Summary:
Last Week Review
• THE SURPRISING DECISION OF THE CENTRAL BANK ON INTEREST RATES clearly colored the dynamics of the stock market last week. While Bank of Japan, People’s Bank of China and Bank of England held their interest rates in place, the US FEDERAL RESERVE finally realized its first interest rate cut since 2020, by 50bps to 4.75% – 5.25%; after BANK INDONESIA made a pre-emptive move to lower BI7DRR by 25bps at the RDG BI on 18Sept to 6.0%.
• The market was quite volatile as the “Sell on News” reaction was offset by higher optimism that the Federal Reserve will continue to cut the Fed Fund Rate by at least 25 bps in November, with expectations of a 50 bps cut at 48.9%, according to the CME FedWatch survey. Over the past week, the S&P 500 gained 1.36%, the Nasdaq advanced 1.49%, and the Dow Jones Industrial Average jumped 1.62%.
• After announcing a higher-than-expected rate cut, Fed Chairman Jerome Powell emphasized that the mandate this time is to keep labor market conditions solid. The FOMC MEETING last Sept 17-18 also released quarterly projections for GDP, Unemployment, PCE & CORE PCE price index. The year-end Unemployment Rate is
expected to rise by 0.4% compared to the baseline forecast in June; similarly, the median forecasts for 2025 and 2026 are also adjusted higher.
• With this 50bps cut, the FOMC now sees the FED FUND RATE to be around 4.38% by year-end, thus forecasting 50bps rate cuts in the remaining 2 Fed meetings this year (25bps lower than market expectation). While the projection for monetary policy easing next year is 100bps (versus 150bps market expectation). For the longer term, the Fed Fund Rate is expected to arrive at a range of 2.8% – 2.9%. The last FOMC MEETING also provided GDP forecast at 1.8% up to 2.0% (or slightly above that) for 2024-2027.
• COMMODITIES: OIL prices settled lower on Friday but recorded a second consecutive week of gains, supported by US interest rate cuts and a drop in US production to its lowest point in a year. Signs of economic slowdown in top consumer CHINA did limit prices, but for the week, both crude oil benchmarks closed up more than 4%. Prices have recovered after BRENT fell below USD 69 for the first time in almost 3 years on September 10.
• About 6% of crude oil production and 10% of natural gas production in the US MEXICO Gulf was halted following Hurricane FRANCINE, the US Bureau of Safety and Environmental Enforcement said on Thursday. RISING CENTRAL EAST CONFLICT, which increases the risk of supply disruption, is keeping oil prices heated. Israel announced on Friday that it had killed a top Hezbollah commander and other senior Lebanese figures in an airstrike in Beirut; sparking fears of an escalation of the war.
• INDONESIA: In a move unexpected by most economists in a Reuters poll (only 3 out of 33 economists predicted BI’s RDG would result in a BI7DRR cut last Thursday), the RUPIAH exchange rate did not fall but instead closed last Friday at 15145/USD, strengthening 1.61% over the week. On the contrary, JCI did go through
a volatile journey, depreciating 0.71% last week even though foreigners were still consistently net buying IDR 5.37 trillion for the whole week; contributing the most significant portion of the total YTD Foreign Net Buy value of IDR 7.75 trillion.
• Other positive sentiments were mostly contributed by economic data such as TRADE BALANCE (Aug) which reported a record surplus (for the 52nd consecutive month) this time jumping to USD 2.89bn (clearly exceeding predictions of under USD 2bn, and certainly from USD 500m last month); supported by above expected Export & Import growth, which is currently the highest Export growth in the last 1.5 years.
This Week’s Outlook
The key US Inflation benchmark PERSONAL CONSUMPTION EXPENDITURE (PCE) price index along with several statements from Federal Reserve officials will be closely watched by investors after last week’s big interest rate cut. The PMI data will also provide fresh insights into the strength of the global economy, and GOLD prices look set to continue their record rally.
Here’s a look at what’s happening in the markets for the coming week.
• The PCE PRICE INDEX, the Fed’s favorite Inflation indicator, which will be released on Friday, will show whether Inflation has continued to ease after the central bank finally began easing monetary policy. Economists expect the PCE PRICE INDEX for August to rise 2.5% on an annualized basis. The Fed’s latest economic projections put the annualized pace of this price index down to 2.3% by the end of the year and 2.1% by the end of 2025. The economic calendar for the coming week also includes the final reading on US GDP Q2, as well as reports on Consumer Confidence, Durable Goods Orders, New Home & Pending Home Sales, as well as weekly data on Initial Jobless Claims.
• THE FED OFFICIALS’ COMMENTS in the coming days are likely to shed more light on the rationale behind last week’s big rate cut and will therefore be closely watched. Names such as Atlanta Fed President Raphael Bostic, Chicago Fed President Austan Goolsbee, and Fed Governor Michelle Bowman will take turns speaking this week; with the public already aware of each person’s different character & thoughts regarding their views on the pace of rate cuts. Finally, Fed Chair Jerome Powell is scheduled to speak on Thursday at the 10th annual US Treasury Market Conference. New York Fed President John Williams and Supervisory Vice Chairman Michael Barr will also speak at the same event. Investors will be looking for clues on how the Federal Reserve views progress in balance sheet reduction.
• MARKET VOLATILITY: The benchmark S&P 500 index hit its highest close in 2 months last week after the Fed announced a major 50 basis point interest rate cut, kicking off the first US monetary easing cycle since 2020. The index is up 0.8% so far in September, which is historically the weakest month for stocks, and has gained 19% since the start of the year. However, the market rally could be tested if economic data fails to support expectations that the economy is navigating a “soft landing”, where inflation eases without impacting growth. Stocks perform much better after the start of a rate cut in that scenario, than when the Fed cuts during a recession. Markets could also become more sensitive to the tight US ELECTION between Republican DONALD TRUMP and Democrat KAMALA HARRIS. Recent polls show an almost even race.
• PMI DATA released from Monday will provide an update on global economic conditions. EUROZONE COMPOSITE PMI has been in expansion territory for 6 months, and UK for 10 months, reinforcing the resilient value of the Poundsterling. Markets seem content for now that the Fed’s half-point rate cut will help prevent a US recession, and thus a global recession. However, some areas of concern remain, as in the Eurozone’s largest economy, GERMANY, business activity slipped further into contractionary territory in August and sentiment remains weak. Meanwhile, CHINA’S economy continues to struggle, putting the world’s second largest economy at risk of not achieving its annual growth target of around 5%.
• GOLD market enthusiasts locked in on bullion prices surging to fresh records, with the USD 3,000/ounce milestone in focus, driven by monetary easing by major central banks and a tight US presidential election. Spot gold prices hit an alltime high of USD 2,572.81/ounce on Friday and are on track for their strongest annual performance since 2020, with gains of more than 24% driven by safe-haven demand due to geopolitical and economic uncertainty, as well as strong central bank buying. Low interest rates also tend to favor gold, which pays no interest. CITI ANALYSTS said in a note last week that gold prices could reach USD 3,000/ounce by mid-2025 and USD 2,600 by the end of 2024 driven by US interest rate cuts, strong demand from exchange-traded funds, and physical off-exchange demand.
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