The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

Doom-loops don't occur in isolation: they interact with each other, reinforcing each other. Attempts to suppress one doom-loop by papering over the unwelcome reality accelerate other doom-loops—Charles Hugh Smith 

In this short issue 

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

I. July’s CPI Momentum Accelerates

II. July Headline and Core CPI’s Diametric Paths 

III. Philippine Treasury Market Defied the July CPI Data

IV. Government Monetary and Deficit Spending Policies as Primary Determinant of Inflation

V. Stagflation Ahoy! Bottom 30 CPI Exhibits Inflation’s Broadening Inequality

The Philippines' July 4.4% CPI: Stagflation Remains a Primary Political, Economic, and Financial Risk

Not only inflation, but stagflation remains a principal risk to the Philippine political, financial, and economic landscape

Inquirer.net, August 6, 2024: Headline inflation in July reached its highest rate in nine months, driven by higher price increases in housing, water, electricity, gas and other fuels, transport items, and food and non-alcoholic beverages, the Philippine Statistics Authority (PSA) reported on Tuesday. Preliminary data from the agency showed the consumer price index grew by 4.4 percent year on year in July, accelerating from the 3.7 percent in June, but slower than 4.7 percent in the same period last year…Inflation print in July marked the fastest growth in nine months or since the 4.9 percent logged in October 2023.  

Some observations from the July CPI Data:  

I. July’s CPI Momentum Accelerates

Figure 1

First, a greater than 0.5%—but less than 1%—spike in the Month-on-Month (MoM) growth rates has typically been a harbinger of a sustained uptick in the Headline CPI Year-over-Year (YoY). July’s MoM rate jumped by 0.72%. (Figure 1 upper image) 

Does this imply a higher CPI in August and the strengthening of the third wave of this first CPI cycle?

II. July Headline and Core CPI’s Diametric Paths 

Second, while the Philippine headline CPI surged from 3.7% in June to 4.4% in July, core CPI dropped from 3.1% to 2.9%. The gap between the headline and core reached its widest level since 2022. (Figure 1, lower graph) 

In the past, this chasm was a result of the headline rising faster than the core or vice versa. Or, while both were headed in the same direction, the divergent pace or speed resulted in the disparity. The recent gap signified a product of path divergence. 

Energy was the primary source of July’s "inflation." According to the BSP, although food inflation also accelerated due to faster price increases of meat and fruits, "the uptick in July inflation was traced mainly to non-food inflation, particularly higher electricity rates and upward adjustments in domestic prices of petroleum products."

Figure 2

Interestingly, the transport CPI spiked from 3.1% to 3.6% despite the moderation in global oil prices as measured by the US WTI. (Figure 2, upper window)

According to the BSP’s inflation basket, food, transport, electricity, and gas constitute 53.5% of the CPI basket. 

However, the antipodal directions indicate generally weak demand for non-food and transportation items. 

Could this signify an escalation of stagflation? 

Moreover, the weakening MoM change in the core CPI has barely supported the rise in general prices in the economy. (Figure 2, lower diagram) 

III. Philippine Treasury Market Defied the July CPI Data

Figure 3 

Next, despite the 4.4% CPI bump in July (and Q2 6.3% GDP), the Philippine treasury market continues to defy inflationary expectations by maintaining a deep inversion of the curve’s belly, which again signals slower inflation, upcoming BSP cuts, and increased financial and economic uncertainty. (Figure 3, upper chart) 

IV. Government Monetary and Deficit Spending Policies as Primary Determinant of Inflation 

Needless to say, the escalating tensions between the deflationary and inflationary forces in the economy should lead to more volatility, and this directional impasse will likely be resolved by (path-dependent) government policies. 

Or, while we are not fans of government statistics, should the government maintain the pace or speed of the latent "Marcos-nomics stimulus," forces of inflation are likely to prevail in this phase of the CPI cycle. 

Marcos-nomics, as Q2 GDP has validated, will continue to anchor on boosting GDP (infrastructure and welfare), funding pre-election, and defense spending. 

That is to say, such stimulus would increase demand by intensifying systemic leverage. 

Figure 4 

The combination of record Universal Commercial Bank lending levels—or rebounding growth rate—and the upsurge in the government’s deficit spending has prompted the most liquid of the money supply measures (M1) to accelerate upward. (Figure 3, lower chart, Figure 4, top and bottom graphs) 

If sustained, this should send the CPI higher over time. 

V. Stagflation Ahoy! Bottom 30 CPI Exhibits Inflation’s Broadening Inequality

Lastly, using official data, the CPI reveals shades of broadening inequality.

The Bottom 30% (B30) income households buy at the same prices as others.

Figure 5

In July, the headline CPI rose faster than the B30, which pulled their spread marginally lower after reaching 2018 highs last June. (Figure 5, topmost graph) 

However, the spread in the Food CPI between the headline and the B30 remains wide and at 2022 levels. (Figure 5, middle image) 

The widening gap in the PSA’s B30-headline inflation data partially confirms a private sector poll’s finding that hunger rates have been rising—not limited to the B30 class, but also on self-poverty ratings. (Figure 5, lowest chart) 

Stagflation is already present among the average citizens. 

Until the government and the BSP discipline themselves from their free-money "trickle-down" policies, stagflation will remain a primary political-economic-financial risk.

  

Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump

 

Measurement problems abound. The housing component, frequently constituting a quarter of inflation indices, often uses the owners’ equivalent rent, which is highly subjective, with a small change in weighting—such as for single-family homes—affecting the outcome. There are multiple measures—consumer price index, producer price index, GDP price deflator— that produce different, often irreconcilable, results. Data-dependent central bankers can fit the statistics to policy—Satyajit Das 

In this issue:

Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump

I. June 2024 Philippine Employment Rates Hit Second to the Highest Level: A Statistical Pump

II. Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus

III. The Unintended Consequences of Raising Government Salaries in the Philippines

IV. Q2 GDP: Consumers Struggle Under Marcos-nomics

V. The GDP is Debt: GDP Won’t Outgrow Total Debt or Systemic Leverage

VI. Q2 GDP Boosted by Devaluation Effect Amid Semiconductor Export Plunge and Stagnant Capital and Consumer Goods Imports

VII. The Money Illusion: Utility GDP Manifest ‘Undeflated’ Inflation; Real Estate GDP Reveals Worsening Signs of Malinvestments

VIII. The Disconnect between GDP Growth and the PSEi 30’s Performance

Philippines' Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus, June 2024 Philippine Employment Rates—A Statistical Pump

"Marcos-nomics stimulus" powered Q2 GDP’s 6.3% as consumers struggled and as the government juiced up employment rate data

I. June 2024 Philippine Employment Rates Hit Second to the Highest Level: A Statistical Pump 

Businessworld, August 11, 2024: THE UNEMPLOYMENT RATE in June fell to 3.1%, the lowest in two decades, as hiring in the construction sector surged, the Philippine Statistics Authority (PSA) reported on Wednesday. Preliminary data from the Philippine Statistics Authority (PSA) showed the jobless rate slipped from 4.1% in May and 4.5% in June 2023. The June unemployment rate was the same as in December 2023. It was also the lowest jobless rate since April 2005, when the statistics agency revised its definition of unemployed to Filipinos aged 15 years and older without a job, available for work, and actively seeking one. This translated to 1.62 million unemployed Filipinos in June, down by 486,000 from 2.11 million in May. Year on year, unemployment went down by 707,000 from 2.33 million in June 2023. 

Beyond such sanguine statistics lies the issue of how this record number of employment rates was achieved. 

Essentially, who has been investing?

Figure 1

The Philippines has a low savings rate (even when calculated based on inflated GDP statistics), foreign direct investments (FDIs) remain subdued (despite Php 4 trillion promises of investment from geopolitical allies of the administration), and the distribution in the growth of the Universal Commercial (UC) bank credit expansion remains heavily skewed toward consumers and the real estate sector. (Figure 1)

The next question is: who has been hiring?

Figure 2

The June data record employment data reveals that the primary source of hiring has been the construction sector: quarter-on-quarter (1.2 million), month-on-month (680,000), and year-to-date (556,000). This massive job expansion largely stems from government-related projects, as confirmed by the industry’s boost to the Q2 GDP. (Figure 2, lowest graph)

The second-lowest unemployment rate was supported by a jump in labor participation rates. (Figure 2, topmost chart)

On a month-on-month and quarterly basis, the agricultural sector represented second-largest employers. Despite staggering losses due to weather-related challenges (Typhoon Carina estimated at Php 3.04 billion and El Niño’s Php 9.5 billion) and structural issues from inflation and other industry imbalances (e.g., entrenched protectionism), the agricultural sector added 571,000 jobs month-on-month and 497,000 jobs quarter-on-quarter. (Figure 2 middle window)

Ironically, according to the Philippine Statistics Authority (PSA), agricultural volume reportedly plunged by 13% in Q2.

Government employment data suggest that agricultural investors appear to be immune to profit and loss conditions, as evidenced by the hiring spree despite ongoing losses and stagnation.

In reality, the only entity not subject to profit and loss is the government, whose existence depends on forced transfers from the public.

The trade industry was the third-largest employer month-on-month in June. Given the lackluster performance of consumers, who have become heavily dependent on credit, it is likely that we should see a reversal soon.

The PSA’s labor survey data represent one of the 31 data sources used for GDP calculation. The Consumer Price Index (CPI) and GDP are highly sensitive political-economic data, which means they are prone to reflecting the agenda of their creators rather than providing unbiased and objective estimates. 

Let us hear it from the horse’s mouth (bold added): 

CPI allows individuals, businesses, and policymakers to understand inflation trends, make economic decisions, and adjust financial plans accordingly. The CPI is also used to adjust other economic series for price changes. For example, CPI components are used as deflators for most personal consumption expenditures in the calculation of the gross domestic product.  Moreover, it serves as a basis to adjust the wages in labor management contracts, as well as pensions and retirement benefits. Increases in wages through collective bargaining agreements use the CPI as one of their bases. (PSA, FAQ on CPI) 

The System of National Accounts (SNA) helps economists to measure the level of economic development and the rate of economic growth, the change in consumption, saving, consumption, investment, debt and wealth of the economy. From the data of SNA, economists can either forecast the future growth of the economy or study impacts on the economy and the institutional sectors of identified government policies and programs. (PSA, FAQ on CPI)

Recent data suggests that authorities have inflated employment figures to boost the GDP. 

II. Q2 GDP Growth of 6.3%: Unpacking the "Marcos-nomics" Stimulus 

In a nutshell, is the BSP concerned about how the gloomy views of consumers and businesses may translate into weaker GDP growth? (Prudent Investor, June 2024) 

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." (Prudent Investor, July 2024)

So, didn’t we get it right? 

While publicly unstated by authorities, the Q2 GDP growth of 6.3% represented the "Marcos-nomics" stimulus, which was anchored by near-record historic spending in Q2.

Figure 3

First, despite the cheerleading by the establishment and mainstream media, the Q2 2024 GDP remained below the exponential trend line of pre-pandemic nominal and real GDP. (Figure 3, topmost image)

Second, Q2 GDP was, in essence, another story of "Marcos-nomics ": government spending surged by 14.8% (nominal) and 10.7% (real), with government GDP posting a 16.8% share, marking its fourth highest level in the national accounts. (Figure 3, second to the highest window)

Once more, Q2 GDP validated our analysis and forecasts.

Third, Government GDP understated the public sector’s contribution to national GDP. Construction GDP was chiefly responsible for the 9.5% and 11.5% growth spikes in gross fixed capital and gross capital formation, accounting for 71.1% and 71.25% of the latter, respectively. (Figure 3, second to the lowest graph)

Importantly, real Construction GDP also represented 19.4% of the national GDP—an all-time high! 

As a side note, the surge in jobs in this sector most likely relates to government-related construction projects or contractors. 

Combined with government spending, direct government expenditures accounted for 27.4% of the Q2 2024 national accounts—the second highest ever! (Figure 3, lowest image)

Of course, this data exclusively represents direct expenditures.

The private sector’s direct contribution to government political projects (e.g., PPPs), as well as the direct and indirect supply and demand chains of these entities and those associated with the bureaucracy, are not included.

Briefly, the government’s direct and indirect contributions to the economy may easily account for about two quarters or approximately 40% of GDP.

So, while the government promotes partial economic liberalization to the public (benefiting the elites), it has been centralizing the economy through the administrative and bureaucratic state, the welfare state, and the warfare state.

The government doles out crumbs of liberalization while fortifying its political stranglehold on the economy.

Domestic wars (against vices such as drugs and POGOs, as well as inflation and poverty) and the promotion of nationalism to expand the warfare state has led to increased socialism or neo-socialism (fascism/cronyism). 

The essence of so-called war prosperity; it enriches some by what it takes from others. It is not rising wealth but a shifting of wealth and income. (Mises 1919) 

This shifting of income is most evident in the erosion of consumer spending. 

III. The Unintended Consequences of Raising Government Salaries in the Philippines 

As an aside, the political leadership has announced that it will begin increasing salaries for government bureaucrats in three tranches. 

Beyond the overall impact of adding to the record fiscal deficit, if government pay levels rise above those in the market economy, it could attract more individuals into the bureaucracy at the expense of the private sector. The rising cost of employment would exacerbate the crowding-out effect on the private sector. 

Since the government does not generate wealth on its own but instead extracts resources from the private sector through direct and indirect taxes, any increase in household spending by bureaucrats is likely to be offset by a decrease in spending by the private sector.

Moreover, this situation could lead to greater politicization of the hiring process, entrenching corruption, favoritism, and nepotism.

Jobs may increasingly be awarded to the highest bidders, friends, personal networks, or as payoffs for political favors. There will likely be more "ghost employees."

Consequently, the motivation of those in power is to increase economic interventions by introducing more laws, funded by the continuing expansion of the government’s budget, which should deepen the centralization process through the expansion of the administrative state. 

Figure 4 

According to the Civil Service Commission, the number of government employees in the new administration vaulted in 2023.  Consider how rising salaries in 2024 might lead to further increases in government jobs. (Figure 4, highest diagram) 

IV. Q2 GDP: Consumers Struggle Under Marcos-nomics 

Circling back to consumer spending: 

Although real consumer spending grew at the same rate of 4.6% in Q1 and Q2, the share of real consumer GDP plummeted from 74.4% to 67.8% as the share of government spending spiked. (Figure 4, second to the highest pane)

This trend is not an anomaly; such an antipodal path has emerged since the advent of the new millennium. This divergence accelerated in 2016 and intensified further during the pandemic recession.

Moreover, since peaking in Q1 2022, the downtrend in consumer spending growth continued into 2024, even as trade and retail GDP marginally outperformed at 6.6% in Q1 and 5.8% in Q2. (Figure 4, second to the lowest chart)

They failed to recognize that BSP policies—characterized by liquidity injections and bank credit expansion rather than productivity growth—were the primary drivers of this trend.

In other words, a large segment of retail entrepreneurs has clearly misread signals indicating that the recent bout of "revenge" spending is "sustainable."

Consequently, the rising vacancies in commercial, office, and residential properties translate to mounting losses and rising credit delinquencies that have yet to surface in bank data.

The poor top-line performance of several PSE-listed firms, which have reported their Q2 2024 results, underscores this issue.

Furthermore, consumer spending per capita continues to erode, ironically, despite record-high employment rates.  More evidence of inflated employment rates? (Figure 4, lowest graph)

V. The GDP is Debt: GDP Won’t Outgrow Total Debt or Systemic Leverage

By the same token, rising leverage has barely added to consumer spending.

UC bank lending to consumers grew by 25.01% to a record Php 1.4 trillion (excluding real estate loans) last June, marking its sixth consecutive quarter of over 25+% growth. In contrast, nominal consumer spending GDP grew by 4.6% in the first half of the year. This translates to Php 5 borrowed for every Php 1 of consumer GDP produced!

Incredible.

Figure 5

In the same vein, historic levels of systemic leverage (public debt plus UC bank credit) have barely supported growth in consumer spending per capita. (Figure 5, topmost image)

The aggregate UC Bank credit plus public debt in June amounted to an unprecedented Php 27.23 trillion, representing 108% of the annualized 2024 GDP!

Authorities are engaged in peddling smoke and mirrors, or advocating the GDP myth, when they claim that the GDP growth rate will outgrow public debt.

Fundamentally, a significant portion of GDP is derived from debt-financed public spending, which means public debt is a crucial factor behind GDP.  So how can GDP outgrow debt when deficit financing—the current driver—is based on debt? 

Secondly, similar to the period from 2009 to 2018, when slower public spending reduced the public debt-to-GDP ratio, banking debt to GDP took over. Banking credit expansion to the private sector became the principal source of finance for government revenue. (Figure 5, second to the highest diagram) 

Debt doesn’t melt away; it is juggled! 

In summary, under today’s de facto fiat money system, GDP is essentially debt. 

Today, we are now witnessing the twin engines of debt operating at full throttle. 

VI. Q2 GDP Boosted by Devaluation Effect Amid Semiconductor Export Plunge and Stagnant Capital and Consumer Goods Imports 

The devaluation effect or stronger US dollar FX via a weaker peso also magnified the contributions of external trade to GDP. 

Yet, the 29.5% plunge in semiconductor exports underscores the fragile state of local producers. Real manufacturing GDP increased by 3.6% (slower than the 4.4% growth in Q1), even as UC bank credit growth to the sector rose by 8.94% (down from 10.11% in Q1). (Figure 5, second to the lowest window) 

Stagnant nominal imports of capital and consumer goods in June further reinforce the lethargy of the private sector. (Figure 5, lowest chart) 

In addition to the slowing retail GDP, other sectors in the industry show signs of weakness.

Figure 6

The previously smoldering GDP of the Accommodation and Food Services sectors has dramatically slowed to their lowest growth levels since Q1 2022. Accommodation GDP fell from 16.1% to 12.9% in Q2, while Food Services GDP dropped from 11.8% to 9.4%. (Figure 6, topmost chart)

In seeming confirmation, air transport Cebu Pacific's Q2 2024 revenue growth of 15.3% pulled its H1 2024 growth lower to 18.1%. Meanwhile, PAL's Q2 2024 revenues contracted by 0.3%, which also weighed on its 1H 2024 revenue growth, reducing it to 3.97%.

Still, the transport GDP surged from 5.4% in Q1 to 14.8% in Q2. Air transport GDP spiked 22%.

VII. The Money Illusion: Utility GDP Manifest ‘Undeflated’ Inflation; Real Estate GDP Reveals Worsening Signs of Malinvestments 

Furthermore, while the Utilities GDP (electricity, steam, water, and waste management) outperformed in Q2 2024, rising from 4.3% in Q1 to 6.1%, its real growth (despite being netted out by the deflator) reflects the oscillations of the CPI. (Figure 6, middle image)

This highlights the "money illusion"—GDP attributed to growth when, in fact, it reflects changes in spending caused by price fluctuations.

Elevated inflation, rising interest rates, and increasing leverage and non-productive economic activities have severely constrained consumer spending.

Lastly, the supply side segment of the Real Estate (RE) sector via its GDP surged from 4.5% in Q1 to 7.2% in Q2 2024.

The industry's GDP has been backed by a surge in loan growth.

UC bank lending to the RE sector’s supply side expanded by 12.34%, marking growth rates above 10% for the eighth consecutive month.

Interestingly, despite the sector’s strong Q2 GDP performance, its value-added contribution to national accounts continues to dwindle, with its share of the total falling from 5.6% to 5.4% in Q2 2024, reinforcing its downtrend. (Figure 6, lowest graph)

On the other hand, the share of bank lending to the sector continues to rebound after an interim low in Q3 2023. 

That is, more borrowing results in lesser and lesser value-added contributions or diminishing returns, which are signs of escalating malinvestments. 

VIII. The Disconnect between GDP Growth and the PSEi 30’s Performance

Anyhow, the establishment and social media seem desperate to see the PSEi 30 rise, attributing any good news to it.

For instance, some claim that Friday’s rebound was caused by a "stronger economy. " Baloney. 

On the contrary, this reflects the politicization of the PSEi 30 through attribution bias: if the index falls, external forces are blamed; but when it rises, credit is claimed for any internal factor, with indirect allusions to politics.

Figure 7

Of course, cheerleaders—who don’t declare their interests—evade the details. They fail to mention the engineered pumps. (Figure 7, topmost visuals) 

Friday’s syndicated rescue operations, which centered on the Sy Group of companies (comprising 32.4% of the PSEi 30 as of August 10th), erased the week’s losses and delivered a 0.64% weekly return on mediocre volume. 

Yet, why hasn’t GDP been boosting the PSE? 

First, GDP is not the economy.  While it attempts to measure the complex nature of millions of moving parts operating spontaneously—supposedly reflecting the economy—it cannot do so effectively. 

This is because one cannot average spending on rice with subscriptions for software. Individual utilities are not only subjective but also change frequently. I may want a burger for one meal but spaghetti for the next, depending on my means and willingness to pay the offered price. 

Second, the distribution of costs and gains is uneven. 

Record government spending benefits politicians, the bureaucracy, and their cronies, while small and medium enterprises (SMEs), which can hardly access formal credit, barely benefit from such political activities.  Instead, the costs are borne by average citizens. 

In a corporatist or neo-fascist state, benefits are concentrated while costs are diffused, resulting in privatized gains and socialized losses. 

Third, despite the myriad regulations designed to curtail and control it, market economies operate on the division of labor and division of knowledge. Unfortunately, specialization, knowledge, and entrepreneurial skills cannot be averaged. 

Fourth, statistics are historical accounts derived from selective assumptions that incorporate specific inputs and calculations. They do not encompass all the causal factors that lead to multifarious and intertemporal outcomes. 

Fifth and finally, the PSE-GDP data indicate that there is confusion in associating a high GDP with the performance of the PSEi 30, which is currently in a bear market. (Figure 7, middle window) 

The GDP trendline has failed to revert to its former trajectory, which coincides with the PSEi 30’s bear market. (Figure 7, lowest chart) 

Given its structural trickle-down political-economic framework, which is entirely dependent on debt, it also bears substantial balance sheet risk. 

The consensus overlooked the last and most critical aspect of the economy. 

Fifteen minutes of glory doesn’t a bull market make. 

____

References: 

Philippine Statistics Authority, Frequently Asked Questions, Consumer Price Index, psa.org.ph 

Philippine Statistics Authority, Frequently Asked Questions, Philippine System of National Accounts (PSNA), psa.org.ph 

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

Prudent Investor, Marcos-nomics stimulus: Yields of the Philippine Treasury Curve Plunged, The Turbocharging of Pre-Election Liquidity Growth July 14, 2024 

Ludwig von Mises, Nation, State, and Economy, 1919 p.190, Mises.org

 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade

Bulls of 1929 like their 1990s counterparts had their eyes glued on improving profits and stock valuations. Not a thought was given to the fact that the rising tide of money deluging the stock market came from financial leverage and not from savings—Dr. Kurt Richebächer 

In this issue 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade

I. PSEi 30: Has BBM’s SONA Cycle Climaxed? 

II. The Health of the Pre-SONA Pump: July’s Index Spike on Sluggish Volume 

III. The Impact of the "National Team:" Rising Concentration Risks in the Financial Spectrum 

IV. The Impact of the "National Team:" Rising Concentration Risks in the Economy 

V. How Media Shapes the Overton Window: Focus on "Ghost Month" while Ignoring Geopolitical Risks from South China Sea 

VI. How the Unwinding Carry Trade from the Japanese Yen’s Massive Rally May Aggravate the PSEi 30’s post SONA Dump 

PSEi 30: Has BBM’s SONA Cycle Climaxed? Rising Contagion Risks from the Unwinding of the Yen-Yuan Carry Trade 

Has BBM’s SONA Cycle Peaked? While the headline index has shown resilience in July, market internals reveal structural weaknesses. The unraveling of the Yen-Yuan carry-trade increases global contagion risks. 

I. PSEi 30: Has BBM’s SONA Cycle Climaxed? 

The following post is a follow-up on my July 21st, “The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects” 

Since its interim peak on July 19th, the PSEi 30 has dropped 2.97%—as of the week ending August 2nd—supported by this week’s decrease of 1.79%, marking its second consecutive decline. 

The major Philippine benchmark fell in 5 of the last 9 trading days. 

Interestingly, this week’s larger decrease came as the Philippine government is expected to announce the Q2 GDP—which has been widely projected to outperform—and June’s labor force survey. 

The authorities are also set to release July's CPI print, which the BSP expects to show a bounce from last month.

And it's also earnings season, where the consensus expects Q2 earnings to exceed expectations. 

Meanwhile, the establishment and media have been peddling the idea of the “ghost” month affecting the stock market’s performance, earnings, and the economy. 

II. The Health of the Pre-SONA Pump: July’s Index Spike on Sluggish Volume 

First, let's examine the performance of the Philippine Stock Exchange last July*. 

*Nota Bene:

-The base reference matters. In my perspective, the 2013 starting point represents the real peak of the PSEi 30 based on volume and market internals.

*Annual returns of the PSEi 30 partially represent an apples-to-oranges comparison due to marginal changes in its membership.

*The data indicated reflects nominal returns and not CPI-adjusted or real returns.

Figure 1

Thanks to the pre-SONA pump, the PSEi 30 jumped 3.23%—representing its second-best monthly performance in 2024 and the biggest July returns since 2018. (Figure 1, topmost image)

It was also the largest of the BBM's pre-SONA pumps over the last three years.

On a year-to-date basis, the PSEi 30's meager 2.62% returns signified its best showing since 2019, which highlights the ongoing bear market.  (Figure 1, middle graph)

Despite this, diminishing returns continue to be a scourge on the PSEi 30.

But how about the volume?

Though July's gross turnover was up 11.3% from a year ago, in peso terms, its depressed level, which was almost equal to 2021, reinforced the downtrend since 2015. (Figure 1, lowest chart)

Figure 2 

Gross volume includes the published special block sales and the undeclared substantial share of cross-trades.

In the first 7 months of 2024, gross volume fell by 8.4% year-over-year (YoY) to Php 865.5 billion, marking a third consecutive annual decline. (Figure 2, highest window)

This means that the paltry improvement last July has not been significant enough to cover this year's volume deficit.

The 7-month main board volume likewise dropped 3.69% to Php 702.7 billion, which signified levels below 2018. (Figure 2, middle visual)

Resonating with the gross volume levels in peso, it has been a downhill for the main board volume since peaking likely in 2013.

Amazing.

The more than a decade-long depression in the PSE's gross and main board volume represents the decadent conditions of capital or savings.

It must be emphasized that these volumes have been inflated by foreign trade, pumps by the "national team," and intra-day dealer trades.

In the first 7 months of 2024, the share of foreign participation has risen from 45.44% in 2023 to 48.8% this year. (Figure 2, lowest diagram)

Foreign investors remained marginal sellers, posting Php 27 billion in outflows, their fifth consecutive year of net selling.

III. The Impact of the "National Team:" Rising Concentration Risks in the Financial Spectrum 

As for the "national team," the Other Financial Corporations (OFC) could be part of this cabal engaged by authorities to prop up the index.

Clue?

The BSP on the OFC’s activities in Q1 2024: The BSP on the OFC’s activities in Q1 2024: “The QoQ growth in the other financial corporations’ domestic claims was attributable to the increase in its claims on the other sectors, the central government, and the depository corporations. The other financial corporations’ claims on the other sectors grew as its investments in equity shares issued by other nonfinancial corporations and loans extended to households increased. Likewise, the sector’s claims on the central government rose as its holdings of government-issued debt securities expanded. Moreover, the sector’s claims on the depository corporations rose amid the increase in its deposits with the banks and holdings of bank-issued equity shares. (bold added) [BSP 2024]

Figure 3

The growth of OFC’s claims on the private sector slipped from 9.5% in Q4 2023 to 8.5% in Q1 2024, which was also reflected in the claims on depository institutions, whose growth rate decreased from 20% to 13.9%. 

Nevertheless, both claims surged to record highs in nominal peso levels, reflecting the returns of the PSEi 30 amounting to 7% and the Financial Index to 17% in Q1 2024. (Figure 3, upper and middle charts) 

OFCs have not just been funding the government; they have also been propping up the PSE! 

To emphasize, the percentage share of the free float capitalization of the top three banks reached an unprecedented 22.7% of the PSEi 30 last May! (Figure 3, lowest image) 

Though it has slipped, it has remained within a stone's throw of 21.85% as of the week of August 2nd. 

The same banking heavyweights command a whopping 89% of the overall Financial Index pie, which is stunningly higher than the 79% share in the week of July 16, 2023.  

This outgrowth partially reflects the decrease in the number of members from 9 to 7, due to the exclusion of Rizal Commercial Bank and Union Bank. 

The only non-bank member of the index is the Philippine Stock Exchange [PSE:PSE].

Figure 4

The Financial Index has not only starkly outperformed, alongside ICT, electrifying the gains of the PSEi 30, but it has also been absorbing a greater share of the depressed volume of the PSE. (Figure 4, topmost graph)

That is, the uptrend in the Financial Index has climbed along with its estimated volume share of the PSEi 30, comprising 18.15% last June. (Figure 4, middle image)

As such, the concentration of gains in the index has also resonated in the context of gross volume.

To wit, the rising concentration risk comes amidst a declining trend in profit growth of the banking system, where a bulk of it represents accounting profits. For instance, mark-to-market losses are concealed via record Held-to-Maturity (HTM) assets, and BSP relief measures that understate NPLs, etc.

IV. The Impact of the "National Team:" Rising Concentration Risks in the Economy

And it is not just banks.

While year-to-date (YTD) gains of the PSEi 30 members have been evenly distributed (as of August 2), the returns of the top five issues have defined the index's performance rather than the overall breadth. (Figure 4, lowest pane)

For instance, the traded volume of the top 20 most active issues increased by 40% this July compared to a year ago and was up by 2.17% YTD 2024 from the previous year.

In the same vein, the volume of the Sy Group soared 46.6% last July from the same month in 2023 and was up 7.3% YTD 2024 compared to a year ago. 

This indicates that the heavy index pumping last July by the Philippine version of the “National Team” amplified the percentage share of the top 20 issues and the Sy Group in the context of volume. 

Meanwhile, the average share of the top 10 brokers increased from 56.98% in July 2023 to 57.6% last month. 

Aside from the sluggish volume, the PSEi 30’s SONA gains have barely been reflected in the PSE’s constellation. 

The advance-decline spread last July 2024 was -150 compared to -166 in the same month a year ago. Again, the PSEi was up 3.23%.

Figure 5

This divergence reverberated in the YTD performance: although negative breadth has become less negative—or price declines have been less intense—a positive sign, they are still declining.  Again, the PSEi was up 2.62% YTD. (Figure 5, topmost diagram) 

Lethargic volume (a symptom of capital consumption), rising risks from the concentration of activities in trading volume (reflecting maladjustment in balance sheet exposure), select stock prices (inflation of mini-price bubbles), broker exposure (increased balance sheet leveraging?), as well as low levels of retail trades (low savings), and rising dependence on foreign trade (increasing reliance on global capital flows) translate to magnified risks of significant downside volatility or simply—a meltdown. 

A stock market meltdown leads to a decrease in collateral values that underpin bank lending, which magnifies balance sheet mismatches, increases illiquidity, and heightens the risk of insolvency within the industry and among its borrowers. It also weakens the balance sheets of investment, pension, and insurance funds (such as the government’s SSS and GSIS), potentially leading to increased capital deficits and further heightening the risk of illiquidity and insolvencies. 

The BSP would likely bail some of these out at the expense of the peso. 

During the stock market meltdown in March 2020, the Finance Chief called on the SSS and GSIS to boost or "rescue" the stock market. The BSP followed this up with record cuts in official rates, historic liquidity injections, and the implementation of various relief measures. The rest is history. 

The BSP implemented ex-Fed chairman Ben Bernanke advise, 

History proves, however, that a smart central bank can protect the economy and the financial sector from the nastier side effects of a stock market collapse (Bernanke, 2009) 

The Philippine version of the national team likely exists for these reasons. 

V. How Media Shapes the Overton Window: Focus on "Ghost Month" while Ignoring Geopolitical Risks from South China Sea 

Incredibly, the establishment and media continue to entertain and mislead the public with the alleged influence of the so-called "Ghost Month" on stocks or the economy.

Because "Ghost Month" is a superstition rooted in Chinese tradition (religion), the media and establishment's embrace of it assumes that the markets and the economy are driven by Chinese culture, even when the Philippines is predominantly a Catholic population. (Figure 5 middle window)

For example, some BSP literatures cite the "Ghost Month" to rationalize the unexplainable. The BSP should address accusations of their having 'ghost employees' instead. 

The repetitive references to the so-called "Ghost Month" also assume that foreign participation in the financial markets and the economy is influenced by Chinese tradition.

Or, are investors or market participants in the PSE and the economy predominantly of Chinese descent or a practitioner of Chinese traditions?

Some PSE facts regarding the alleged misfortunes of the Ghost Month:

Since the PSEi uptrend from 2003 through 2023, August has closed lower in 14 of the 21 years, or 67% of the time, with an average change of -0.72%. Yet, August 2021 delivered a majestic 9.33% return, the highest since 2000. August 2022 also produced a 4.24% return, the highest since 2008. (Figure 5, lowest graph)

So, what happened to the "Ghosts" of 2021 and 2022? Did the PSEi call upon the movie comedians known as the "Ghostbusters" to foil the rut? Or, have these rallies been a product of the BSP's easy money campaign?

Ironically, the same media and establishment experts have been unanimously silent about the June 17th Ayungin Shoal incident, which involved a standoff between the Philippine and Chinese Coast Guard.

The incident could have triggered World War III—had the US agreed with the Philippines' interpretation, activating the 1951 Mutual Defense Treaty. Unfortunately, the US implicitly gave a cold shoulder to the Philippines, forcing the latter to negotiate and deal with Chinese authorities over the South China Sea. Naturally, the US is opposed to this.

The same echo chamber has been observed ignoring the ongoing shift to a war economy through its embrace of war socialism.

Superstitions are given precedence over facts that matter, translating to the brazen hoodwinking of the public that fomenting war is good for the economy while Ghosts will scare the wits out of investments. 

Won't a war lead to a partial transformation of the living population into ghosts? 

Yet, who would invest in a country on the brink of war? Who would like to see their investment ownership evaporate when enemy drones start wreaking havoc on crucial social, economic, and political edifices, exacting a heavy toll on life and disrupting the division of labor?

But don't worry, stocks and real estate will boom! 

Sorry, but that’s an absolutely stunning imbecilic logic. 

VI. How the Unwinding Carry Trade from the Japanese Yen’s Massive Rally May Aggravate the PSEi 30’s post SONA Dump

The scarcity of local volume translates to amplified vulnerability to volatile foreign sentiment, mercurial fund positioning, and flows. 

Proof?

The massive +4.7% rally by the Japanese yen $USDJPY stole this week’s thunder.

It smashed what the consensus called the “unstoppable” force, a speculative mania. 

To amplify its policy, the Bank of Japan (BOJ) reportedly timed its $36 billion intervention in July to coincide with softening signs in the US economy.

Furthermore, the Chinese yuan $CNY also rebounded by 1.1% week-over-week (WoW). The US dollar index fell by 1.1%. 

The unraveling of the yen and yuan carry trades unleashed a wave of de-risking and deleveraging that rippled across the globe.

Figure 6 

Asian currencies posted substantial gains. (Figure 6, topmost graph) 

The Philippine peso rallied by 0.46%, with the $USDPHP closing at 58.08 and looking poised to fall below the 58 levels and retest the 57.5 area this coming week.

The Philippines led the rally in ASEAN bonds. (Figure 6, middle window) The sharp fall in the 10-year Philippine bond yields strengthens the view that the BSP is about to cut rates.

Furthermore, as signs of mounting strains in the economy emerge, the "belly" of the Philippine treasury curve has also inverted—meaning yields of 2-to-7 year notes have dropped below the 1-year note and partly below the 6-month T-bills. (Figure 6, lowest chart)

Philippine treasuries appear to be defying the BSP’s projected increase in inflation.

Figure 7

The unwinding of the carry trades sent the Japanese stocks crashing.  The yen’s massive rally coincided with the Nikkei 225’s 5.81% nosedive last Friday, to register its 2nd largest one-day decline after the Black Monday crash of October 1987.  The Nikkei was down 4.6% WoW. (Figure 7, topmost and middle charts)

Asian stock markets closed mostly lower. Eleven of the nineteen bellwethers posted deficits, with an average decline of 0.47%. Aside from Japan, the most significant weekly declines were led by Taiwan and the Philippines.(Figure 7, lowest graph)

All of this indicates the magnified contagion risks associated with asset booms driven by financial leverage.

Figure 8 

Risks in the ‘periphery’ have reached the ‘core.’ 

The race to a series of record highs by the S&P 500 $SPX has echoed the PSEi 30’s muted rally in 2024. With the SPX down, the PSEi 30's SONA pump has started to wobble. (Figure 8, highest image)

Foreign outflows of Php 1.6 billion this week have partly resulted in the PSEi 30’s 1.79% decline.

In the backdrop of lethargic volume, concentrated activities, and a rising share of foreign participation, a continuation of global de-risking and deleveraging translates to more liquidations here and abroad, which could expose many skeletons in the closet of the Philippine financial system.

The SONA pumps of 2022 and 2023 not only surrendered all their gains; more importantly, the PSEi 30 closed lower than its base at the start of the pumps. (Figure 8, middle graph)

If history rhymes, the PSEi 30 could fall below its June 21st low of 6,158 during this SONA cycle (post-SONA dump).

Further, when the Philippine peso rallied in 2018 (USD PHP trended lower), it marked the onset of the PSE’s bear market. Will history repeat? (Figure 8, lowest chart)

Importantly, weren't we repeatedly told that easy money would fuel the embers for the rocketing of asset gains?

___

References

Prudent Investor, The 2024 Pre-SONA Pump: Philippine PSEi 30 Soars to 6,800 - History, Details, and Effects, July, 21, 2024

Bangko Sentral ng Pilipinas, Q1 2024 Domestic Claims of Other Financial Corporations Rise by 2.8 Percent QoQ and 12.9 Percent YoY, July 31, 2024

Ben S. Bernanke, A Crash Course for Central Bankers, ForeignPolicy.com, November 20, 2009