Summary:

Last Week Review

• HELLO SEPTEMBER! US PCE PRICE INDEX & US GDP: INFLATION SAFELY CONTROLLED WHILE ECONOMY GROWS. Global stocks recorded their 4th consecutive month of gains despite a massive sell-off in early August, supported by US economic data that helped the Dollar break a multi-week losing streak. The PERSONAL CONSUMPTION EXPENDITURE (PCE) PRICE INDEX – the Federal Reserve’s favorite measure of inflation – rose 0.2% in July which was in line with expectations, and fell 0.1% on an annualized basis to 2.6% yoy, according to US Commerce Department data released on Friday.

• The report also said: Consumer spending, which accounts for more than two-thirds of US economic activity, rose 0.5% last month. This data prepares the Fed for the next stage to start easing monetary policy from September. During August, the Dow Jones Industrial Average rallied 1.8%, the S&P 500 shot up 2.3%, and the Nasdaq gained 0.6%. The MSCI world stock index recorded a monthly gain of 2.40%.

• This stellar performance was a surprising recovery from the early August sell-off reminiscent of the October 1987 “Black Monday” that occurred when traders priced in a so-called Goldilocks scenario, where the US economy continued to grow but was not strong enough to prevent a rate cut. The confident money market is currently pricing in the Fed’s first rate cut of 25 basis points at its September meeting, with a 33% chance of a major reduction of 50 basis points.

• The US economy grew faster than expected in the second quarter of the year due to strong consumer spending, and corporate profits, according to a report on Thursday. US GDP 2Q came in at 3.0% qoq, stronger than the 2.8% forecast, and much better than the previous quarter’s figure of 1.4% which disappointed and brought the threat of stagflation.

• CURRENCY: The US DOLLAR stabilized near 1-week highs against a basket of other major currencies, on track to break its 5-week losing streak despite still posting monthly losses of around 2.5%. Against the YEN, the Dollar was at 146.14, losing more than 2.5% over the past month, as pressure on the Japanese currency eased on the prospect of narrowing interest rate differentials.

• ASIA & EUROPE MARKETS: MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.48% and ended the month with a 2% gain. Japan’s NIKKEI, after falling in early August, fell 1.16% for the month. Core inflation in Japan’s capital, TOKYO, increased for the fourth consecutive month in August, according to data released on Friday, with a 2.4% rise in prices indicating the prospect of further interest rate hikes from the BANK OF JAPAN in the near future.

• EURO fell 0.2% to USD 1.105, following weaker-than-expected GERMAN inflation data, while EUROZONE CPI also came in at the expected 2.2% yoy (easing from the previous month’s 2.6%); raising bets on further rate cuts from the EUROPEAN CENTRAL BANK (ECB). This rate cut is necessary in order to boost the German economy as their 2Q GDP figures are starting to worry as they plunge into recession territory -0.1% qoq, from 0.2% in the previous quarter.

• COMMODITIES: OIL prices melted as BRENT crude oil futures for October delivery, closed down 1.43% on Friday to USD 78.80/barrel, contracting 0.3% for the week and dropping 2.4% for the month of August. While US WTI futures closed down 3.11% to USD 73.55, down 1.7% in the last week and depreciated 3.6% in August. Oil prices were unable to crawl higher even amid news of Libya’s oil field closures that led to the loss of 63% of the country’s total oil production (900k to 1 million bpd), as traders weighed expectations of an OPEC+ supply hike that was due to start in October, as they begin to scale back voluntary production cuts. In contrast, GOLD prices posted a monthly gain of 2.8% and Gold spot price to USD 2,502.44/ounce.

• JCI posted a strong monthly performance with almost 5% gain on the back of massive Foreign Net Buy of IDR 11.49 trillion (RG market) during the month of August, making the YTD foreign short position narrowed to IDR 2.89 trillion. When compared to the highest Net Sell position last June which amounted to IDR 36 trillion, it can be concluded that over the past 3 months foreigners have spent around IDR 33 trillion on Indonesian stocks and brought JCI to 7.43%. This in turn has influenced the RUPIAH exchange rate which has appreciated 4.51% over the past month (where the lowest position touched IDR 15295/USD) and 4.78% over the past 3 months.

This Week’s Outlook

• The August employment report turn to be the main focus of the week as markets prepare for the US Federal Reserve to start cutting interest rates later this month. Meanwhile, the Bank of Canada will cut rates again, oil prices look set to remain under pressure and China will release more manufacturing data. Here’s a look at what to expect in the markets over the next week.

• The LABOR REPORT as usual starts with JOLTs Job Openings (Wednesday), then ADP Nonfarm Employment Change (Thursday), and the last highlight is NONFARM PAYROLL & Unemployment Rate (Friday). Market participants believe that as the Fed prepares to cut interest rates for the first time in years, the August labor report is important to show how aggressively the central bank will move interest rates. A reading that is too low, could reignite recession fears. A reading that is high beyond expectations has the potential to disrupt the Fed’s pivot plan.

• Jerome Powell, the Fed Chairman, has signaled that it is time to start lowering interest rates, and the market has priced in at least a 25 basis point cut at the September 17-18 FOMC Meeting. On the one hand, there are caveats around expectations of a smooth execution of this pivot as it was weighed down by strong consumer spending data released last Friday.

• BANK OF CANADA is expected to cut interest rates again for the third consecutive time at their meeting on Wednesday. The bank has cut the benchmark rate twice since June to bring it down to 4.5% and the market now expects two more rate cuts this year after September.

• OIL PRICES recorded sizable monthly losses on expectations for an OPEC+ supply increase starting in October when they begin to scale back voluntary production cuts totaling 2.2 million barrels/day. Reuters reported on Friday that OPEC+ is sticking to plans to increase production starting next month, especially due to the closure of oil fields in Libya. Meanwhile, there is still uncertainty surrounding the Fed’s interest rate cut amid sluggish global demand. As is known, lower interest rates can boost economic growth and overall oil demand.

• CHINA: will release August CAIXIN MANUFACTURING PMI data on Monday which is expected to return to expansion territory after contracting in July. Government data on Saturday showed that China’s manufacturing activity slumped to a 6-month low in August as factory-level prices fell and factory owners struggled to secure orders, putting continued pressure on the Chinese government to issue more economic stimulus measures to boost household demand.

• Following a weak performance in the second quarter, the world’s second-largest economy continued to lose momentum in July. Policymakers have indicated a shift away from their traditional strategy of investing heavily in infrastructure projects, and focusing more stimulus efforts directly on households.

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