Macro Strategy

The Specter of Growth Scarcity

 

• A weaker US economy has become a key headline, and the imposition of tariffs would only further exacerbate the situation.
• Our findings indicate mixed US economic signals, with market-Fed rising divergence historically increasing volatility.
• BI is gradually injecting liquidity, but sluggish money supply growth still poses risks to economic trajectory, requiring further easing measure.

 

Growth Concerns Are Now at The Fore. A weaker US economy has become a key headline, and the imposition of tariffs would only further exacerbate the situation. As such, the 25% tariff on Canada and Mexico has now been postponed for the second time, with markets likely to shrug off any further tariff threats. We have been highlighting that the US yield curve flattening signals weaker economic growth expectations, benefiting bonds at the expense of equities. Since the peak steepening of 41 bps (10 – 2 Yrs spread) in early Jan-25, the curve has contracted to 20 basis points in early Mar-25. A flatter yield curve driven by weaker growth expectations is typically followed by a weaker DXY, which has already been occurring, with the DXY down 5.7% from its peak. Additionally, the DXY's performance under a potential Trump 2.0 administration has closely mirrored its trajectory during Trump 1.0, whereby DXY moderated post the peak of appreciation 7-8 weeks after elections. The key distinction, in our view, is the scale of depreciation. In 2017, DXY depreciated 12% despite FFR hikes, an outcome unlikely to be repeated.

 

The US Economy Trend: Mixed Signals. Our findings suggest that the US economy is currently sending mixed signals, with some indicators pointing to moderate growth, while others suggest a potential slowdown. The Beige Book, the Dallas Weekly Economic Index (WEI), and the latest Fed chairman statement indicate continued but modest economic expansion. However, more real-time measures, such as GDPNow, consumer confidence, and labor market data, are flashing warning signs. Rising layoffs, slowing retail sales, and declining business confidence suggest that the economy may be heading for a more significant downturn. This is also reflected in the Bloomberg recession indicators, which have recently shown an increase in probability.

 

Indicators Showing Resilience or Slight Moderation

 

Beige Book: The latest report indicates that overall economic activity has increased slightly since mid-January. While consumer spending weakened overall, demand for essential goods remained strong, though discretionary spending declined due to higher price sensitivity, particularly among lower-income shoppers. Vehicle sales fell modestly, while manufacturing saw slight to modest growth across most Federal Reserve Districts. Employment edged higher, supported by improved labor availability in various sectors. Price increases remained moderate across most regions.

Dallas Fed Weekly Indicator: The Weekly Economic Index (WEI), which tracks real-time economic activity, stood at 2.24% for the week ending 1st Mar and 2.43% for 22nd Feb, based on an annualized four-quarter GDP growth scale. The 13-week moving average is 2.46%, slightly below the 2.51% four-quarter GDP growth recorded through 4Q24.

Federal Reserve Commentary: Fed Chairman Jerome Powell continues to signal that the US economy remains on solid footing despite elevated uncertainty. As a result, the Fed sees no urgency in adjusting policy and prefers to wait for greater clarity.

 

Indicators showing Weaker Signals

 

GDPNow Forecast - The Federal Reserve Bank of Atlanta’s closely watched GDPNow model projects a sharp 2.8% annualized decline in GDP growth for this quarter, a stark contrast to the 2.3% increase projected just a week ago. Unlike the official quarterly GDP figures, which are lagging indicators, GDPNow provides a real-time estimate based on incoming economic data. The contraction estimate is caused by larger negative contribution of net export despite a slight growth on consumption and investment.

The Consumer Confidence Index fell by 7.0 points in February to 98.3, marking the largest monthly decline since Aug-21, reflecting increasing concerns about economic conditions.

The Purchasing Managers Index (PMI) dropped to 50.3% in February, down 0.6 percentage points from January’s 50.9%, signaling a slowdown in manufacturing activity.

US retail sales declined by 0.9% in Jan25, the weakest in two years. The figures are also worse than expected, suggesting that consumer demand is softening. Major retailers, including Walmart, Target, and Best Buy, have also issued warnings about slower consumer spending in 2025, citing concerns over how tariffs could impact revenues and corporate profits.

US labor market: US job growth (NFP), unemployment, and wage gains all fell short of expectations in Feb 25. The economy added 151K jobs, below the 160K forecast, while the unemployment rate rose to 4.1%, slightly above the expected 4.0%. Average hourly earnings increased by 4% y-y, just under the 4.1% projection.

US WARN (Worker Adjustment and Retaining Notification Act) tracker indicates nearly 100 companies announced layoffs for March, highlighting growing corporate caution toward mundane growth trajectory ahead.

S&P Global reported earlier this year that US bankruptcies have surged to their highest levels in 14 years. Consumer discretionary and Industrial were the two sectors with the most bankruptcy filling in 2024.

 

What’s Next? Market Opportunities and Risk Catalysts

In our view, more weaker signals would point to larger monetary easing or potential of more FFR cuts to stem further growth derating in the short term, which would lead to potential bullish yield steepening, whereby the short end (UST 2-Year yield) declines faster than the long end. The latest FedWatch data reflects this trend, showing a rising probability of three Fed rate cuts this year vs only one rate cut expectation earlier this year. In our view, such a market environment would benefit all emerging market asset classes, particularly in Indonesia as weaker DXY would support greater stability in the IDR, a key risk factor monitored by Bank Indonesia. A stable IDR is crucial for any potential rate cuts. Also, low inflation makes Indonesian assets more attractive in real terms, further strengthening their investment appeal. Lastly, the recent increase in foreign outflows, particularly in the equity market, suggests that several negative domestic developments have already been priced in, potentially reducing further downside risks.

 

On the risk factors, with the current divergence between market and Fed expectations regarding the rate cut trajectory could often led to significant movements in the DXY and increased market volatility. Also, seasonal dividend repatriation in 2Q would put weigh on IDR ST trend. Both factor could potentially lead to a more hawkish BI.

 

Growth and Money Supply Moderation Remains the Biggest Risk. SRBI continues to indicate a more measured pace of monetary contraction. In Feb-24, Bank Indonesia (BI) maintained a balanced approach to SRBI issuance and maturity, a trend that carried into its first issuance of Mar-25. This suggests BI is gradually reintroducing liquidity into the market while preventing an oversupply of IDR that could threaten currency stability. The unmet demand for SRBI has driven stronger bids for SBN, supporting yield stability amid concerns over BI and the government’s debt monetization strategies.

 

While debt monetization is often linked to money creation, raising fears of inflation and typically seen as a last-resort policy, the current situation appears different:

• Monetary Base Trends: Indonesia’s M0 (monetary base) data showed a significant increase in Nov-Dec 2024. While such an uptick is often associated with central bank money creation, it is also a common seasonal pattern toward year-end.
• BI’s Market Interventions: BI actively participates in secondary markets as part of its triple intervention strategy to maintain stability. Since 2024, BI added IDR450tn in SBN to its balance sheet, primarily purchasing from banks, which were the sole net sellers that year. Despite this, no inflationary pressures emerged.

 

Our primary concern is the potential moderation in economic growth this year. From an M2 (broad money) perspective, fiscal spending and loan growth are the key drivers. If the business cycle continues to slow, loan growth is likely to weaken further, limiting M2 expansion. Given the current pace of fiscal spending, government expenditure alone are unlikely to be sufficient to drive M2 growth. This is particularly important because M2 growth is closely correlated with the Jakarta Composite Index (JCI), serving as a key signal for earnings growth.

 

With the government’s substantial debt issuance plans, broadening the investor base will be essential to mitigate the risk of a crowding-out effect in the domestic market. One potential approach is to expand global bond issuance, though this would require offering attractive yields to draw in investors. Maintaining fiscal prudence will be critical, as any credit rating downgrade would raise the country’s credit default swaps (CDS), making debt issuance more expensive. Given these constraints, the government is likely to adopt a gradual approach to increasing debt issuance to avoid excessive market disruptions.

 

Rising Foreign Inflow Supported IDR Appreciation. The 10-year US Treasury yield rose by 8 bps to 4.32%, while the 2-year yield remained steady at 3.99%. Meanwhile, Indonesia’s 10-year government bond (INDOGB) yield declined by 5 bps to 6.87%. The US Dollar Index depreciated by 3.68% over the past week, which partly underpinned IDR appreciation of 1.72%, closing at IDR 16,295. Indonesia’s 5-year Credit Default Swap (CDS) also declined by 2 bps to 77 bps.

 

• Fixed Income Flow. In bond market, foreign investors recorded a net inflow of IDR6.14tn. increasing total foreign ownership to IDR896tn. On MTD basis, foreign inflows reached IDR5.50tn, with YTD inflows at IDR19tn. The banking sector saw weekly outflow of IDR4.11tn weekly and IDR6.29tn MTD, while Bank Indonesia (excluding repo transactions) recorded a significant weekly inflow of IDR24.89tn and IDR27.41tn MTD. The mutual fund sector posted a minor outflow of IDR0.11tn, while the insurance and pension fund sector recorded an inflow of IDR2.59tn.
• Equity Flow. Foreign investors finally turned into net inflows in the 1st week of Mar25 (3 – 7 Mar25) amounted to IDR184bn, the first inflow following 6^th consecutive weeks of outflows. The YTD outflows, however, remain considerable at IDR19.5tn. BMRI, BBCA, BBRI, MDKA, BBNI remains as the company which saw consistent outflow over the past month.

 

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