downturn 

 

The November CPI downturn was broad-based.   

Figure 5 

 

Though food weighed the most on the index, 7 of the 13 components were down YoY, while 12 of 13 fell month-on-month. The transport and the Food segments fell the most MoM.  [Figure 5, topmost chart] 

 

For this reason, the headline CPI posted a more substantial drop from 4.9% in October to 4.1% in November than the Core CPI, which slipped from 5.3% to 4.7% over the same period.  

 

In any case, the uptrend of the 2015 inflation cycle remains intact, or the current disinflation represents a countercyclical phase.  [Figure 5, middle pane] 

 

Aside from having predicted its peak last March, another indicator has confirmed the disinflation dynamic.  

 

Each time the Month-on-Month volatility of the CPI soared past 1%, it marked an inflection point. September’s 1.4% volatility sealed the fate of the present downturn of the inflation cycle, which climaxed with January 2023's record monthly 1.7% volatility—previously discussed here. [Figure 5, lowest graph] 

 

VI. Relative Strong Peso, Weak Oil Prices Helped Eased the CPI; Redux: the BSP is about to Ease Soonest 

Figure 6 

 

The relatively strong peso (from a generally weak US dollar) added to the CPI’s decline. [Figure 6, topmost graph] 

 

As for "imported inflation," falling international oil prices, which represent the emaciating demand for oil amidst disunion between OPEC and other oil producers, have also contributed to the downside pressure on the CPI. [Figure 6, middle chart] 

 

By and large, the sharp plunge of the Headline and Core CPI represents the weakening of the Nominal GDP amidst a multi-year high in the BSP's rates.   

 

Using the expanded data, the scale and speed of the headline and CORE CPI decline resonated with the Great Recession of 2008-2009, when the BSP went on a panic-cutting spree.[Figure 6, lowest window] 

 

Although the treasury markets have acknowledged this, the BSP remains seemingly confused about its supposed "data-driven" policy actions.  

  

As noted earlier, contra the consensus and the BSP's recent declarations, unless actions in the T-bill markets reverse, we accede with the Treasury Market's position: the BSP's rate cuts are coming soon! Much sooner than everyone thinks. 

 

Our bet is on the markets over politics. 

Booming Philippine jobs? A Comprehensive Review of the PSA's October Labor Data Exposed a Dark Secret: Surging Non-Labor Force!

 

Statistics are like bikinis. What they reveal is suggestive, but what they conceal is vital―Aaron Levenstein, economist, former business Professor, Baruch college 

In this issue 

Booming Philippine jobs? A Comprehensive Review of the PSA's October Labor Data Exposed a Dark Secret: Surging Non-Labor Force! 

I. The Glorious Headlines: October Unemployment Fell to a Multi-Year low of 4.2% or Employment Rose to a Multi-Year High of 95.8% 

II. October’s Unemployment Dropped on a Backdrop of Reduced Labor Force Participation 

III. The Skeleton in the Closet of October’s Employment Data: The Spike of the Non-Labor Force Population! 

IV. Full-Time Jobs Growth Stalled, Retail Jobs in Decline, Mixed Performance for the Rest 

V. The Impact of Slowing Employment Gains on the GDP and Consumer Spending 

Booming Philippine jobs? A Comprehensive Review of the PSA's October Labor Data Exposed a Dark Secret: Surging Non-Labor Force! 

 

Statistical Hocus-Pocus?  Philippine October employment rates soared to 95.8%—a multi-year high—on the surging non-labor force population! 

 

I. The Glorious Headlines: October Unemployment Fell to a Multi-Year low of 4.2% or Employment Rose to a Multi-Year High of 95.8% 

 

Inquirer.net, December 8, 2023: There were fewer unemployed Filipinos recorded in October as the wealth of seasonal jobs created at the onset of the holiday season started absorbing more workers, including the new entrants to the country’s workforce, the Philippine Statistics Authority (PSA) said in a report on Thursday. A nationwide survey of 44,499 households showed there were 2.09 million Filipinos who were either jobless or out of business in October, down from 2.26 million recorded in September, the report added. That was equivalent to an unemployment rate of 4.2 percent slightly down from 4.5 percent in the previous month…The dip in joblessness coincided with a decline in the number of jobseekers in October. Data showed 49.89 million Filipinos formed part of the nation’s labor force, which represents people age 15 years old and above who actively looked for work during a period. That was smaller than the 49.93 million labor force size recorded in September, but bigger than the 49.30 million posted a year ago. This brought the labor force participation rate to 63.9 percent in October, down from 64.1 percent in the previous month. 

 

Since the Philippine labor force survey plays a crucial role in determining consumer spending, income, and inflation, it represents a critical data source for the calculation of the GDP. 

 

So, one way to amplify the GDP is to bolster the employment numbers.  

 

Nonetheless, as a politically sensitive number, there is no guarantee of the accuracy/objectivity/impartiality of the estimates. 

 

Let us begin with the Philippine Statistics Authority’s (PSA) definitions of the data used here. 

 

1. Population 15 Years Old and Over: This refers to number of population 15 years old and over excluding overseas workers. Overseas workers are excluded in the estimation of the size of working population (population aged 15 years and over) since the data on their economic characteristics are not collected because they are not considered part of the labor force in the country. 

2. In the Labor Force or Economically Active Population This refers to persons 15 years old and over who are either employed or unemployed in accordance with the definitions described below.  

3. Employed Employed persons include all those who, during the reference period are 15 years old and over as of their last birthday, and are reported either: a. At work, i.e., those who do any work even for one hour during the reference period for pay or profit, or work without pay on the farm or business enterprise operated by a member of the same household related by blood, marriage, or adoption; or b. With a job but not at work, i.e., those who have a job or business but are not at work because of temporary illness or injury, vacation, or other reasons. Likewise, persons who expect to report for work or to start operation of a farm or business enterprise within two weeks from the date of the enumerator’s visit are considered employed. 

5. Unemployed…Unemployed persons include all those who, during the reference period, are 15 years old and over as of their last birthday, and reported as persons:  a) Without work, i.e., had no job or business during the reference period; b) Currently available for work, i.e., were available and willing to take up work in paid employment or self-employment during the reference period, and/or would be available and willing to take up work in paid employment or self-employment within two weeks after the interview date; and c) Seeking work, i.e., had taken specific steps to look for a job or establish a business during the reference period, or  Not seeking work due to the following reasons: (1) fatigued or believed no work available, i.e., discouraged workers; (2) awaiting results of previous job application; (3) temporary illness or disability; (4) bad weather; and/or (5) waiting for rehire or job recall.  

6. Persons Not in the Labor Force Persons 15 years old and over who are neither employed nor unemployed according to the definitions mentioned. Those not in the labor force are persons who are not looking for work because of reasons such as housekeeping, schooling, and permanent disability. Examples are housewives, students, persons with disability, or retired persons.  

Or, the definitions detail the embedded assumptions of the data set, which serve as our basis for analysis. 

 

II. October’s Unemployment Dropped on a Backdrop of Reduced Labor Force Participation 

Figure 1 

First. The October unemployment/employment rate of 4.2%/95.8% was similar to November 2022 and represented the lowest/highest since at least 2017. (Figure 1 upper window)  

By this assumption, the Philippine economy has been booming even when the 2023 Q2 and Q3 GDP showed a substantial slack in private sector performance. Paradoxical, isn’t it? 

 

Two.  The irony is that, unlike in November 2022, the sharp drop in labor participation boosted the employment rate.  The labor participation rate was 63.9% in October 2023 compared with 67.5% in November 2022. (Figure 1, lower pane) 

 

Labor participation rate = labor force/employable population (15 years and over). 

 

III. The Skeleton in the Closet of October’s Employment Data: The Spike of the Non-Labor Force Population! 

 

Three.  The number of employed people also peaked in November 2022 and has been downhill since.  As such, though the employment rate hit the same levels, the number of employed shed by 1.91 million or a decline of 3.83% from 49.71 million in November 2022 to 47.8 million in October 2023.   

Figure 2 

Four.  The population of 15 years and older (employable persons) grew by 1.6% CAGR from 74.73 million in January 2020 to 78.02 million in October 2023.  (Figure 2, upper graph) 

 

Put another way, since November 2022, the growth in the number of people employed has barely reflected the demographic expansion.  

 

Fifth. Excluding people looking for jobs (labor force), employment to the (employable) population fell to 61.3%—a one-year low!  (Figure 2, lower chart) 

 

Not mentioned in the "Persons not in the labor force" are dependents outside retired individuals, housekeeping, and persons with disability.  How about moochers supported by government welfare, OFW remittances, wealthy relatives or sponsors, and others?  

Non-labor force = labor force - population of employable (15 years and over)

 

This segment is a considerable sector, representing 36% of the employable population last October!   

Its growth spike since November 2022 has resulted in a sharp decline in labor force participation.  

 

Employment rate = number of employed people/labor force. 

 

Therefore, the decline in the labor force magnified the employment rate.  

 

Unemployment rate = number of unemployed people/labor force. 

 

Transfers of some of the unemployed to the non-labor force sector could have contributed to the decrease in the numerator, hence the decrease in the unemployment rate. 

   

Could this signify statistical legerdemain—a shift from the labor force to the non-labor force—intended to boost the headline employment/unemployment performance? 

 

Or has there been an actual boom in the non-labor force?  A boom of dependents?

 

No mainstream experts or even officials have told us this.  Perhaps this represents a taboo in the Overton Window. 

 

Instead, some have used the pretext of "low-quality jobs" or "seasonal workers" to mask the internal decay.  

 

Incredible. 

IV. Full-Time Jobs Growth Stalled, Retail Jobs in Decline, Mixed Performance for the Rest 

 

Figure 3 

 

Sixth. After hitting a peak in July 2023, full-time employment growth has stalled while part-time jobs remained a substantial—30%—segment of the overall employment! (Figure 3, topmost chart) 

 

Seventh.  The country's biggest employer, the agricultural sector, has been rangebound in 2023, while second-ranked the trade sector has been slightly declining.  (Figure 3, middle window) 

 

The worsening employment in the trade sector could signify the erosion of consumer spending conditions. 

 

The second-tier job providers have had mixed performances in 2023 (construction, manufacturing, transportation, public administration, administrative, and hotel and food services). Figure 3 (lowest graph)  

 

Figure 4 

The third-tier employers with significant GDP contributions finance, and real estate saw incremental increases over the last few months of 2023.  Add the information sector to this. (Figure 4, upper graph) 

 

V. The Impact of Slowing Employment Gains on the GDP and Consumer Spending 

 

Last but not least is the employment data's potential impact on the GDP.   

 

One, employment rates appear to be peaking in the face of the slowing headline GDP.  (Figure 4, lower chart) 

 

Figure 5

Two, the decline in "real" consumer spending per capita GDP since Q1 2021 has contradicted the rising employment rates. Or the increase in employment hasn't added to the purchasing capacity of the labor force.  (Figure 5, topmost diagram)   

Why has the population been gaining jobs but losing their spending power?  Sure, inflation represents a critical factor.  But why wouldn't businesses and employment suffer from it, too?

Three, the recent plunge in the labor force—due to the surge of non-labor force—could compound the plight of the struggling consumers burdened by inflation. (Figure 5, middle pane) 

 

Too many moochers?  Will they further worsen the nation’s dissaving? 

 

In sum, the October headline employment data likely represents a statistical charade.   

 

It disguised the recent surge in the non-labor force sector that diminished the labor force participation rate.   In turn, the decline in the labor force magnified the employment rate growth.  

 

In any case, slowing universal commercial bank loan growth has coincided with the peak and the current downturn in nominal employment growth.  This should translate to a decaying feedback loop in consumer demand, investment, and employment, which should result in higher credit risks. (Figure 5, lowest chart)  

 

Good luck to those who bought the PSA's employment data as a bullish signal.