Macro Strategy

The Travails of Resurgent Risk Catalysts

 

  • The resurgence of inflationary risk: rising geopolitics tension led to stronger oil price, US strike port, solid Sep NFP data, and China stimulus.
  • Robust initial data on China’s property market potentially highlights the impact of recent broad-based stimulus announcement to consumers.
  • The recent spike in oil prices has modest impact on Indonesia, but more gradual FFR cuts have strengthened the DXY, causing the IDR to tumble.

 

The resurgence of inflationary risks has led to a recent spike in the Dollar Index (DXY) index, on a more moderate expectation of the Federal Funds Rate (FFR) cuts. Contributing factors include escalating geopolitical tensions in the Middle East, strikes at East and Gulf Coast US ports, stronger US non-farm payroll (NFP) data, and impact of the recent China’s economic stimulus. The stronger DXY has weighed on the Indonesian rupiah (IDR), potentially limiting Bank Indonesia’s (BI) ability to implement consecutive rate cuts.

  1. Rapid escalation of geopolitical risks. The intensified conflict between Israel and Iran (along with its proxies) has sparked renewed fears of rising oil prices. Last week, Brent crude climbed to USD78/barrel, while WTI rose to USD74/ barrel—both up nearly 10% since Iran launched missiles on 1st These price increases, however, are still lower than those seen in previous conflicts’ early episode of the Iraq-Kuwait War (1990), Gulf War (1991), Israel-Lebanon conflict (2006), and the Russia-Ukraine war (2022). There’s still risk that oil prices could rise further due to anticipated supply constraints, as the ongoing Israeli strikes on Lebanon’s capital, Beirut, continue. However, the absence of Iran’s oil production is expected to be compensated by other OPEC+ members, as seen in past episodes. Additionally, increasing US oil production would moderate price increases. Historically, geopolitical-driven oil price increase has been temporary, although China's recent stimulus measures could intensify upward pressure on energy prices in the medium to longer term on rising energy demand.
  2. The recent strike at East and Gulf Coast US ports, the largest since 1977, has raised concerns about potential inflationary pressures (Exh. 3). The strike was tentatively resolved after just three days, with an agreement to increase wages by 62% over six years. The strike caused an estimated USD15bn loss to US economy, a meager 0.05% of US GDP. It is expected to take two to three weeks for port operations and freight rates to normalize. Further discussions are scheduled for January 15, 2025, which could keep inflation risks in play and influence the Fed’s decision on future rate cuts trajectory.
  3. Surging non-farm payroll (NFP) in Sep. The latest NFP report showed a surge of 254k jobs in Sep-24, significantly higher than the upwardly revised 159k in August and well above the forecast of 140k. This marks the strongest job growth in six months. The unemployment rate fell to 4.1%. With the Fed now prioritizing employment over inflation, this recent trend supports a more gradual path for rate cuts. Unlike previous precedence, last Friday's stronger NFP data did not trigger a market downturn, indicating a shift in sentiment away from the "good news is bad news" mindset, mainly underpinned by recession concerns. This will lead to a more cohesive alignment between monetary and market trend trajectories going forward.
  4. China's recent stimulus measures may be starting to show effects. It is reported that between 1-4th Oct, Beijing saw a 92.5% y-y increase in new home viewings, while Shenzhen experienced staggering 569% y-y surge in new home sales from Tuesday to Friday last week and a 233% rise in existing property sales. Nationwide, there has been a 50% increase in participation in property-related activities. Although these spikes could be partly attributed to holiday discounts, the growing interest in home purchases could lead to a rise in housing prices for the first time in 16 months. This would reflect the initial impact of China’s recent broad-based stimulus measures.

 

What’s the impact to Indonesia. In our view, the current rising oil prices have not yet reached a concerning level as the Indonesia Crude Price (ICP) averaged USD81/barrel in 8M24 were still slightly below the state budget assumption of USD82/barrel, with the ICP for Sep-24 set at USD72/ barrel. However, it’s worth noting that in the past, rising oil prices have led to early fuel imports and this would potentially lead to stronger import figures, lowering the trade surplus outlook. Regarding the policy rate, the more gradual expectations of FFR cuts, which has led to the strengthening of the DXY, may prompt BI to adopt wait and see stance on its easing cycle during the October meeting, mainly as the IDR has erased all its year-to-date gains. In recent quarters, BI's benchmark rate decisions have placed greater emphasis on supporting the strength of the IDR. However, considering the current weak domestic macroeconomic conditions as evident in the continued deflation trend, a contraction in PMI, and softer middle-class spending, we believe BI will stay committed to its easing cycle, with another rate cut likely later in the 4Q.

 

Capital market – Foreign Flow return to Fixed Income

On the return of inflationary risk which led to more gradual FFR cuts, the yield has exhibited some volatility with the 10-year US Treasury yield rose by 23 bps to 3.98% last week, while the 2-year yield increased by 38 bps to 3.93%. The yield on the 10-year Indonesian Government Bond (INDOGB) also climbed 18 bps to 6.64%. The US Dollar Index gained 1.53% compared to the previous week, which has led to 2.38% weekly depreciation on the IDR, closing at IDR15,485/USD. Meanwhile, Indonesia's 5-year Credit Default Swap (CDS) remained steady at 68 bps for the week.

 

Fixed Income Flows – As of 3 Oct-24, there’s weekly foreign inflow of IDR 5.35tn with total foreign ownership of domestic Government Securities (SBN) raising to to IDR 878tn. Despite the announcement of China stimulus, Indonesia still enjoyed IDR7.89tn of foreign inflow MTD. The banking sector also saw a weekly inflow of IDR21.52tn (MTD: IDR 0.55tn), Bank Indonesia (excluding Repo) reported weekly outflows of IDR3.37tn (MTD outflows of IDR 12.41tn). Mutual funds experienced a weekly outflow of IDR0.25tn, while the insurance and pension fund sectors saw inflows of IDR0.89tn during the same period.

 

Equity Flows - Foreign outflows continues into the 1st week of Oct-24, with weekly outflow reached IDR4.4tn, similar to the last of week Sep-24. JCI performance declined by 2.6% wow to sub 7500 level.

 

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