Macro Strategy

Post-Trump’s Decisive Victory

 

  • Despite 25bps cut, the Fed belief the policy and economy are still in a good place, signaling more gradual FFR cut trajectory.
  • Trump's core objective to drive the economy requires an initial balanced approach to manage reflation risks and ensure sustainable rate cuts.
  • China has intensified its stimulus, focusing on empowering local governments to increase spending and stimulate domestic growth.

 

Trump’s Victory Impact on FFR. The Federal Reserve lowered its interest rate by 25 basis points to a target range of 4.50%-4.75% during its November meeting, with a balanced assessment of the US economy. Fed Chairman Jerome Powell highlighted that both the policy stance and the economy are in a good position, suggesting a gradual approach to future rate cuts. The rate cut halted the USD's post-election strengthening following Trump’s victory. Powell also reaffirmed the Fed's independence, stating he would not resign if requested by Trump, and emphasized that the Fed hasn’t factored in Trump’s policies yet due to their uncertain timing and specifics.

 

Toward the end of the week, the IDR displayed strength, recovering some of its losses from the past month, partly underpinned by BI’s intervention. Unlike the heightened volatility following Trump’s 2016 victory, recent market activity has shown a more muted response, as expectations for Trump’s victory had already been factored in, in our view, minimizing any surprise effect. Despite this stabilization, Bank Indonesia has maintained a contractionary stance, with the latest SRBI auction reaching a three-month high. Without a much stronger trend in the IDR from its current level, BI is expected to keep rates steady.

 

The Core Tenets of Trump’s Objectives. A stronger economy has become the central tenet of Trump’s policy expectations. In our view, this premise would imply persistent Fed funds rate (FFR) cuts, and hence weaker USD, especially as other central banks in the DXY basket have also suggested potential rate reductions, intensifying global monetary pressures toward lower interest rates. Nonetheless, with the current resilience of the US economy, a significantly stronger, immediate pro-growth fiscal policy could potentially lead to expectations of a more stable FFR trajectory due to reflation risks. This would ultimately strengthen the USD further, creating challenges for the US export and trade outlook. Therefore, a more balanced approach in the early phase of Trump’s administration seems plausible, with deregulation efforts aimed at keeping inflation low, particularly in the energy sector.

 

Drawing from Trump’s first term, additional tariff policies may take time to implement, while a tax cut appears more likely once the Tax Cuts and Jobs Act (TCJA) expires at the end of 2025. The Fed has indicated it will not significantly consider Trump’s policies until they are officially in effect, signaling a cautious approach in its stance. If the US economy remains balanced with controlled spending, it could provide a stable basis for continued rate cuts in 2025, which in our view, aligning more with Trump’s key objectives.

 

China’s Latest Measure. As Trump’s policies are anticipated to hamper Chinese exports, a key pillar of China’s economy, the government is shifting its focus inward. It is supporting local governments in managing hidden debt and increasing fiscal spending to stimulate domestic demand, as demonstrated in the recent stimulus package from China’s National People’s Congress (NPC) Steering Committee. However, this plan appears to have fallen short of market expectations for more direct demand-side spending.

 

The NPC approved additional measures to enable local governments to allocate CNY10tn toward reducing off-balance sheet. The stimulus aims to significantly reduce hidden local government debt to CNY2.3tn (from CNY14tn) by 2028, representing an 80% reduction through a combination of a central government debt-swap (CNY4tn) and local special bond issuance (CNY6tn), which will also lower local governments' interest payments by CNY600bn over five years. The new stimulus empowers local governments to boost spending, stimulating domestic demand and helping to counterbalance the potential impact of weaker exports, thereby supporting steady growth amid global trade pressures.

 

Capital Market – Volatility Spike on Trump’s Victory. Trump’s victory combined with the potential Republican Sweep has resulted in considerable volatility on the 10-year UST yield, with yield seesaw between 4.26% to 4.42%, before settling at 4.30%, down 7 bps w-w. The 2-year yield rose 5 bps to 4.26%. Meanwhile, the 10-year Indonesian Government Bond (INDOGB) yield experienced a slight decline, easing by 1 bps to 6.75%. In the currency market, the US Dollar Index fell by 0.16% w-w, while the Indonesian Rupiah depreciated by 0.32% to IDR 15,670 per US Dollar. Additionally, Indonesia's 5-year Credit Default Swap (CDS) dropped by 3 bps, landing at 69 basis points.

 

Fixed Income Flow – A surge in foreign outflow. Foreign investors recorded an MTD outflow of IDR4.65tn, bringing down the total ownership to IDR881tn as of November 7 (Thursday). Similarly, the banking sector saw MTD outflows totaling IDR16.16tn. In contrast, Bank Indonesia (excluding Repo transactions) posted an inflow of IDR26.57tn as part of its triple intervention to stabilize the financial market. Mutual funds also recorded an inflow of IDR1.17tn, while the insurance and pension fund sector added IDR1.25tn.

 

Equity Flow - Foreign outflows in 1st week of November reached IDR4.6tn, with the JCI dropping 2.9% w-w, with YTD foreign outflows in the regular market totaled IDR10.0tn, with MTD outflows stood at IDR5.3tn. Key inflow stocks included INDF, BRMS, ANTM, TINS, ASII, EXCL, UNTR, BUMI, ITMG, AMMN, GOTO, and MAPA. Conversely, BBRI, BMRI, BBCA, ADRO, TLKM, PANI, BRIS, BREN, BUKA, and ICBP were consistently among the top outflows.

 

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