Summary:
WHAT A BEARISH WEEK, the S&P 500 fell 3.05%, the Nasdaq fell 5.52%, and the Dow rose 0.01% last week. The S&P had its biggest weekly drop since March 2023 and the Nasdaq had its biggest weekly drop since the week of October 31, 2022. It can be seen that the bullishness created since the bottom of last November is starting to lose its way; triggered by the Middle East conflict escalating on the weekend two weeks ago when Iran attacked Israel by sending 300 explosive drones and missiles, most of which were claimed to have been successfully repelled by Israel; plus negative market sentiment by the dashed hopes of an immediate interest rate cut this year, due to emerging US economic data still showing economic strength. Starting from the US Retail Sales data (which underpins most of the US economic growth) grew faster than expected, immediately making the US Treasury yield crawl up to a 5-month high (since last Nov). Following the data, several economists revised their 1st quarter economic growth expectations higher and warned that a rate cut was not imminent. This was immediately echoed by Federal Reserve Chairman Jerome Powell and a number of his colleagues at the US central bank, with words that higher interest rates for longer are still needed, and they feel comfortable enough to be patient to monitor inflation on a stable trajectory towards the 2% target before deciding on a rate cut. As a result, the chances of this 25 bps pivot occurring at the FOMC Meeting in June immediately shrank to only about 17.5%; while the rate cut occurred in August to 37.5%, even this deflated from 44.5% last week, as reported by Investing.com’s Fed Rate Monitor Tool. Large financial institutions such as Morgan Stanley also see the forecast for US interest rate cuts this year becoming increasingly bleak, in addition to having removed the possibility of a rate cut in June and postponing it to July / August, they also reduced the Fed’s total rate cut forecast this year to 3x only (while this is still in accordance with the projections of the Fed itself), down from their initial estimate of 4x.
To make matters worse, UBS market strategists have gone as far as to predict that the Fed may even need to raise rates to 6.5% next year if US economic growth & sticky inflation remain unstoppable. While Powell said that the potential for easing monetary policy still exists if there is evidence of significant weakness in the labor sector, the latest weekly Initial Jobless Claims data did not support this with stagnation, while the Philadelphia Fed Manufacturing Index rose significantly to a 2-year high in April.
QUARTER 1 FINANCIAL REPORT season is approaching with a number of S&P 500 companies mostly reporting their Q1 performance above expectations, which again shows how resilient the US economy is. Unfortunately, this failed to pump up positive sentiment in the market and was rather seen as a factor that further deterred a US interest rate cut this year. Lastly, the sentiment from the ISRAEL-IRAN WAR which is getting fiercer with each side’s counter-attacks being monitored by the entire global audience (even alluding to Iran’s nuclear center), sent GOLD prices to record highs above USD 2400/ounce (up almost 1% in the past week). However, last week US WTI OIL prices retreated 4.07% due to a surge in US crude oil weekly stockpiles far above expectations, plus concerns that oversupply is incompatible with global demand which still seems sluggish. These two factors are seen as more dominant than the Middle East conflict that threatens the smooth flow of global oil logistics. The RUPIAH which is still weakening above 16200/USD (-0.83% last week) also added to the gloomy aura in the market, while the 10-year INDONESIA STATE OBLIGATION YIELD has shot up to 7.0% again, the highest point in almost 6 months. No doubt, JCI had to absorb all these negative sentiments in the market and resulted in a week decline of 2.3%.
This time, the market is really responding to good news as bad news, and bad news as bad news; so in conclusion there is almost no good news left to support the market.
This week’s outlook:
Earnings reports from major tech companies and Inflation benchmark data from the Personal Consumption Expenditure (PCE) price index will color this week, as the rally in US stocks begins to lose steam on concerns that interest rates should remain higher for longer. Economists expect the PCE price index to remain high in March. Recent economic data indicates that the handling of inflation seems to be stagnant, despite a strong labor market, while the escalating geopolitical tension in the Middle East has further inflated oil prices, as well as comments from Fed officials including its chairman Jerome Powell signal that investors should back off expectations of a rate cut this year. Speaking of economic data, in addition to the PCE price index this week market participants will also be presented with the usual 1st quarter GDP figures, New Home Sales, weekly Initial Jobless Claims, as well as consumer sentiment from the respected Univ. of Michigan.
The 1st quarter earnings season is still in its early stages, analysts see aggregate profit growth for S&P 500 companies at 2.9% yoy, down from 5.1% expected in early April, according to LSEG data cited by Reuters. This week 4 Magnificent Seven tech giants will report their results: Tesla, Meta, Microsoft, and Google.
Oil prices rose slightly on Friday but posted the biggest weekly decline since February, after Iran seemed to take little notice of the Israeli drone strike, suggesting that an escalation of the Middle East conflict could be avoided. However, traders are still not willing to rule out the possibility of this war disrupting supply. On Friday, the IMF called on OPEC+ to start raising oil production from the start of July, after OPEC+ members (led by Saudi Arabia and Russia) came to the end of voluntary production cuts of 2.2 million barrels per day at the end of June.
Investors will also be closely monitoring the PURCHASING MANAGER INDEX figures from the Eurozone, US, and UK on Tuesday for further clues on Inflation, particularly in the services sector. The US & European services sectors are known to have slowed down and this could guide the European Central Bank to execute their planned rate cut in June. On the other hand, rate hikes are being monitored from the Bank of Japan after they release their quarterly economic growth and Inflation forecasts at their meeting next Friday. BOJ Governor Kazuo Ueda said on Friday that the Japanese central bank is very likely to raise interest rates if Inflation keeps creeping up as well as reduce their massive bond purchases. The Japanese Yen itself has pulled back regularly since the BOJ’s decision last month to end the 8-year negative interest rate era, as market participants focus more on the central bank’s dovish tone over borrowing costs which will still be around 0% for a while.
Indonesian investors/traders will be looking forward to a number of important economic data starting this Monday: Trade Balance (Mar) as well as our Export – Import growth, followed by BI’s RDG decision on interest rates on Wednesday.
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