The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects

In economics, hope and faith coexist with great scientific pretension and also a deep desire for respectability—John Kenneth Galbraith 

In this issue

The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects

I. 2024 SONA Pump: Are Philippine Stocks and the Peso Immune to Global De-Risking and Deleveraging?

II. The History of BBM's Pre-SONA PSEi 30 Pumps 

III. Explaining the Index Pump: Concentrated Gains and Rotational Activities

IV. 2024 SONA Pumps: Concentrated Trading Activities amidst Decadent Volume

V. 2024 SONA Pumps: Concentration in Broker Activities with Marginal Brokers Squeezed Dry 

VI. More Signs of Liquidity Squeeze: Decaying Market Depth and Weakening Market Breadth 

VII. Divergent Signals from the SONA 2024 Pump: Key Points to Ponder

VIII. 2024 SONA Pump: Foreign Money Cushions Domestic Savings Deficiency

IX. 2024 SONA Pump: Engineered by Domestic Financial Institutions?

X. 2024 SONA PUMP: PSEi 30 at 6,800: Windfall from Liquidity Expansion and Conclusion 

The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects 

As the Philippine President is about to deliver his third SONA, the PSEi 30 has surged for a fourth straight week to 6,800. What makes these gains artificial? 

I. 2024 SONA Pump: Are Philippine Stocks and the Peso Immune to Global De-Risking and Deleveraging? 

The Philippine PSEi 30 closed the week ending July 19th just shy of the 6,800 level. 

Philstar.com, July 20: The local stock market inched its way closer to the 6,800-level, finishing the week on a high note despite a downtrend in Asian shares. The local stock market inched its way closer to the 6,800-level, finishing the week on a high note despite a downtrend in Asian shares… a stronger peso and optimistic economic prospects buoyed local market sentiment… also anticipating the second quarter corporate earnings results. 

In addition to the above, 'strong net foreign buying' contributed to this outperformance. 

Previously, a more prominent explanation had been expectations of rate cuts by the Fed and potential monetary easing by the BSP. 

Financial market news coverage has been mechanically influenced by current events—specifically, the 'availability bias' described in post hoc narratives: because of this event, therefore that. As a result, recent events receive disproportionate attribution and focus. 

However, there seems to be a crucial event missing from this coverage: the political leadership is slated to deliver the annual State of the Nation Address (SONA) on July 22nd, Monday. 

Figure 1 

With a 2.16% advance this week, the PSEi 30 has enjoyed its fourth consecutive weekly winning streak. This weekly gain has propelled the Philippine benchmark to be the second-best performer among its regional peers, following Mongolia’s MSE. (Figure 1, topmost image) 

Remarkably, the PSEi outperformed amidst a prevailing downturn in the Asian market, where 12 out of the 19 national benchmarks closed lower by an average of 0.53%. 

Furthermore, the increased risk appetite for Philippine assets was also reflected in the Philippine peso, which was the only Asian currency to advance this week amidst a strong USD. (Figure 1, middle graph) 

The US dollar index $DXY grew by 0.27% WoW, but eight of the nine regional currencies, excluding Japan, closed lower. 

The USD-Philippine peso $USDPHP retraced by 0.08%, from last July 12’s quote of Php 58.38 to Php 58.335. 

While the yield of the Philippine 10-year bond dived a week earlier, paving the way for its outperformance in the region, it remained unchanged this week as most of the regional peers experienced declines. (Figure 1, lowest diagram)

Figure 2

In contrast, Emerging Asia’s 5-year credit default swap (CDS) exhibited a 520-basis points spike in Philippine CDS (ADB data), indicating that while it comes from a low base, a sustained regional risk-off sentiment could reverse any recent gains. China’s CDS soared by 930 bps. (Figure 2, topmost and middle charts) 

How do the causalities cited by the local media fit into this context? 

The strengthening dollar, falling bond yields, declining stocks, and rising CDS are likely symptoms of de-risking and deleveraging in the face of slowing economies and potential rate cuts. 

Are Philippine stocks and the peso suggesting immunity to this emerging phenomenon? 

II. The History of BBM's Pre-SONA PSEi 30 Pumps

Here is the most important thing the echo chamber has critically missed: 

Since the inauguration of the incumbent President in 2022, the PSEi 30 has enjoyed a series of pre-State of the Nation Address (SONA) pumps. 

The incumbent's previous SONAs were on July 25, 2022, and July 24, 2023. 

From the 6,065.23 trough on June 23, 2022, the PSEi 30 soared to a peak of 6,863.86 on August 19 of the same year, delivering a 13.17% return. (Figure 2, lowest graph) 

The PSEi 30 then surrendered all of those gains and more but found a second post-election honeymoon in October, alongside the UK’s Bank of England (BoE) rescue of its emerging pension crisis, which saw global stocks bottom and reverse to the upside. 

The second SONA pump began on July 7, 2023. It emerged from an interim low of 6,379.03 to reach an interim high of 6,679.13 on July 26, 2023, resulting in a 4.7% return. 

In both instances, the PSEi 30 surrendered all its fleeting gains in no time. 

The third SONA pump came at the temporary bottom of 6,158.48 on June 21, 2024, following the Ayungin Shoal incident. Through July 19th or at 6,791.69, the PSEi 30 has returned by 10.3%. 

How will this time be different compared to its recent predecessors? 

Nota Bene: The SONA pumping cycle doesn’t necessarily end on its actual date, as factors such as momentum and domestic and local liquidity flows may determine its lifespan. 

III. Explaining the Index Pump: Concentrated Gains and Rotational Activities 

Why is it an index pump?

Figure 3

This week's 2.16% gain represents the largest week-before-SONA returns. (Figure 3, topmost chart). The difference between the present and previous environments doesn't provide a relevant comparison or suitable probabilities for making a forecast. For instance, the political-economic landscape of 2009 and 2010 was influenced by the climax of the Great Financial Crisis. 

This week’s gains were once again concentrated on the (free float) market cap heavyweights. 

While it may be true that 20 of the 30 member issues were up this week, the outsized gains of the top 10 issues, which carried an astounding 72% share of the PSEi 30 (as of July 19th), delivered the gist of this week’s 2.16%. (Figure 3, middle graph) 

On average (equal-weighted price change), the weekly return was only .92%. 

The substantial difference between the average and the change in the headline index was principally due to the free float weights. 

And this week’s activities resonated with the last four-week performance. 

Fundamentally, while the PSEi 30 was up 10.3% from June 21st to July 19th, the accrued gains were largely derived from the top 5. 

Again, while 22 of the 30 member issues rose during this period, the average gain was 5.48% indicating the spread caused by distortions of the free float market cap relative to the equal-weighted price change. (Figure 3, lowest visual) 

Moreover, the top 5 issues, which expanded by an average of 15.4%, accounted for most of the 5.5% four-week average growth. 

Figure 4

In addition, the 51.17% pie of the top 5 heavyweights have drifted close to their recent milestone levels, with the index pumps rotating among the heavyweights. (Figure 4, topmost graph)

That is, shifting or rotational pumps from ICTSI to the financial 3 to the other market cap heavies—which presently includes the real estate members! (Figure 4, middle and lowest windows)

IV. 2024 SONA Pumps: Concentrated Trading Activities amidst Decadent Volume

Figure 5

Aside from the incredible pre-closing pumps and dumps contributing to the headline returns, the 2024 version of SONA pumps has emerged against the backdrop of a DETERIORATING mainboard volume! (Figure 5, topmost graph)

As an aside, we omitted posting recent charts of pre-closing massive pumps and dumps to conserve space.

At least there was some volume surge in previous SONA pumps, which is certainly lacking today. And incredibly, little is known about how cross-trades have padded such low-volume pumps.

However, it has not just been the PSEi 30 market cap weightings; the lean trading volume has also been concentrated among the heavyweights.

For instance, the Sy Group's share of the main board volume has been rising in support of the pumps to its shares. (Figure 5, middle pane)

Additionally, the volume share of the top 20 traded issues accounted for 83.6% over the 4-week period, slightly higher than the 83.1% year-to-date. This means that less than 20% of the volume has been dispersed among the other 264 listed companies. Duh!

The PSE noted that there are 284 listed firms as of the second quarter. 

V. 2024 SONA Pumps: Concentration in Broker Activities with Marginal Brokers Squeezed Dry

More to this point:

Although the overwhelmingly dominant share of the top 10 brokers decreased from 59.16% YTD to 57% in the four-week SONA pump, the number of total active participating brokers fell to its lowest level (since I began plotting it). (Figure 5, lowest image)

This means that while transactional volume has spread to a wider scope of brokers, which is good news, the plunge in the active share of participants implies that current conditions have squeezed the marginal brokers, which is bad news.

The PSE also noted that there are a total of 122 active brokers in their Second Quarter Report. 

Could this be confirmation of our prediction that a large segment of marginal brokers will become extinct soon?

And the above data reveals the extent of concentration of trading volumes and trading participants to an elite cabal, who are likely managing the PSEi 30 levels.

VI. More Signs of Liquidity Squeeze: Decaying Market Depth and Weakening Market Breadth

Figure 6

Naturally, the insufficiency in volume and market depth translates to the underperformance of market breadth.

While this week's market internals showed advancing issues marginally higher by 53 against declining issues, from the June 21st low to the present (SONA pump 2024), decliners remained ahead of advancers 1,924 to 1,888, a spread of 36 in favor of decliners.

This means that the headline performance has starkly diverged from the PSE universe. Incredible.

Another likely indicator of general market sentiment is the participation level of traded issues.

Unlike in the prior SONAs where the number of traded issues saw slight increases, we have been witnessing the opposite in the present conditions—a contraction!

The decreasing rate of average daily traded issues accentuates the ongoing liquidity squeeze at the PSE.

Other measures, such as the average daily number of trades and the average daily volume per trade, exhibit the same worsening liquidity drought.

VII. Divergent Signals from the SONA 2024 Pump: Key Points to Ponder

Yet, for prudent investors, here are some critical points to ponder:

-How can this be a bullish sign when the 10% increase in the Index has been accompanied by a drought in volume supported by stagnant participation and decaying breadth?

-Why would the increasing concentration of the index, trading, and market activities not signify an INCREASING risk to financial stability?

-How could the ARTIFICIAL embellishment of the index signify a bullish sign?

Lastly, why and how would these orchestrated campaigns to impose price distortions not magnify increasing imbalances and malinvestments in the PSE, the local capital markets, and the economy?

VIII. 2024 SONA Pump: Foreign Money Cushions Domestic Savings Deficiency

What is the source of financing for the SONA pump?

In essence, savings or credit are the sources of investments (real or financial).

Under the classical gold standard, credit represents the savings of another individual, intermediated by depository institutions.

Under the current fiat money, the US dollar standard, credit can account for "money from thin air."

How has the PSE's low volume signified a sign of increased savings? Or has institutional money been tapping credit for the SONA pump?

Or has the PSEi 30 been reliant on foreign savings and leverage (carry trades)?

PSE data provides some clues:

True, aggregate foreign money flows surged to PHP 2.8 billion this week, the largest since May 17, 2024. 

However, the degree of flow has failed to boost the PSEi 30 during the SONA pump in 2023 and may represent a temporary dynamic today.

As it stands, in the world of global financialization, foreign money flows may account for fund flows by affiliates or subsidiaries of PSE-listed firms registered abroad and offshore firms of allies and colleagues, rather than from money managers in search of higher returns.

These fund flows may be used to artificially inflate statistics to show increased interest by foreigners "to paint the tape."

In any case, while foreign flows cushioned the ongoing decline in trading volume this week, these inflows accounted for a mere PHP 93.6 million from the June 21st trough. 

The spike in this week's flows reveals that foreign flows have largely been absent in the previous three weeks, and it is likely that the 2024 SONA pump has been engineered by domestic financial institutions. 

Our guess: Could this partly be the handiwork of the Maharlika Sovereign Wealth Fund and other government financial institutions? 

More importantly, despite foreign flows, trading volume remains in the doldrums, exposing only the deficiency in savings. 

Yes, the Philippine Statistics Authority declared an increase in gross savings in 2023. However, the broader picture tells us a different story: a marginal rebound following a collapse. 

Yet, questionably, this savings data is determined by GDP! 

IX. 2024 SONA Pump: Engineered by Domestic Financial Institutions?

There are clues pointing to this possibility. 

The SONA pumps may involve Other Financial Corporations (OFCs). 

For instance, according to BSP data covering Q3 2023: "Based on preliminary results of the Other Financial Corporations Survey, the domestic claims of the other financial corporations grew by 2.4 percent in Q3 2023… the other financial corporations’ claims on the other sectors, particularly the private sector, grew as the sector extended more loans to households and increased its holdings of equity shares in other nonfinancial corporations" (bold added)

Figure 7 

Claims on the private sector surged at the end of Q2 2023 going into Q3 2023. (Figure 7, topmost graph) 

Did flows from the OFCs account for the SONA 2023 pump? 

What about in 2022? 

While the Q3 2022 data was silent on claims on the private sector, the reversal from outflows in Q2 2022 could have been indirectly responsible for the June to August 2022 SONA pump, which delivered a 13% gain. 

X. 2024 SONA PUMP: PSEi 30 at 6,800: Windfall from Liquidity Expansion and Conclusion

Furthermore, signs of accelerating liquidity growth could extrapolate to money diffusion into the PSEi 30, channeled through orchestrated or engineered asset pumps. 

May's fourth largest public spending, possibly representing an early-stage distribution of liquidity from the pre-Election "Marcos-nomics stimulus," may also have been used by banks and non-bank financial institutions for the 2024 SONA pump. 

This has a precedent. 

An uptrend in the growth of cash in circulation financed the previous national (Presidential) elections, which percolated into the pumps of SONA 2022 and the 2022 post-election stock market honeymoon. 

Another factor was the spillover from the historic PHP 2.3 trillion liquidity injections in 2020-2021 by the BSP to rescue the banking system—which was sold to the public as benefiting the economy. 

An uptick in the growth of cash in circulation from April to October 2023 also supported the 2023 SONA and the Q4 2023 rally in the PSEi 30. 

How does this apply to the present? 

May 2024's cash in circulation growth of 6.1% represents the highest level since December 2022, which fund flows have likely spurred this SONA 2024 pump. (Figure 7, middle image) 

It is unsurprising that a substantial part of liquidity growth has been partly funded by bank credit expansion. 

Universal Commercial Bank lending growth, which may have been used to finance pre-election spending in 2021-2022, has been manifested in the pumps of SONA 2022 and the post-election honeymoon. And its reduced growth may have depressed the returns of the SONA 2023 pump. (Figure 7, lowest chart) 

Finally, the accelerating UC bank lending growth from Q4 2023 to the present has been instrumental in financing the 2024 SONA pump. 

As previously explained, though disinflation could prevail in the interim due to the slowing real economy, supported by the rise in non-performing loans (NPLs), which may constrain the uptrend in bank lending, sustained increases in deficit spending should put a floor on inflation. 

A resurgence of inflation, which should cap interest rate cuts, will further expose imbalances and malinvestments resulting from all these orchestrated attempts to create an artificial economic and financial boom through credit expansion, price manipulation, and statistical artifices. 

Although the political leadership did not explicitly mention the stock market to boost his political capital during the previous SONAs, the message—implying "strong earnings growth ", "optimistic economic prospects", a "stronger peso," and so on—represents the commonplace conveyance by institutional mouthpieces in explaining the recent spike in the PSEi 30. 

However, when everything goes off the rails, it has to be either the US Federal Reserve or something foreign, but hardly ever local affairs (attribution bias). 

QED.  

Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth

 

The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance— Taylor Caldwell, (often misattributed to Marcus Tullius Cicero) 

In this issue

Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth  

I. The Radio Silence on Last Week’s Collapse of the Philippine Treasury Yield Curve

II. What a Bullish Flattener Implies

III. How Rate Cuts Could Affect the Health of the Philippine Banking System

IV. Mounting Economic Fragility: Higher May Unemployment Rate and the Rising Dependence on Government Jobs

V. Mounting Economic Fragility: Elevated Trade Deficit, Softened FDI Flows in April, and Stagnant Manufacturing Sales

VI. "Marcos-nomics stimulus:" The Turbocharging of Pre-Election Liquidity Growth  

Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth

The collapse in the yields of the Philippine Treasury Markets highlights the BSP's upcoming rate cuts, which, along with May's spending and liquidity growth spike, represents the "Marcos-nomics stimulus."

I. The Radio Silence on Last Week’s Collapse of the Philippine Treasury Yield Curve

Last week, significant developments in the Philippine treasury markets went largely unreported by the media and the echo chamber. Despite this, the implications of these changes are significant for the country's economy.

Figure 1

One. T-bill rates remained steady, while yields on Philippine notes and bonds plunged, deepening the "bullish flattening" process that we have been pointing out. (Figure 1, topmost window)

Two.  The entire Philippine treasury curve has traded below the Bangko Sentral ng Pilipinas' (BSP) overnight reverse repurchase rate (ON-RRP). (Figure 1, middle image) 

Figure 2

Three.  The steep drop in 10-year Philippine treasury notes last week was the most pronounced in the (ASEAN) region, even surpassing the recent declines seen in US Treasury counterparts. (Figure 1, lowest diagram, Figure 2, upper graph)

In essence, treasury traders have reinforced indications that the BSP is preparing to lower rates.

You heard this first here.

II. What a Bullish Flattener Implies

Yet, a bullish flattener can be seen as a sign of different things depending on the context.

In the BSP’s latest Financial Stability Report (FSR), a bullish flattening curve represents "Longer-term outlook is improving and investors price-in lower rates. This gives the central bank room to lower the policy rate" (BSP, 2023)

For Wellspring Financial Advisors, "We have historically seen bull flattening leading into a recession. This can often happen because of a flight to safety trade and/or a lowering of inflation expectations " (Bruss, 2023)

Last we noted that "T-bill rates have been coming off their recent highs, and the narrowing of the treasury curve or a "bullish flattening" has highlighted weaker inflation and slower GDP growth, supporting the BSP's desired rate cuts" (Prudent Investor, 2024)

The point is, while not a direct indicator of economic conditions or inflation, the treasury yield curve provides a crucial insight depending on prevailing economic and financial circumstances.

Nonetheless, the following factors may be relevant to the present conditions:

First, the fact that rates have been tumbling translates to the treasury markets expecting an easing of monetary policy. Rate cuts can only be justified by diminishing inflation rates.

Second, lower inflation expectations increase the demand for longer-term securities. (ceteris paribus)

Third, it could also signify slowing economic growth or increasing risk aversion (even flight to safety).

Fourth, it may imply accruing imbalances in the supply and demand for Philippine treasuries.

III. How Rate Cuts Could Affect the Health of the Philippine Banking System

How will this affect the banking system?

One. The illusion of debt-financed spending utopia.

While lower rates could boost the GDP in the immediate term through increased credit expansion, allowing for expanded financing of Keynesian desired spending, this is contingent upon the capacity of balance sheets to absorb higher leverage.

For instance, unlike in 2008-2017, the serial BSP rate cuts in pre-pandemic 2019 haven’t exactly bolstered bank lending, which in contrast, declined due to the scourge of hidden NPLs. (Figure 2, lower pane)

Only the BSP’s historic Php 2.3 trillion liquidity injections backed by the unprecedented relief measures reversed it in 2021.  

Powered mostly by consumer loans, universal commercial bank lending soared by 10.2% in May 2024—the strongest growth since March 2023.

Much of the current strength in bank lending is due to 'refinancing' or debt 'rollovers,' which is why the Consumer Price Index (CPI) remains subdued.

Ironically, the establishment brands this debt expansion as 'restrictive.' Incredible.

In the absence of this vigorous credit expansion, think of what would happen to inflation and GDP.

The thing is, spending will be determined by balance sheet conditions over time, rather than just rates alone.

Two. A temporary boost on investments.

With surging fixed-income prices, it may also boost the banking industry’s investment side of the balance sheets.

Figure 3

It may also temporarily lower the industry’s camouflaged mark-to-market losses in the context of held-to-maturity (HTM) assets. (Figure 3, topmost chart)

However, HTMs showed minimal improvement when 10-year yields plummeted in 2022-2023, confirming the trend observed from 2019 to 2022, where a crash in rates resulted in negligible progress for the bank’s HTM assets.

Three. An adverse impact on the bank’s interest margins.

Furthermore, the narrowing bond spreads should also lead to tighter interest margins for banks as the 2019-2020 experience showed, which means lesser incentive to lend. (Figure 3, middle graph)

Lastly, falling rates expose disguised credit risks.

During 2019-2020, the BSP rate cuts were in response to mounting pressures from credit delinquencies in the banking system. While the pandemic recession exacerbated the situation, BSP's comprehensive measures—combining rate cuts, liquidity injections, and various relief efforts—masked the true extent of NPLs. (Figure 3, lowest pane)

Despite some of these relief measures and subsidies in place, the recent resurgence of NPLs have been pressuring the BSP to consider such rate cuts.

Figure 4

In short, the BSP rate cuts would whet the speculative appetite of banks and financial institutions for "investments," while reducing their core "lending" operations (similar to the rate cuts of 2019-2020) (Figure 4, topmost image)

Most importantly, higher interest rates have exacerbated the servicing costs associated with record-high levels of public debt, indicating a potential reduction in GDP growth driven by lower public spending over time.

IV. Mounting Economic Fragility: Higher May Unemployment Rate and the Rising Dependence on Government Jobs

Despite its ever-shifting or ambivalent stance, the BSP has been advocating for lower rates. Several economic data released last week help explain this push.

Firstly, despite the recent record-high employment rates, labor markets continue to face challenges.

While the unemployment rate rose from 4% in April to 4.1% in May, this increase was primarily due to a rise in the labor force participation rate. The employed population actually increased by 510,000 month-over-month (MoM), but a larger increase in the labor force by 576,000 led to an uptick in the unemployment rate. (Figure 4, middle visual)

However, a broader analysis reveals emerging tensions in labor participation rates. 

It seems odd to see a job boost in the investment-starved agricultural sector reportedly suffering substantial losses from El Nino. Yet, the government bannered Php 9.6 billion in investment gains this month (mostly from the elites). 

Furthermore, the government was the largest contributor to job gains. Aside from construction jobs stemming partly from government infrastructure projects (including PPPs), the government and defense sectors saw significant gains in both May and March. (Figure 4, lowest chart) 

Even assuming its accuracy, this data provides clues as to why consumers have been struggling, contradicting the headline trend of "full employment." 

V. Mounting Economic Fragility: Elevated Trade Deficit, Softened FDI Flows in April, and Stagnant Manufacturing Sales 

Next, external trade retraced much of its April advances in May.

Figure 5

Import growth fell from a 13.01% increase in April to a negative 0.03% in May, primarily due to an 11.5% plunge in capital goods imports, while consumer goods imports only rose by a meager 0.42%. Capital and consumer goods accounted for 25.6% and 19.6% of the total share, respectively. (Figure 5, topmost pane)

Export growth also dived from a 27.9% growth spike in April to a 3.08% contraction in May. 

While Artificial Intelligence (AI) has boosted global semiconductor trade, with exports increasing by 19.3% year-over-year (YoY) and 4.1% month-over-month (MoM) in May, Philippine semiconductor exports saw an incredible collapse from a 30.7% YoY growth spike in April to a 13.3% contraction in the same month! Microchip exports accounted for 43.4% of the total share. (Figure 5, middle graph) 

Thirdly, despite periodic junkets by the leadership, which reportedly led to significant investment pledges from key geopolitical partners like the US and NATO, April's Foreign Direct Investments (FDI) fell by 36.9%, but overall YTD growth was up still 18.7%. Debt made up significant proportions of both April's and YTD FDIs: 73.2% and 63.5%, respectively. What happened to these investment promises? (Figure 5, lowest chart) 

Also, debt-driven FDI flows do not automatically translate into 'investments' and could serve other purposes. Some might declare it as such to the government to avail of incentives. 

Lastly, FDI flows exhibit a downtrend.

Figure 6

Finally, domestic manufacturing remains stagnant, with production values and volumes increasing by 2.2% and 3.2% respectively in May (YTD: -0.1% and +0.9%). However, these gains may be offset by declining sales values and volumes, which saw decreases of -1.5% and -0.3% in May (YTD: -1.4% and -0.3%). (Figure 6, topmost graph) 

Imports have partially filled the slack in domestic production, which is the essence of the trade deficit. 

Overall, weak imports and a manufacturing stupor manifest a fragile domestic demand. 

In a nutshell, despite optimistic projections by the echo chamber, even government data suggests a critical shortage of investments and an increasing dependence on debt supporting the real (not statistical) economy.  

Moreover, deepening dependence on the government to stimulate GDP growth, evidenced by near-record "twin deficits," could lead to heightened inflation, higher future taxes, and magnified reliance on external debt. (Figure 6, middle chart)

It is not helpful when the establishment confuses the GDP with the overall economy, for the simple reason that the GDP has been skewed to reflect the growth of the government and the elites—the "trickle-down syndrome." 

VI. "Marcos-nomics stimulus:" The Turbocharging of Pre-Election Liquidity Growth

Could the public spending spike observed in May 2024 signify a potential precursor to a "Marcos-nomics stimulus" program? 

Meanwhile, infrastructure, public defense-related projects, pre-election expenditures, and bureaucratic spending were likely funded by the national government, which saw a 22.3% spike in disbursements in May. 

This contributed to a 14.8% surge in national government spending over the first 5 months, reaching an all-time high nominal level of Php 1.443 trillion! 

So if we are not mistaken, "Marcosnomics" will be heavy on political expenditures but sold to the public as a "stimulus." (Prudent Investor, 2024)

May 2024 marked the fourth highest spending on record, which significantly boosted the BSP’s principal measure of liquidity, M3, to 6.5%, a six-month high.

Figure 7

A substantial portion of this liquidity growth stemmed from cash in circulation, which surged to its second-highest level on record, surpassing the zenith of December 2022. (Figure 7, topmost image) 

Traditionally, December has been the peak for M3 annually. However, this time could be different. If May’s spending trend continues, nominal cash levels may surpass the historic highs of December 2023 even before year-end! 

May’s cash growth rate of 6.1% YoY was the highest since December 2022’s 7.6%. 

For want of doubt, the administration has begun injecting large amounts of cash into the financial system. 

Together with the accelerating growth in the banking system’s loans, the BSP’s net claims on the central government (NCoCG) surged by 89.21% in May, while the bank's NCoCG slowed to 12.2%. (Figure 7, middle graph) 

This combined financing of government deficit spending and private sector borrowing or formal credit expanded by 9.44% to a record Php 27.02 trillion in May! 

And yet, all we can hear from the consensus is that this represents a “restrictive environment!” 

The thing is, if May’s deficit spending-driven liquidity growth will be sustained, it should put a floor on the present private sector-powered disinflationary impulses—with a time lag. 

The Philippine treasury markets have signaled that the BSP may be about to confirm the unannounced "Marcos-nomics stimulus" with upcoming rate cuts. 

However, such stimulus could also reinvigorate the third wave of the incumbent inflation cycle. (Figure 7, lowest chart) 

Stay tuned.

___ 

References

FINANCIAL STABILITY COORDINATION COUNCIL, 2023 FINANCIAL STABILITY REPORT December 2023, p.35 bsp.gov.ph

Kevin Bruss Steepening and Flattening of the Yield Curve, Wellspring Financial Advisors, August 10, 2023; wellspringadvisorsllc.com

Prudent Investor, June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'? July 7, 2024

Prudent Investor, Could the Philippine Government Implement a 'Marcosnomics' Stimulus Blending BSP Rate Cuts and Accelerated Deficit Spending? Substack.com June 30, 2024

 

The PSEi 30 6,500 Enigma: A Closer Look at the Widening Gap Between PSEi 30 and Market Internals

 The house of delusions is cheap to build but drafty to live in, and ready at any instant to fall—A. E. Housman

The PSEi 30 6,500 Enigma:  A Closer Look at the Widening Gap Between PSEi 30 and Market Internals

Along with the rise in global risk appetite, the Philippine PSEi reached 6,500 but its market internals told a different tale. 

The prospect of easy money has whetted the speculative appetite of the global financial markets.

With the US dollar index down by 0.92% this week, it spurred a rally in the currencies and stock markets of the Asia-Pacific region.

Figure 1

Five of the nine ex-Japan Asian currencies rose, led by the Thai baht (THB), Indonesian rupiah (IDR), and the Singapore dollar (SGD). The Philippine peso  (PHP) increased by 0.14%. The heightened speculative fervor was apparent in the region's stock markets. (Figure 1, upper window)

Seventeen of the 19 national bourses in the Asia-Pacific region jumped by an average of 1.43%. China's SSEC and Sri Lanka's Colombo were the only laggards. (Figure 1, lower chart)

Meanwhile, five of the national bourses set fresh all-time highs for the week: Japan, India, Taiwan, Mongolia, and Pakistan.

Simultaneously, the Philippine PSEi 30 marked a second straight weekly gain. 

However, there is an idiosyncratic story behind the PSEi 30’s surge.

Figure 2

This week's advance brought the PSEi 30 back into positive territory year-to-date (+0.66%). 

But gainers were in the minority, with 14 of the 30 members closing higher. Four of the five biggest market cap issues were the focal point of this week's advance. (Figure 2, topmost pane)

Ironically, the average weekly return was only 0.12%, indicating that on an equal-weighted basis, the overall performance was subdued due to balanced upside and downside returns from its members. 

Market breadth in the PSE was slightly negative, with decliners leading advancers for the second consecutive week. (Figure 2, second to the highest image)

Though mainboard volume fell by 23.1% to Php 3.69 billion, the top 10 brokers still controlled a significant majority, averaging 57% of it. (Figure 2, second to the lowest diagram) 

Further, the top 20 traded issues represented 86.1% of the mainboard transactions. (Figure 2, lowest chart) 

All this illustrates the skewed nature of trading activities where institutional players have been propping up the headline index. 

Figure 3

This week’s pump led by ICTSI (+2.92%) has elevated its free float market cap to its highest level. (Figure 3, topmost chart) 

Pumps in BDO (+8.3%) and SM (+2.35%) have also boosted the top 5's free float cap to 50.5%.  BDO ranked third after SM and ICT in terms of free float market cap. 

The share of the top 5’s free float market cap jumped to 50.5%. 

Incidentally, end-session pumps and dumps were comparatively insignificant compared to previous weeks.

Figure 4

In any case, however one slice or dice it, the slack in volume remains the principal factor behind the nearly decade-long drought in returns.

June's gross volume reached a low not seen since 2010, while the first semester's gross volume plummeted to 2011 levels. (Figure 4, topmost and middle charts) 

It is no coincidence that the declining PSE volume has coincided with the banking system's liquidity metric: cash-to-deposit ratio. (Figure 4, lowest graph)

Despite all the constant yelling by the mainstream of statistical hypes, which have been labeled as G-R-O-W-T-H, the PSEi 30 remains one of the region's laggards, which are likely symptoms of capital and savings consumption.

And notwithstanding the perpetual cheerleading, the echo chamber has still been silent about the mounting risks from debt, leveraging, inflation, and various forms of misallocations and malinvestments. They’ve been reticent about the mounting risks of war too! 

Aside from the distortion from the BSP's policies, institutional pumping remains a significant factor behind this bear market. 

Or, the result of such organized pumps is to magnify pricing imbalance by inflating their share prices relative to their natural income streams and distorting capital prices, resulting in the amplification of the misallocation of resources in the real economy.

Figure 5

In the end, besides political objectives (e.g. rising stocks = resilient economy = good governance), another reason could be to prevent the PSEi 30 from sliding into a death cross, potentially prompting further and deeper scale of foreign selling (as in the past). Figure 5

It's worth noting that despite the obvious shift to a wartime economy, which comes at the expense of the market economy, authorities and the mainstream prefers the general public to remain complacent, assuming that everything will remain hunky dory or stable. 

In doing so, authorities can continue accessing public savings to fund their militant political projects (boondoggle) and exercise centralized control over the economy, with institutional cronies acting as their facilitators.  

Bubbles eventually burst. 

June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'?

 

The current political status quo, however, is built around protecting investors—rather than the taxpayers who ultimately pay all the bills—from risk. This method of turning debt into inflation is attractive to governments and their Wall Street enablers because it shifts the burden of runaway spending to ordinary savers and consumers who pay the real price of de facto inflationary default through price inflation, unaffordable homes, stagflation, and falling real wages—Ryan McMaken 

In this issue

June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'?

I. Global Central Banks Predominantly on an Easing Trajectory

II. The BSP’s Programming of the Inflation Narrative via the Confirmation Bias

III. Widening Inequality: Headline CPI vs. Bottom 30% CPI Hits 22-Year High!

IV. June’s Demand Side Disinflation: Non-Performing Loans Surge in May

V. Escalating Deficit Spending as a Floor on the CPI; Will Belated Rate Cuts Sow the Seed of the Next Wave of Inflation?

June CPI’s Decline Reflects Demand-Side Slowdown: Will the BSP Join Global Peers in Easing Policies, and Will the Government Pursue 'Marcos-nomics Stimulus'?

The decline in June CPI was broad-based and signifies primarily a demand-side factor. And with global central banks on an easing spree, will this and deficit spending anchor the "Marcos-nomics stimulus"?

I. Global Central Banks Predominantly on an Easing Trajectory

Figure 1

Easy money policies have made a dramatic comeback, and charts reveal that global central banks have been reinforcing the market's propensity for leveraged speculative activities.

For the first time since October 2020, the Bank of America (BofA) reports that there were zero rate hikes from central banks last June. (Figure 1, topmost and middle charts)

Ironically, even as inflation has yet to be fully contained or subdued, this aggregate easing trajectory reinforces the path dependency of authorities, primarily in support of the swelling of government control of the economy channeled through the rapid expansion in deficit spending (partly via the war economy), boosting asset prices which serve as collateral, and the backstopping of systemic leveraging (debt expansion).  

In the same vein, the uptrend in US government deficit spending should serve as a template for the world. (Figure 1, lowest image) 

In the Asian region, governments like Thailand (USD 13.5 billion for household debt relief), South Korea (USD 18 billion for Micro Businesses), and Indonesia (USD 28 billion-Free Meal for schools) have been rolling out various forms of politically targeted subsidies in "support of the economy." 

II. The BSP’s Programming of the Inflation Narrative via the Confirmation Bias 

The Philippine June CPI data illustrates such conditions from the lens of the Philippine political economy. 

Business Times/ Reuters July 5, 2024: PHILIPPINE annual inflation was at 3.7 per cent in June, easing from the previous month on a slower increase in utility costs, the statistics agency said on Friday. The rate, which was below the 3.9 per cent forecast in a Reuters poll, brought the average reading in the six months to June to 3.5 per cent, within the central bank’s 2 to 4 per cent target range. The Philippine central bank said inflation was expected to have settled between the 3.4 to 4.2 per cent range in June. 

This outlook represents an update of our June 10th post, predicting the temporary peak of the recent bounce in inflation.

Firstly, the Bangko Sentral ng Pilipinas (BSP) exercises significant control over the inflation narrative.

Before releasing the Consumer Price Index (CPI) data, the BSP projects a path that serves as the basis for consensus estimates, representing the survey's "normal distribution."

While media outlets focus on the BSP's annual targets when reporting CPI numbers, the public often overlooks the deviation of the consensus median estimate from the actual outcome. It also discounts their flawed predictive track record.

The selective attention from the "pin the tail on the donkey" approach perpetuates "confirmation bias," reinforcing the public's preconceived notion that authorities have complete control over the economy.

III. Widening Inequality: Headline CPI vs. Bottom 30% CPI Hits 22-Year High!

Next, authorities bask in the glow of reported slowdown in inflation, they quickly claim credit or take a victory lap.

Inquirer.net, July 5, 2024: The lower inflation rate registered in June — at 3.7 percent — is proof that the administration’s economic policies have been effective, House of Representatives Speaker Ferdinand Martin Romualdez said on Friday.

However, few notice that data from the Philippine Statistics Authority (PSA) reveals a different story—this includes officials. 

In fact, it shows that inflation has had an adverse impact on households at the bottom 30%, leading to a widening inequality gap.

Figure 2 

The gap between the national CPI and the CPI of households in the bottom 30% has surged to its highest level since the post-Asian crisis in 2002! (Figure 2, topmost graph) 

While the bottom 30% buys goods at the same prices from the same stores as everyone else, their higher inflation rate highlights the disproportionate loss of purchasing power against goods and services.

The slowdown in the statistical inflation rate has barely alleviated conditions, affecting not only the lowest-income households but also average households, while elites benefit from direct access to the formal banking system and capital markets to safeguard their assets.

Evidence?

Including government external borrowings, FX deposits in Philippine banks have soared to Php 3.324 trillion in May 2024, marking the third-highest level recorded, in tandem with the surging US dollar-Philippine peso pair. (Figure 2, top and middle windows) 

Given the low penetration levels of formal finance and financial literacy, this surge in FX deposits could be interpreted as FX "speculation" by elites and upper echelons of households within the BSP’s jurisdiction. 

Amazing, right?

IV. June’s Demand Side Disinflation: Non-Performing Loans Surge in May

Authorities may view the slowing inflation rate as an accomplishment, but the easing of the CPI is likely to slow further for several politically unpalatable reasons:

Figure 3

One. The PSA's CPI month-on-month rate continues to decline, in contrast to its strengthening which had backed the previous uptrend in the CPI. (Figure 3, upper chart) 

Two. Outside of food CPI, there has been a sustained moderation of the Core (non-food and non-energy inflation) which posted a steady 3.1% in June. Importantly, prices have been falling across the board. Paradoxically, food inflation has been moderating globally. (Figure 3, lower diagram)

Figure 4 

Three. Philippine treasury traders have bet against inflation. T-bill rates have been coming off their recent highs, and the narrowing of the treasury curve or a "bullish flattening" has highlighted weaker inflation and slower GDP growth, supporting the BSP's desired rate cuts. (Figure 4, top and bottom charts)

Four. While the slowing inflation rate has been perennially sold to the public as a supply-side phenomenon, the real story is that this represents a demand-side downturn. 

For instance, in June, we pointed out the surge in consumer credit card and salary loan non-performing loans (NPLs) in Q1 2024. These NPLs have now surfaced to the "core" from the "fringes." 

Businessworld, July 5, 2024: THE BANKING INDUSTRY’S nonperforming loan (NPL) ratio soared to a near two-year high in May, data from the Bangko Sentral ng Pilipinas (BSP) showed. The Philippine banking industry’s gross NPL ratio rose to 3.57% in May from 3.45% in April and 3.46% a year ago. This matched the 3.57% ratio in July 2022. It was also the highest in 23 months or since 3.6% in June 2022.

The BSP data on the banking system’s selected performance indicators confirm our view that the accelerating accounts of consumer borrowings (and businesses) have been used to roll over or refinance existing record debt rather than for consumption.

Therefore, refinancing has been used by the banking system to conceal the mounting liquidity and solvency issues that are plaguing it. 

We are oblivious to the actual numbers of "zombie" institutions, which survive by constantly rolling over debt and remaining afloat solely through the accumulation of debt. 

Aside from relief measures and regulatory subsidies, the banking system continues to accumulate imbalances, exacerbated by the BSP's pseudo "tightening" policies, which are actually easy money policies. 

In reality, the BSP cannot afford to "tighten" as it did in 2018, as it would risk triggering a domino effect or contagion due to the growing liquidity and solvency issues. 

The Philippine economy and financial system have been gradually devolving into a Ponzi finance-economy. (Prudent Investor, 2024)

Figure 5

Aside from the historic high of held-to-maturity (HTM) assets, rising non-performing loans (NPLs) could exacerbate liquidity tightening in the banking system and exert pressure on banks' accounting profits. (Figure 5, topmost chart)

Loan growth in the banking system has declined in similar fashion to 2018-19, with NPLs on the rise following rate hikes from the increase in the CPI.  (Figure 5, middle and lowest graphs)

Rising NPLs would not only slow loan growth but also negatively impact banks' investment portfolios, increase credit risks, and deteriorate asset quality, ultimately affecting capital conditions. 

While the BSP has employed various regulatory and liquidity measures to disguise the decaying conditions in the banking system, eventually, the chickens come home to roost or these measures will eventually prove ineffective.

Figure 6

Haven’t you noticed? Banks have been increasing their borrowings from the public. While they market these as 'green' or 'sustainable' bonds to piggyback on politically favored themes, they are essentially debt. 

At Php 1.398 trillion, the banking system's outstanding bills and bonds have nearly reached Php 1.44 trillion—levels similar to those seen in 2019 (pre-pandemic). (Figure 6, upper diagram) 

Of course, everyone calls this "sound banking"…until it isn’t. 

The government will release labor data tomorrow, on July 8th. 

Other economic sensitive data, such as external trade and manufacturing, have yet to be released. 

Nonetheless, the S&P Global PMI reported a softening of the manufacturing conditions last June. (bold added) 

The first half of 2024 ended with a further improvement in operating conditions across the Filipino manufacturing sector, as per the latest PMI® data by S&P Global. Output and purchasing activity rose at accelerated rates. However, June marked a notable slowdown in new orders growth. Moreover, manufacturing companies in the Philippines continued to reduce their backlogs, and further trimmed back their staffing levels. Turning to prices, despite a fresh rise in cost burdens, the rate of input price inflation remained weaker than that seen historically. Meanwhile, charges were raised at a softer pace in June. The headline S&P Global Philippines Manufacturing PMI – a composite single-figure indicator of manufacturing performance – fell to a three-month low of 51.3 in June, from 51.9 in May. (S&P Global, July 2024) 

The Philippine PMI seems to have been plagued by a "rounding top." (Figure 6, lower image) 

A slowdown in credit usage by businesses and households will likely exert downward pressure on inflation and GDP.  

V. Escalating Deficit Spending as a Floor on the CPI; Will Belated Rate Cuts Sow the Seed of the Next Wave of Inflation?

On the other hand, inflation could find a floor from the ramping up of deficit spending. 

May's expenditure was historic as it almost reached the three-year streak of record-breaking December levels. 

For instance, the Philippine government proposes to import costly fighter jets, which, if pursued, would swell trade deficits and increase the need for external borrowings, potentially further weakening the Philippine peso. Instead of pursuing this path, it might be more effective to focus on resolving territorial disputes via negotiations. 

It's as if these jets would make a significant difference in deterrence and actual combat. 

Figure 7

Nevertheless, helped by May's expenditure-driven budget deficit, May’s public debt soared by 8.9% YoY and 2.2% MoM to a record Php 15.35 trillion in May.

The all-time high in public debt was primarily fueled by a surge in foreign debt (up 8.8% YoY and 4.2% MoM) that spiked its share of the total from 31.4% to 32%. (Figure 7, topmost graph) 

It is no surprise that public debt dynamics are correlated with the USD/Philippine peso exchange rate, as well as with the CPI. (Figure 7, middle image) 

Alongside the transformation of the banking system's business model towards consumer spending, the trickle-down "spending one’s way to prosperity" economic development paradigm focuses on centralizing the economy via the credit-financed record savings-investment gap, channeled through the "twin deficits." This translates to an increasing reliance on foreign savings. 

Subsequently, the deepening reliance on credit increases the incentives for the BSP to ease its monetary policies. 

This also implies that the USDPHP rate is driven nearly entirely by the policy path, as confirmed by data, rather than monetary policy differences between the Fed and BSP. 

With global central banks easing, the BSP can justify its shift to an accommodative stance. 

And as noted earlier, the BSP easing and increased public spending in support of GDP growth could signify the "Marcos-nomics stimulus." 

In light of this, the Philippines would most likely join the ranks of its neighbors in throwing down the gauntlet of stimulus. 

It wasn't until a single 100-basis-point rate cut that the CPI began to rise, accelerate, and sow the seeds of the present 9-year CPI trend. (Figure 7, lowest chart) 

Are we witnessing a repetition of the inflation cycle? 

___

References 

Ryan McMaken, Three Lies They’re Telling You about the Debt Ceiling May 23, 2023, Mises.org 

Prudent Investor, Has the May 3.9% CPI Peaked? Are Filipinos Really Spending More On Non-Essentials? Credit Card and Salary Loan NPLs Surged in Q1 2024! June 10, 2024  

S&P Global, Production growth sustained, although underlying demand trends soften S&P Global Philippines Manufacturing PMI July 01, 2024 PMI.SPGLOBAL.com