STRONG US ECONOMIC DATA LED TO HAWKISH COMMENTS FROM FEDERAL RESERVE OFFICIALS. For last week, all three major US indexes recorded their fifth consecutive weekly gain with the S&P advancing 1.4%, the Nasdaq soaring 2.3% and the Dow edging up 0.04%. The US PMI data showed that overall business activity especially the Service sector in the US experienced healthy growth in expansionary territory, while US Import-Export activity in December also rose above the previous month (as expected). To top it all off, Initial Jobless Claims came in at 218k for the latest week, lower than the previous week and also lower than expectations of 221k. The revised US consumer Inflation rate showed that the annualized inflation rate in 4Q23 was unchanged at 3.3%, suggesting that the easing of price pressures over the past year is on track. This mixed picture of the US economy is unlikely to change the Fed’s view that higher for longer interest rates are still needed at this time. Automatically a number of strong economic data above further dashed the hopes of market participants that the central bank would start cutting interest rates in March. So far the Fed Rate Monitor Tool poll from has shown an 84% chance that interest rates will be held steady at the March FOMC Meeting. In contrast, a potential 25bps rate cut could materialize in May although the probability has dropped to 52.2% from almost 60% a week earlier. On the other hand, it is felt that the Fed needs to leave the era of higher interest rates for longer as pressure on banks and commercial real estate property owners has been detected, which was also raised by US Treasury Secretary Janet Yellen last week, although she believes the situation is still safely under control with the help of bank regulators.

EUROPEAN & ASIAN MARKETS: While Asian markets mostly experienced a short trading week due to the Chinese New Year holiday, Europe also released PMI data from Eurozone, Germany which both are still struggling to get out of contractionary territory, while the UK has at least managed to waltz into expansionary territory. Speaking of PMIs, China and Japan have released Services PMIs that show their Services sectors stayed in expansionary territory in January. Unfortunately, China’s deflation is still entrenched as CPI (Jan) plunged further to -0.8% yoy, a bigger deflation than -0.3% in the previous month and also bigger than the -0.5% forecast. The same can be seen in PPI (Jan) which is still struggling in negative territory at 2.5% yoy, slightly up from Dec at – 2.7%. Still discussing CPI, Germany as Europe’s largest economy, reported January CPI cooled further to 2.9% yoy, from 3.7% in the previous month, on track towards the ECB’s 2% target. German Factory Orders in December experienced a significant increase of 8.9% mom from flat growth in the previous month, although on the one hand German Industrial Production for December slipped further to -1.6% mom, from -0.2% in November.

INDONESIA: recorded economic growth in the 4th quarter of 2023 at 5.04% yoy, exceeding consensus expectation of 5.0% and higher than the 3rd quarter at 4.94% supported by domestic spending. On full year basis, 2023 GDP stood at 5.05% and surpassed the projection of several institutions although the economic growth in 2023 is slower than the economic growth in 2022 which was 5.31%. Foreign Exchange Reserves for January slightly depreciated to USD145.1 billion compared to USD146.4 billion in December. The Rupiah was at its strongest position in 2 weeks, closing at IDR15,611/USD before Indonesia’s financial markets went on a long-weekend holiday to welcome the Lunar New Year. The short trading week also managed to garner IDR4.45 trillion (RG market) of foreign spending in the stock market, bringing the YTD total to almost IDR7 trillion.

COMMODITIES: OIL prices gained 6% over the past week (after plunging 7% in the previous week) on renewed concerns over the continuing Middle East conflict after Israel rejected a ceasefire offer from Hamas. The US has also been seen pounding Iran-linked gangs in Iraq, Syria and Yemen. In Russia, Ukrainian drone attacks on the largest oil refinery in southern Russia are still being recorded, leading Russia to reduce exports of diesel and also naphtha, a petrochemical feedstock. In addition, a statement from the US Energy Department said that US crude oil production will not be able to meet expectations. US refinery production has been temporarily halted for maintenance, which has led to a significant drop in US production.

This week’s outlook:

After recent strong labor and economic growth data made markets re-evaluate the timing of the Federal Reserve’s rate cut, all attention will be on the January US INFLATION REPORT released on Tuesday. Any signs that price pressures start to ease could push interest rate cut bets even further ahead. Economists forecast a 0.2% rise in consumer prices from the previous month, with an annualized increase of 2.9%. Headline Inflation is forecast to increase by 3.8% yoy. Market participants will also be monitoring comments from a number of Fed officials this week. From the US, their economic calendar will also contain Retail Sales figures for January, which will be announced on Thursday along with Initial Jobless Claims; while producer-level Inflation and Consumer Sentiment data will be out on Friday.

EARNING REPORT season will still dominate this week even after the S&P500 hit the 5,000 level for the first time in history and the Nasdaq briefly topped 16,000 last Friday, supported by megacaps and chip makers. From the released earnings results of around two-thirds of the S&P 500 companies, LSEG data shows that Wall Street estimates now call for 9.0% growth in 4/2023 earnings, compared to 4.7% growth expected at the beginning of the year; while 81% of companies have exceeded estimates, compared to previous estimates which averaged 76% over the previous 4 earnings periods, according to Reuters.

OIL prices are expected to remain volatile in the next few days after last week’s 6% gain.

UK will release employment, inflation and GDP data which will be closely monitored this week as investors try to time the Bank of England’s first rate cut. EUROZONE will also release its 4Q23 GDP on Wednesday with the economy expected to remain stagnant at 0.1% yoy growth.

JAPAN is scheduled to release its preliminary estimate of GDP on Tuesday, with estimates of 4Q23 economic growth starting to rebound, following a contraction in Q3 as inflationary pressures weigh on household spending and slow corporate investment. The data is being closely monitored by market participants amid bets that the Bank of Japan will end its negative interest rate policy (which has been in place since 2016) in April this year. The GDP data is also likely to show that Japan’s economy has slipped to fourth globally, behind the US, China and Germany.

Investors in INDONESIA will be waiting for Consumer Confidence (Jan.) data on Tuesday and Trade Balance (Jan.) and Export – Import growth data on Thursday.

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