Authored by: Hans Christian Elma, Antonio Panis, Elijah Soriano
Edited by: Justin Choi, Jared Go, Ethan So
Latest Economic Data
Philippine Economic Data
BSP cuts RRP by 25 bps from 6.50% to 6.25%
YoY CPI Inflation deccelerated to 3.3% in August
Unemployment rate rose to 4.7% in July
US Economic Data
YoY CPI Inflation deccelerated to 2.9% in July
YoY PCE Inflation remains constant at 2.5% in July
YoY Q2 GDP Growth revised upwards to 3%
Unemployment rate dropped to 4.2% in August
Introduction
August was an extremely eventful month for both the economy and financial markets. The month began with a momentous global stock market rout caused by the unwinding of a popular Japanese yen carry trade. Despite this, global and local stock market performance after the aforementioned event was relatively strong as shown in the shaded area of Figure 1. This strong performance on a global setting was primarily due to a strong signal from Federal Reserve chairman Jerome Powell implying future rate cuts in the US. For the local setting, on the other hand, this was caused by a mix of both the aforementioned signal from Powell and a 25 basis rate cut from the Bangko Sentral ng Pilipinas (BSP). In order to anticipate what may happen moving forward, it is imperative to first understand the fundamentals of recent events.
Figure 1. S&P500 and PSEi
Source: TradingView
Global Market Selloff
The month of August began with an alarming surprise as stock markets all around the world went through large selloffs. This global selloff was led by Japan as the Nikkei 225 tumbled by more than 12% which was its largest one day movement since the Black Friday in 1987 (Bloomberg Originals, 2024).
Figure 2. Nikkei 225.
Source: TradingView
The primary culprit behind the large magnitude of this selloff was the Japanese Yen carry trade (Ranganathan, 2024). A carry trade is an investment strategy that involves borrowing money in the currency of a country with a low interest rate, and utilizing this to invest in different assets such as equities (Bloomberg Television, 2024). The Japanese Yen was a particularly attractive target for this strategy due to the negative interest rate environment Japan had from 2016 until early 2024 as shown in Figure 3. The popularity of this increased even further throughout 2022 and 2023 as the interest rate differential between Japan and the US widened, and the Yen depreciated (Ranganathan, 2024).
Figure 3. Uncollateralized Overnight Call Rate.
Source: TradingView
On March 19, 2024, the Bank of Japan (BOJ) raised its policy rate for the first time in more than a decade which effectively ended the era of negative interest rates, yield curve control, and qualitative and quantitative easing (BOJ, 2024). Furthermore, they made another rate hike during July 31, 2024 which now puts the Uncollateralized Overnight Call Rate (BOJ’s policy interest rate) at 0.25% (BOJ, 2024). With the expectation of future BOJ rate hikes coinciding with Federal Reserve rate cuts, the foreign exchange market priced in the interest rate differential between both countries to narrow which is reflected in the appreciation of the Japanese yen.
Figure 4. US Dollar to Japanese Yen.
Source: TradingView
As the Japanese yen appreciated relative to the currencies of many investors, the amount they would have to pay back Japanese debtors increased as well. This, combined with a poor US stock market performance during the latter half of July forced carry trade leveraged investors to cut losses. This paved the way for the strong selling pressure that dragged stock prices down on a global scale.
Jackson Hole
“The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.” — Jerome Powell
The statement made by the chairman of the Federal Reserve signals a crucial turning point in the monetary policy of the United States. After a period of maintaining elevated interest rates aimed at curbing the inflation caused by strong demand and supply-side pressures, the Federal Reserve is now likely to begin implementing rate cuts. This decision is justified by economic factors that indicate both a cooling inflation rate and labor market.
Figure 5. US Inflation Rate
Source: U.S. Bureau Labor of Statistics
Note: Shaded area represents recession, as determined by the National Bureau of Economic Research.
Inflation, as measured by the Consumer Price Index (CPI), has slowed over recent months, following a previous surge, and is now closer to the Federal Reserve’s long-term target of 2%. (Bureau of Labor Statistics, 2024). This data reflects the impact of previous rate hikes, as tighter monetary conditions are absorbed by the economy, thus reducing inflationary pressure to paveway for future rate cuts.
Figure 6. US Unemployment Rate.
Source: U.S. Bureau Labor of Statistics
The BLS also reports that the number of job openings has declined from its peak. This is reflected in the July 2024 employment data, where the unemployment rate rose to 4.3%, and there were 8.2 million job vacancies in June 2024, which is down by 941,000 over the year (Bureau of Labor Statistics, 2024). This cooling labor market, paired with progress on inflation levels, indicates that the risk of an overheated economy has diminished.
Given these recent economic developments, Powell’s call for adjusting policy rates is both timely and necessary. The Fed's goal is to achieve a soft landing, or in other words, reduce inflation to the target level (2%) without inducing a recession. The current available economic data supports a cautious approach to rate cuts, which if done at a gradual pace, would allow the U.S. economy to maintain its momentum without causing inflation to spike upwards.
BSP Rate Cut
On August 15, 2024, the BSP made a significant policy decision, reducing its Reverse Repurchase Rate (RRP) by 25 basis points (BSP, 2024). This marked the first rate cut in nearly four years. This move aims to foster economic growth in the face of slowing consumption.
The rate cut occurred even though inflation remained above the BSP's target range of 2% to 4% during the time of the announcement. In July, inflation was recorded at 4.4%. However, this figure was partly influenced by a low base effect from the previous year. When adjusting for this, Remolona stated that the inflation rate was closer to 4.1%, which while slightly higher than the target range, was still aligned with the BSP's expectations. In addition, it is important to account for the lag at which monetary policy affects the economy. By the time the impact of this rate cut takes effect in 2025, inflation is expected to settle within the target range according to the central bank’s long-term inflation forecast (BSP, 2024). Further strengthening the BSP’s projection, it can be observed in Figure 8 that despite the upticks in Headline CPI inflation, core inflation (CPI excluding select volatile food and energy prices) has continuously trended downward. This indicates that upward pressure on headline CPI is primarily caused by food as a function of high inflation on rice.
Figure 7. Headline, Core, and Food Inflation.
Source: Philippine Statistics Authority.
The Philippine economy, which grew by 6.3% in the second quarter of 2024, showed robust performance in sectors like construction and government spending. However, this was accompanied by a slowdown in consumption which is a component of the Philippines' GDP. Consumption grew by only about 4.6% in Q2 whereas the previous year indicated an average growth 5.5%. As shown in figure 8, growth in household consumption has been on an overall downward trend since the start of 2022, implying a weakening domestic demand growth.
Figure 8. Philippines’ Household Consumption
Source: Philippine Statistics Authority.
With regards to the data presented, Remolona commented, “We’re somewhat more confident in the inflation numbers coming down than in the GDP numbers going up. Consumption was relatively weak. So it doesn’t look like something that could easily be sustained.” Thus, despite ongoing economic expansion, the BSP’s rate cut is a calculated move to ensure the sustainability of this in the long-run.
Future Outlook
Assuming that economic data remains within the expectation of the BSP, another 25 basis point rate cut may be seen in either October or December. Due to the long lags of monetary policy, the decision they made for the year 2024 will only be felt in the year 2025. Future rate cuts in 2025 will depend on how inflation and economic growth align with the BSP’s expectations. Ultimately, the BSP is taking a cautious approach to ensure both inflation management and sustained economic expansion in the long term. The global economic environment and domestic consumption trends are key aspects when it comes to influencing monetary policy decisions. Future expectations for global markets, particularly the impact of the US Federal Reserve policy changes and ongoing developments in Japan’s monetary tightening, will also be key considerations. These factors will influence capital flows and investor sentiments, potentially adding further considerations to the BSP’s policy-making in the coming year.
References
Bangko Sentral ng Pilipinas. (2024, February). Monetary Policy Report February 2024.
Bangko Sentral ng Pilipinas. (2024, August 15). Monetary Policy Stance Briefing. Facebook. https://fb.watch/u2ZQOsu6R8/
Bloomberg Originals. (2024, August 23). Why Japan’s Yen is so Volatile. YouTube. https://youtu.be/kI4qhULFG2o?si=1THHzZtG6gUAyl_H
Bloomberg Television. (2024, August 6). How the Global Carry Trade Impacts Market Selloff. YouTube.https://www.youtube.com/watch?v=7jf0PJN2TWY
Changes in the Monetary Policy Framework. (2024, March 19). Bank of Japan. https://www.boj.or.jp/en/mopo/mpmdeci/mpr_2024/k240319a.pdf
Consumer Price Index. (2024, July). U.S. Bureau of Labor Statistics. https://www.bls.gov/cpi/
Decisions at the July 2024 MPM (1): Change in the Guideline for Money Market Operations. (2024, July 31). Bank of Japan. https://www.bsp.gov.ph/Price%20Stability/MonetaryPolicyReport/FullReport_February2024.pdf
Employment Situation Summary. (2024, August 2). U.S. Bureau of Labor Statistics. https://www.bls.gov/news.release/empsit.nr0.htm
Fuentes, A. (2024, August 15). Bangko Sentral cuts interest rates by 25 bps, another rate cut this year likely. ABS-CBN News. https://news.abs-cbn.com/business/2024/8/15/bangko-sentral-cuts-interest-rates-819
Ordinario, C. U. (2024, August 16). BSP cuts policy rate by 25 bps ahead of Fed. BusinessMirror. https://businessmirror.com.ph/2024/08/16/bsp-cuts-policy-rate-by-25-bps-ahead-of-fed/
Philippines Statistics Authority. (n.d.). 2nd Quarter Household Spending. Republic of the Philippines. Retrieved September 3, 2024, from https://psa.gov.ph/statistics/national-accounts/sector/Household%20Final%20Consumption
Philippine Statistics Authority. (2024, September 5). Summary Inflation Report Consumer Price Index (2018=100): August 2024. Republic of the Philippines. https://psa.gov.ph/content/summary-inflation-report-consumer-price-index-2018100-august-2024
Ranganathan, Vidya. (2024, August 7). Explainer: What is the yen carry trade?. Reuters. https://www.reuters.com/markets/asia/what-is-yen-carry-trade-2024-08-07/
Comments