Macro Strategy

Post Relief Rally: What’s Next?

 

• The relief rally risks losing momentum and reversing unless Indonesia shows clearer signs of growth to support inflows.
• US LT Inflation expectation remains anchored despite higher ST inflation risk, which points to higher probability for FFR cuts.
• Lower energy price would also help to ease broader ST inflationary pressure and open up govt fiscal buffer for demand side stimulus.

 

Fading Tailwinds and Emerging Headwinds? Trade tensions seem to be easing, sparking a relief rally across various asset classes. The S&P 500 has risen 11% from its recent low, the VIX has dropped to the 20s range, 10 years INDOGB yields have fallen by 17 bps from their recent peak, and the JCI has climbed 12% from its recent low. The key questions now are whether the current rally is sustainable and what catalysts will be necessary to drive the next market uptick. We revisit the four key developing factors highlighted in our report, "The Rattle of the Tariff Tantrum" (8 April 2025), which we believe will influence investor behavior and asset allocation decisions. Our observations suggest that the current relief rally may be losing momentum and could reverse on profit-taking unless Indonesia can deliver clearer signs of growth improvement to attract inflows. Indonesia will need to deliver a stronger growth differential as global growth slows, capitalize on lower oil prices to strengthen its fiscal buffers, and take advantage of a weaker USD.  We also note that the probability of rate cuts remains high, as LT inflation expectations stay anchored, while lower energy prices would help ease broader ST inflationary pressures, supporting asset prices momentum.

 

Factor 1: US Recession Risk and FFR Trajectory. Concerns over tariffs have increased recession risks, especially since agreements have yet to be reached with countries that were expected to set the benchmark for negotiations. Trump’s struggles with China could also slow down other countries’ responses, as they feel less pressure to immediately finalize deals with the US. Under the current scenario of a 10% baseline tariff rate on countries other than China, inflationary risks remain. The Beige Book reported weaker business confidence amid rising tariff tensions, although some sectors continue to show stable conditions. Lower confidence could lead to reduced business activity due to uncertainty, which might weigh further on the economy even with a pause in tariff hikes. Several businesses mentioned they have passed on higher costs to consumers, pointing to a higher short-term inflation path. The small and medium-sized businesses in the US that rely on imports expect it could take two years to fully pass through cost increases, assuming a tariff rate between 10%-20%.

Despite rising inflation, the long-term inflation expectations, as shown by the Fed’s preferred 5-year, 5-year forward (T5YIFR) inflation gauge, appear stable, rising to 2.2% and still relatively close to Fed’s inflation target of 2%, while unemployment expectation rise.  From past patterns, when tariff-driven inflation rises alongside growing risks of higher unemployment, the Fed tends to adopt a less hawkish approach and current development points for further certainty on FFR cuts ahead. While market expectations for rate cuts have now shifted to three cuts in 2025, Fed officials remain cautious. BI also raised their estimate for FFR cuts in 2025 to 50 bps from the previous 25 bps.

 

Factor 2: Currency Risk – Weaker DXY, No IDR Appreciation. The DXY has rebounded recently, mainly driven by reduced expectations for aggressive Fed rate cuts and easing trade tensions. Furthermore, the narrowing gap between market-implied year-end rates and the Fed’s dot plot points to potentially lower volatility ahead.  

 

However, we note 3 factors which could keep DXY to remain soft:

1. Ongoing US policy uncertainty, especially the unpredictability of Trump’s policies, continues to weigh on the USD, which might prolong "Sell America Trade" trend, slowing investment flows as investors wait for clearer policy direction.
2. The tariffs could cause global trade to contract, leading countries with large trade surpluses against the US to reduce their reinvestment flow into US assets, particularly US Treasuries, adding further pressure on the USD over the medium term.
3. A weaker dollar may also challenge the US Treasury market’s attractiveness, especially as bonds from other advanced economies become more appealing to investors. Further outflow from UST could considerably affect the DXY level as seen in recent weeks.

 

Nonetheless, we believe the USD’s role as the dominant global reserve currency will persist, as historical periods of USD weakness have not meaningfully reduced its share in global reserves. Despite considerable weakness in the USD recently, the IDR has not appreciated, underscoring ongoing domestic structural challenges especially on the growth strategy. In addition, seasonal factors such as dividend repatriation and the hajj pilgrimage season have contributed to pressure on the currency on higher USD demand. Addressing these structural issues may require further fiscal and monetary reforms.

 

Factor 3. Safe-Haven Shift. As highlighted in last week’s report, the recent rise in US Treasury yields appears to have contributed to a shift in President Trump’s tone toward de-escalation, which helped revive market risk appetite. This tone change also coincided with US Treasury auctions featuring tenors favored by foreign investors. Demand for the 5-year and 7-year Treasury auctions remained relatively stable, as reflected in the healthy bid-to-cover ratios. However, lingering distrust in Trump’s policies could pose a longer-term risk to the US Treasury’s status as a global safe haven.

In Indonesia, 10-year government bond yields have swiftly fallen back below 7%, supported by strong domestic demand, while equities have rebounded 11% from their April 8 lows. Since 2023, we observed that net domestic inflows (excluding Bank Indonesia and individual investors) into government bonds tend to increase whenever the 10-year yield crosses above 7%, while heavier selling pressure started when yields approach the 6.5%-6.6% range. Looking ahead, the expectation of a BI rate cut, supported by Bank Indonesia’s slight shift to a more dovish stance amid slower loan growth targets and challenges in attracting Third Party Funds, could further encourage inflows into SBN.

 

Factor 4. Oil Price Weakness. The decline in energy prices is helping to ease broader ST inflationary pressures, potentially strengthening the case for future rate cuts and improving investor sentiment. Major global energy agencies have already revised their demand forecasts for 2025.

In Indonesia, lower oil prices offer additional fiscal relief. Based on the government’s fiscal sensitivity analysis, we estimate that if the ICP averages USD70 in 2025, it could free up around IDR80tn in fiscal space. The combination of reduced energy compensation payments and front-loaded debt issuance should further bolster fiscal buffers, with SAL balances could reach close to IDR400tn this year. In our view, fiscal driven stimulus will be the ultimate catalyst to counter the prevailing weak domestic consumption trend.

 

Capital Market: Market Still On the Uptrend. The 10-year US Treasury (UST) yield declined by 5 bps to 4.29%, while the 2-year UST yield fell by 7 bps to 3.74%. Domestically, the 10-year Indonesian Government Bond (INDOGB) yield edged down by 2 bps to 6.92%. The DXY strengthened by 0.40% over the past week, while the IDR weakened slightly by 0.03% to IDR16,830. Indonesia’s credit risk also improved, with the 5-year Credit Default Swap (CDS) spread narrowing by 12 bps to 96 bps. JCI rose 3.7% last week to 6678.9, with property, tech and basic material as the best sectoral performer.

 

• Fixed Income Flow: The Ministry of Finance reported (as of 24 April) a weekly foreign inflow of IDR4.68tn into domestic Government Securities (SBN), bringing total foreign holdings to IDR895tn. On MTD basis, foreign inflows stood at IDR3.27tn. Among domestic investors, the banking sector recorded a significant weekly outflow of IDR8.08tn but maintained a positive MTD inflow of IDR57.76tn. Bank Indonesia (excluding repo transactions) booked a weekly inflow of IDR22.56tn, although it registered a net MTD outflow of IDR38.10tn. The mutual fund sector posted a weekly inflow of IDR0.94tn, while insurance and pension funds also recorded combined inflows of IDR2.58tn.
• Equity Flow: While JCI continue its uptrend, foreign outflows remain persistent, with another IDR694bn outflow registered during the fourth week of April 2025 (21–25 April), pushing total MTD and YTD outflows to IDR7.8tn and IDR34.7tn, respectively. Selling pressure remained concentrated in large-cap financial names, with BMRI, BBRI, BBCA, BBNI, and UNTR topping the list of stocks with consistent foreign outflows. On the other hand, selective buying was observed in sectors tied to commodities and telecoms, with ANTM, CPIN, TLKM, JPFA, and ASII recorded steady foreign inflows.

 

… Read More 20250428 Macro Strategy