Macro Strategy: Shifting Curves, Diverging Signals

Macro Strategy

Shifting Curves, Diverging Signals

Shift in US yield curve as weak jobs, soft consumption, and inflation risks raise stagflation fears and pressure Fed policy response.
IMF upgrades global growth outlook; S&P affirms Indonesia’s BBB rating, citing fiscal discipline and domestic demand.
Indonesia’s 2Q25 GDP likely marks a trough, with soft consumption offset by stronger fiscal spending and resilient net exports.

The Shift in Yield Curve, What is The Risk? Following weaker-than-expected job data last Friday, we observed a reversal in the US yield curve's flattening trend. Since April 25, the US yield curve has been showing steady flattening, with the 2Y–10Y yield spread had narrowed from 56 bps to 41 bps by end of July. However, the spread widened sharply to 52 bps last Friday, driven by a steeper decline in the 2Y yield relative to the 10Y. This shift reflects a surge in market expectations for Fed easing. While such bullish steepening typically supports asset re-rating, the cause of such reversal is concerning as it came from significant downward revisions to prior job data, which raise concerns about deeper economic turbulence:

1. Large labor data revisions. May and June Non-Farm Payrolls were revised down by a combined 260k, and the latest July report showed a gain of just 70k jobs, with the unemployment rate rising to 4.2%. These developments suggest a softening labor market and reinforce rate-cut expectations. With the Fed remains leaning toward hawkish in recent FOMC, the risk of falling behind the curve has now become more pronounced, and policy catch up could lead to further market instability.

2. Weak Consumption. In addition to soft labor market data, US personal consumption remains sluggish. While the advance estimate for 2Q25 GDP showed a 3.0% annualized rebound from a -0.5% contraction in 1Q25, overall growth in 1H25 reached just 1.3%, the slowest pace since 2022. Consumption rose only 1.0% y-y in 1H25, marking the weakest performance since the post-pandemic recovery. These conditions increase the complexity for the Fed in addressing its dual mandates: balancing the need to manage inflation expectations with the growing risks to growth.

3. Rising Inflation Risk. On the inflation front, early signs of tariff passthrough are becoming more apparent. Input cost pressures are rising in select goods, and producers may soon begin passing these costs onto consumers. Whether this results in a one-off price level adjustment or signals a more persistent inflation trend remains uncertain, but the risk of renewed inflationary pressure cannot be dismissed. In our view, the current policy paradox, slowing growth alongside the risk of renewed inflation, could fuel increased market volatility in the near term, as concerns over a possible stagflation episode mount. In such an environment, the yield curve typically flattens, driven by lower long-end yields reflecting weak long-term growth expectations, while short-end yields remain elevated due to rising inflation pressures.

Markets now see an 80% chance of a rate cut at the September FOMC meeting, up from 50% earlier, and have shifted expectations toward three rate cuts in 2025 instead of two. In response, the yield curve steepened significantly, as investors adjusted their view of the Fed’s potential next move, front-end yields declined on expectations of a quicker policy pivot, while long-end yields remained anchored by concerns over slowing growth. With growing expectations of rate cut, DXY outlook will continue to remain soft.

Not all is Negative. Despite what seems to be an unending period of uncertainty, we believe resilience remains intact in the current era of growth, both globally and in Indonesia.

IMF Positive Upgrade The latest IMF outlook reinforces this view. Following recent tariff developments, the IMF upgraded its global GDP growth forecast to 3.0% in 2025 and 3.1% in 2026, an increase of 0.1–0.2 percentage points from the April estimate. Even before the upgrade, global GDP was far from contraction territory, signaling that the global economy will likely continue expanding, albeit at a slower pace. Energy prices are projected to ease, and inflation, outside of the US, is expected to trend lower. This provides room for non-US central banks to adopt more accommodative policies, offering support for domestic demand and cushioning potential trade-related shocks. That said, financial market volatility may persist, especially as the US is expected to run large fiscal deficits over the next decade. This could add a risk premium to already elevated US yields, potentially limiting the downside for government bond yields across many emerging markets.

S&P Maintain Rating and Outlook on Indonesia. S&P has affirmed Indonesia’s sovereign credit rating at BBB with a stable outlook, citing the country’s disciplined fiscal policy as a key anchor. Some of the key points from latest S&P reports:

Domestic demand is expected to remain a key driver of growth as the commodity windfall tapers off. S&P also highlighted the government's swift post-pandemic fiscal consolidation, particularly the return of the budget deficit to below 3% of GDP, as a positive factor.
Although recent infrastructure spending has fallen short of targets, this is expected to be offset by contributions from Danantara and state-owned enterprises (SOEs), along with a push for more public–private partnerships. Progress in downstreaming initiatives is also seen as a key support for export performance and the external balance, especially as commodity prices stabilize.
While S&P anticipates a modest widening of Indonesia’s fiscal deficit through 2028, it maintains confidence in the government’s commitment to the 3% ceiling. The planned expansion of the free nutritious meal program is expected to be funded through new revenue sources or budget reallocations, helping to preserve overall fiscal discipline.

Indo 2Q25 GDP: potential trough quarter. This week, market focus shifts to the release of Indonesia’s 2Q25 GDP, where we expect growth to ease slightly to 4.8% y-y from 4.87% in 1Q25. Several indicators point to this moderation. Retail sales growth slowed to 1.2% y-y in 2Q25, down from 2.7% in the previous quarter, while the Current Economic Conditions Index dropped to a two-year low, signaling softer consumer activity.

On a more positive note, investment and government consumption likely improved, supported by a sharp increase in fiscal spending in June. This late-quarter acceleration helped offset the earlier contraction in 1Q and the subdued performance during the first five months of the year. Net exports are expected to remain a key growth driver, with the recent trade surplus highlighting Indonesia’s external resilience amid global tariff pressures. We view 2Q25 as a potential trough for GDP growth. The combination of increased fiscal momentum and continued weak macro indicators may raise the urgency for a more accommodative policy response in the coming months.

Capital Market – Shift in Yield Curve. US Treasury yields declined notably, with the 10-year yield falling by 17 basis points (bps) to 4.23% and the 2-year yield dropping by 22 bps to 3.69%, shifting from flattening trends since April, into steepening curve. Indonesia’s 10-year Government Bond (INDOGB) yield rose by 6 bps to 6.58%. On the currency front, post Fed’s hawkish message at the last FOMC meeting, the US Dollar Index strengthened significantly, gaining 2.61% to reach 100.19. Nonetheless such strength appears short lived, as it tumbled back to 98 level on higher expectation of Fed’s rate cuts following large revision in the job data. The Indonesian Rupiah depreciated by 1.09% against the USD, closing at IDR16,493 per USD. Meanwhile, Indonesia’s 5-year Credit Default Swap (CDS) spread widened by 4 bps over the week to 75 bps, signaling a mild increase in perceived sovereign credit risk.

Fixed income flow - Foreign investors posted a weekly net outflow of IDR0.70tn in the domestic Government Securities (SBN) market, bringing total foreign ownership down to IDR932tn. However, on MTD basis, foreign investors still recorded a net inflow of IDR13.28tn, reflecting sustained interest despite recent profit-taking. The banking sector saw a weekly net outflow of IDR7.53tn, though it continued to post a strong MTD net inflow of IDR83.57tn. Meanwhile, Bank Indonesia (excluding repo transactions) recorded a weekly inflow of IDR21.51tn, reducing its MTD net outflow to IDR31.73tn. Mutual funds contributed a smaller but positive inflow of IDR0.38tn during the week.

SRBI flow - Bank Indonesia’s outstanding SRBI declined by IDR27.35tn on a weekly basis, bringing the total outstanding to IDR724tn. Foreign investor participation continues to moderate, with another net outflow of IDR17.2tn recorded last week. YTD, foreign investors have posted a cumulative net outflow of IDR77.39tn, bringing down its ownership to IDR137tn, representing roughly 19% of total SRBI outstanding.

Equity flow - The JCI edged down by only 0.1% last week, showing relative resilience despite a significant downturn across regional equity markets. After briefly recording its first weekly inflow, foreign investor sentiment shifted back into outflow territory. In the 5th week of July 2025, foreign investors withdrew IDR2.4tn from the market, pushing total MTD (July 1 to August 1) outflows to IDR6.5tn, while on YTD basis, cumulative foreign outflows have reached IDR45.4tn. The top five stocks that consistently attracted net foreign inflows were ASII, TLKM, GOTO, UNTR, and BRIS. Meanwhile, the stocks that experienced consistent net foreign outflows included BBCA, BMRI, ICBP, SSIA, and ANTM.

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