• The Dow closed in negative territory on Wednesday (20/09/23), as surging US Treasury put the squeeze on Technolody sector, bringing the Nasdaq to a 1.5% decline; after the Federal Reserve left interest rates unchanged, but signaled a higher interest rates for some time and one more hike this year. The Federal Open Market Committee, the FOMC, kept its benchmark rate in the current level of 5.25% to 5.50% after evidence that its 11 rate-hikes delivered so far are starting to turn the tide in the battle against inflation. The Core Personal Consumption Expenditures Index (Core PCE), which is closely watched by the Fed as a more accurate gauge of Inflation, slowed to 4.3% (from 4.7%) in August, the slowest pace since September 2021. Nevertheless, the FOMC maintained their forecast for rates to peak at 5.5% to 5.75% this year (or 5.6% at the midpoint) according the Summary of Economic projections that accompanied the monetary policy statement.
• On the other hand, Federal Reserve Chairman Jerome Powell struck a more hawkish tone on signs of a strengthening economy that could push inflation back up. For next year, the Fed sees the benchmark rate will be at 5.1%, suggesting just two rate cuts in 2024, compared with four rate cuts projected previously. For 2025, interest rates are expected to drop to 3.9% and fall further to 2.9% in 2026. For 2024, inflation is estimated to slope to 2.6% and down further to 2.3% by 2025, before eventually slipping to the 2% target in 2026. The US central bank’s concern in their attempt to achieve the above targets is coming from the tight labor market, which has proved to be the culprit of sticky inflation as wage growth underpins the bulk of price pressures in the service sector. Federal Reserve memberst expect the Unemployment Rate to be at 3.8% in 2023 (down from a prior estimate of 4.1%) but rise to 4.1% next year and remain at that rate for 2025. For 2026, the Unemployment Rate is expected to fall to 4.0%.
• The strength in the US economy, which has surprised many, has forced the Fed policy makers to upgrade the economic outlook ahead. This year’s economic growth is estimated to reach 2.1% more than double the 1% rate that was projection at the June meeting, while the growth forecast for 2024 was raised to 1.5% from 1.1% previously. With this stronger economic growth outlook, there is a posibility of one rate hike in 1/2023 if inflation proves to be picking up. This thinking inevitably sent the 2-year and 10-year US Treasury yields soaring to their highest point in a decade. The 2-year Treasury yield (the most sensitive to interest rate changes), rose to 5.12%, the highest level since 2006, after falling to a low of 5.049% yesterday.
• In the evening, US market participants will pay attention to economic data on Initial Jobless Claims (forecast: 225k vs. previous 220k), the Philadelpia Fed Manufacturing Index (Sept.) which still seems pessimistic about the business climate situation in September is predicted to show a negative reading of -0.7 compared to 12 in the previous month; and the last is Existing Home Sales (Aug.) which is expected to be relatively unchanged from the previous month at 4.1 million units.
• ASIA MARKETS: in a week filled with several central banks’ interest rate decisions, China has set its benchmark short-term and long-term (5- year) interest rates to remain unchanged at their respective levels of 3.45% and 4.20%. Later this afternoon at around 14.30 WIB, the Bank Indonesia Board of Governors Meeting (RDG) will vote on whether the BI7DRR will again be held at 5.75%, as it has been since January.
• EUROPEAN MARKETS: The UK released Inflation figures (Aug.) at 6.7% yoy, successfully softer than the 7.0% prediction and also down slightly from the previous period’s 6.8%. This is an important insight for the Bank of England which will set its interest rate decision later this afternoon around 18.00 WIB where the market has priced in a possible 25 bps increase to 5.5%. Germany yesterday announced Inflation figures at the producer level which turned out to be deflationary as expected at -12.6% yoy, more than double the previous month’s -6.0% deflation.
• COMMODITIES: Oil prices fell on Wednesday with WTI slipping from its USD90/barrel high, after the Federal Reserve warned of one more interest rate hike before the year-end, masking the fact that there was a drop in US crude inventories. As for New York-traded West Texas Intermediate (WTI), it fell to USD89.66/barrel from Tuesday’s high of USD92.43 (the highest point since November 2022), while Brent is now perched at USD93.53/barrel, deflating 0.9% yesterday as well as WTI, slipping from a 10-month high of USD95.94 on Tuesday. Crude Oil prices are getting closer to the psychological USD100 figure, where profit-taking and weakening momentum indicators are starting to appear. The Energy Information Administration (EIA) released weekly US Crude Oil Inventories data (ending Sept. 15) down by 2.135 million barrels, slightly lower than predictions at minus 2.2 million barrels. The drop in inventories was also evident across all fuel variants. The reason behind this is that US crude oil exports surged last week, averaging 5.067 million barrels per day compared to 3.09 million barrels per day in the previous week. Imports on the other hand fell by 1.1 million barrels per day to 6.5 million last week. Oil refineries also only produced at 91.9% capacity last week, compared to the previous rate of over 93%. However, US Crude Oil production for last week was recorded at a 3-year high of 12.9 million barrels.
• JCI finally managed to close above the psychological level of 7000 for the first time this year (last: 7011.68), but left a Shooting Star-like candle formation after touching a high of 7046.48, when the RSI indicator also showed a negative divergence. NHKSI RESEARCH believes that the interest of market players should be monitored further whether yesterday’s foreign buying of IDR728 billion will last long and add to their coffers of Indonesian stocks. FYI, Foreign Net Sell (1M) was recorded at IDR4.49 trillion, while foreign net buy was recorded at IDR10.12 trillion YTD. If this 7000 level can be maintained, NHKSI RESEARCH estimates that JCI will have a chance to close at 7300-7400 by year end.
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