Authored by: Andrei Dimaculangan, Jared Go, Antonio Panis, Ethan So, Elijah Soriano
Latest Economic Data:
Philippine Economic Data
Bangko Sentral ng Pilipinas (BSP) hikes RRP by 25 basis points to 6.50%
YoY Inflation eases to 4.9% in October from 6.1%
GDP Q3 YoY growth rate at 5.9%, beating expectations
US Economic Data
The Fed keeps the Federal Funds Rate at 5.25%
GDP Q3 YoY growth rate at 4.9%, beating expectations
Unemployment rate rises to 3.9%
Overview
The month of October can be highlighted by 2 major events - The Israel-Hamas War and US 10-Year Yields reaching a 16 year high of close to 5%. The conflict in Gaza has been a long-standing problem for many years.
However, the surprise attack on October 7 by Hamas caused tensions to rise with Israel declaring war on Hamas. This negative and volatile development raised fears and concerns that the conflict may spread to other parts of the Middle East, a region that supplies nearly 31.3% of global oil production in 2022 (Statista, 2023).
The second major event was the sudden increase in US 10-Year Yields to a 16 year high of close to 5% (Reynolds et al., 2023). This increase was done without the Fed raising rates which highlights the market expectations of a continued hawkish stance by the Fed, or in other words, the narrative that interest rates may stay higher for longer.
With two major volatile developments happening, it is no surprise for both the U.S. and the Philippine stock market to be down for the month. The S&P 500 closed the month at 4193.81, down 3.10% month-to-date (MTD) but up 8.84% year-to-date (YTD). As for the Philippines, the PSEi is trading below the 6000 level at 5,973.78, down 6.42% MTD and 8.87% YTD. Foreign outflows also continued for the month with -9.70B of net foreign selling.
Source: Philippine Stock Exchange
Israel-Hamas War
Source: TradingView
On October 7, Hamas, a Palestinian militant group, launched a surprise attack towards Israel towns, killing more than 1,400 people.
This prompted Israel to declare war against Hamas and other militant groups in Gaza. The supply of oil in the global trade has not largely been affected as the war is confined between Israel and Palestine. Due to speculative fear of a future supply shock though, oil prices rose upon the beginning of the conflict. Prices have now fallen to pre-war levels due to various conditions such as weaker demand (Lee, 2023).
If the war were to spread across the region, major oil-producing countries nearby would be at risk. Major trade lines would also be affected as the Middle East is home to the world’s busiest shipping routes such as the Suez Canal, the Red Sea, and the Persian Gulf. All these factors could worsen global inflation even amidst a high interest rate environment.
Source: TradingView
Amidst the escalating conflict in the Middle East and an inflationary economic backdrop, investors are looking into buying safe haven assets such as gold. Hence, due to higher demand, gold prices rallied as shown in the chart above.
Source: TradingView
Defense stocks also surged as the rising geopolitical tensions could increase the US and EU’s defense spending (Mishra, 2023). As shown above, the U.S. Aerospace and Defense ETF rallied around the time when the conflict started.
US Bond Yields
Source: TradingView
As stated earlier, the US 10-year government bond yield rose close to 5%, marking a 16-year high. This type of US government bond is considered to be the risk-free rate by many investors (Vipond, n.d.). With the risk-free rate having a higher yield, investors may demand a higher rate of return from other debt instruments. In other words, borrowing costs in the country may rise.
On the 19th of October, 2023, Federal Reserve Chair Jerome Powell gave a speech at the Economic Club of New York City. One of the things he stated was that the higher bond yields may reduce the necessity for further rate hikes (Bloomberg, 2023). The Fed’s tools to combat inflation revolve around reducing accessibility to borrow money in order to slow down the economy. If the market is doing this by nature though, there is less of a need for the Fed to intervene. In line with the aforementioned statement, on November 1, 2023, the Fed kept the Federal Funds rate constant at 5.25%.
Philippine Context
With a potential supply shock to oil internationally due to the aforementioned Israel-Hamas war, the Philippines is prone to be hit with higher transportation costs.
This, combined with minimum wage adjustments and a widely forecasted El Niño leave upside risks to inflation elevated.
The BSP has monetary board meetings eight times a year and it is during these when the board decides to either reduce/hike interest rates, or keep them constant (BSP, n.d.). However, if they see fit, they can opt to change the level of interest rates prior to scheduled meetings. On October 26, 2023, the BSP took off-cycle action and hiked the RRP by 25 basis points which now puts it at 6.50% (BSP, 2023).
Conclusion
“There are two types of forecasters: those who don’t know, and those who don’t know they don’t know.” - John Kenneth Galbraith
With various ongoing events around the world that may have a significant impact on the global economy, the future remains clouded with uncertainty. The Israel-Hamas war, bond-selloff, and off-cycle rate hike are only some examples of such events. In order to better anticipate where the economy may be headed next, it is imperative to closely observe how present conditions evolve.
References
Bloomberg. (2023, October 21). Powell: Bond Market Reducing Some Impetus to Hike. https://www.youtube.com/watch?v=3rt2KX2Tw3A
Bangko Sentral ng Pilipinas. (n.d.). Price Stability. https://www.bsp.gov.ph/SitePages/PriceStability/PriceStability.aspx#MPAIT
Bangko Sentral ng Pilipinas. (2023, October 26). Monetary Board Increases Target RRP Rate by 25 Basis Points. https://www.bsp.gov.ph/SitePages/MediaAndResearch/MediaDisp.aspx?ItemId=6891
Federal Reserve. (2023, November 1). Implementation Note issued November 1, 2023. https://www.federalreserve.gov/newsevents/pressreleases/monetary20231101a1.htm
Lee, J. (2023, October 18). Oil’s Many Headwinds Are Masking the Middle East Turmoil. https://www.bloomberg.com/news/newsletters/2023-10-18/oil-faces-headwinds-that-are-masking-turmoil-from-israel-hamas-war?cmpid=BBBXT101823_ENERGY&utm_medium=email&utm_source=newsletter&utm_term=231018&utm_campaign=energy
Mishra, N. (2023, October 18). Defense Stocks & ETFs Soar Amid Rising Geopolitical Tensions. https://finance.yahoo.com/news/defense-stocks-etfs-soar-amid-173400184.html
Reynolds, G., Carson, R., Hirai, J. (2023, October 23). Treasury 10-year yield breaches 5% for first time since 2007. Bloomberg.com. https://www.bloomberg.com/news/articles/2023-10-23/treasury-bonds-market-10-year-yield-tops-5-for-first-time-since-2007
Statista. (2023, August 25). Middle East: Oil Production 2022. Statista. https://www.statista.com/statistics/265200/middle-eastern-oil-production-in-barrels-per-day/#:~:text=Oil%20production%20in%20the%20Middle%20East%20amounted%20to%20roughly%2030.7
Vipond, T. (n.d.). Risk Free Rate. https://corporatefinanceinstitute.com/resources/valuation/risk-free-rate/#:~:text=In%20practice%2C%20the%20risk%2Dfree,of%20risk%2C%20as%20explained%20here
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