Macro Strategy: Navigating Market Inertia

Stock Code	Last Price	Change	Change %
DSSA	45,800	950	2.12%
MFIN	3,350	670	25.00%
DCII	168,400	400	0.24%
DATA	1,535	225	17.18%
PACK	2,470	220	9.78%
LIFE	6,500	200	3.17%
PNGO	1,845	195	11.82%
AMMN	7,050	175	2.55%

Macro Strategy

Navigating Market Inertia

Global rate cuts are gradually unfolding with several prominent central banks cutting rates. Bank of England is next in line.
A potential change in tone at this week’s FOMC with the latest data pointing toward further moderation in growth factors.
A weaker IDR and sluggish growth momentum continue to weigh on overall market sentiment, and this could protract market inertia.

The Axiom of Rate Cuts Unfold. The global trend of rate cuts is gradually unfolding as major central banks initiate their respective rate cut cycles. Last week marked a pivotal change in global rates, with the Bank of Canada being the first among the G7 to implement a 25bps rate cut. Officials expressed confidence that inflation is heading towards their target and indicated that further rate cuts could follow if underlying inflationary pressures continue to ease. As anticipated, the ECB also reduced its interest rates by 25bps. Interestingly, the ECB raised its inflation forecast for 2024 and 2025 by 0.2 percentage points each. While this may send mixed signals, it also reflects the ECB's flexibility in adjusting rate cuts in response to inflation factors. Similarly, the Fed in Mar24 also maintained its rate cut dot plot projection despite rising inflation forecasts. ECB officials noted that inflation might rise again until the end of the year before moderating toward target by 2H25.

Looking ahead, 7 other major central banks (including the Fed) are set to hold policy meetings this month, with the Bank of England expected to be next in the rate cut cycle, particularly as the UK's inflation approaches 2%, the lowest in almost three years. This series of rate cuts by major central banks is likely to strengthen the expectation that the Fed will adopt a similar stance. As the first Fed rate cut is still anticipated in Sep24, we remain cautious that such timing would lead to transient cross-currency volatility risks, which would also have implications for IDR stability.

A Potential Change in Tone. Although the first Fed rate cut is not expected until the September FOMC meeting, we anticipate a potential shift towards a more accommodative narratives in this week's meeting (June 11-12). Last Friday's robust US Non-Farm Payroll (NFP) data may appear strong, potentially weakening market conviction. However, not only are NFP figures prone to downward revision, but the unemployment rate rose to 4%. According to the US Treasury, this increase is primarily due to a large influx of immigrants, raising the breakeven pace of job growth from 100k to over 200k. The higher immigrant labor force means businesses are unable to match the rapid labor growth, leading to a rise in the unemployment rate. At 4%, the unemployment rate is still within the Fed's economic target, confirming the latest Beige Book report's more pessimistic outlook. This outlook is also reflected in the downward revision of 1Q24 GDP, slower real disposable income growth, and a low savings rate. The strong labor market might only support the case for sideways inflation for the remainder of 2024, much like the Fed anticipated in its last meeting.

In this week's FOMC meeting, we expect the Dot Plot to indicate smaller rate cuts in 2024 (compared to March Dot Plot's 75bps) but bigger rate cuts in 2025. On the Summary of Economic Projections (SEP), we also foresee potential revisions to GDP and core PCE to align more closely with the recent constrained growth momentum. In the latest PCE published in March, both figures saw notable upward revisions.

Beware of Market Inertia. The weaker IDR and sluggish growth momentum continue to weigh on overall market sentiment, particularly in the equity market. With the DXY surging to nearly 105 following solid US NFP data, the IDR could face additional pressure and higher volatility. Despite the stronger-than-expected Forex Reserves data released last Friday, which led to a slight appreciation of the IDR, the overall market remains negative, as evidenced in further declines in the JCI, which saw consistent lower high-lower low trend in the past one month.

While a weaker IDR has previously been associated with potential rate hikes, as seen in Oct-23 and Apr-24, Bank Indonesia's statement in the May 2024 meeting suggests a shift away from this stance. BI indicated that it has moved from a potential risk scenario to a baseline scenario and that the current benchmark rate is sufficient to stabilize the IDR and keep inflation within the targeted range. Any abrupt change from this stance could lead to potential outflows, especially in the fixed-income market, due to perceived higher monetary policy risk. Large and sudden outflows could further weaken the IDR, negating the intended impact of a rate hike.

In this context, BI is actively reducing liquidity through high SRBI issuances, signaling that it will not revert to using interest rate adjustments with 4-weeks average of outstanding OMO has now closed to this year high at IDR826tn. Simultaneously, banks have access to additional liquidity due to new macroprudential incentives, which have unlocked around IDR81tn in early June, on top of the existing IDR165tn. Additionally, the postponement of the BP Tapera 3% rate cut should help stabilize consumption, particularly for discretionary items. However, the risk of no significant catalysts for household consumption remains, especially given the lack of fiscal space due to weak government revenue trends. This could further prolong the risk of weak growth momentum, potentially leading to market inertia for the time being.

Capital Market – Currency Risk Continuous to Affect Foreign Flow Trends. The 10-year US Treasury yield went down 8 bps MTD, settling at 4.43% while the 2-year UST yield decreased by 2 bps to 4.87%. On similar fashion, the 10-year INDOGB yield also saw slight drop of 2 bps to 6.90%. Indonesia's 5-year CDS also down by 1 bp to 71 bps on May 31, 2024, compared to the previous week.

Fixed Income Flow – Foreign investors registered IDR2.52tn inflow last week (4^th June), with overall foreign ownership of domestic government securities (SBN) now totaling IDR806.27tn. However, on MTD basis, foreign investors turned into slight outflow of IDR0.70tn, following the first monthly inflow this year in May, whereby foreign inflow surged to IDR17tn. The banking sector experienced a significant inflow of IDR7.68tn last week, with MTD inflow at IDR12.13tn, while both mutual funds and insurance & pension fund both saw weekly inflow of IDR1.34tn and IDR3.08tn, respectively. Conversely, Bank Indonesia (excluding Repo) recorded an outflow of Rp3.57 trillion, leading to an MTD outflow of Rp17 trillion.

Equity Flow – The JCI fell below the critical 7,000 level as persistent foreign outflows continue to dominate. The first week of June 2024 saw a foreign outflow of IDR 1.7 trillion, with the JCI performance declining by 1.0%. The year-to-date 2024 outflow in the regular market has now reached IDR 14.6 trillion. Commodities-related stocks such as AMMN, ADRO, MBMA, PGAS, INCO, and BREN consistently remained among the top inflows, while the Big-4 Banks, TOWR, TLKM, ASII, SMGR, and UNTR consistently appeared on the outflow list, a trend that has persisted in recent trading weeks.

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