Last week review:
Federal Reserve Chairman Jerome Powell’s hawkish speech at the Jackson Hole – Wyoming symposium summed up the focus of investors last week. Powell said tight monetary policy is needed to achieve the Inflation target at 2%, which in the process is already expected to bring down economic growth and weaken the labor market. The statement automatically pushed up the US Treasury yield in anticipation of the high interest rate trend continuing. The 2-year US Treasury yield closed at a high of 5.12%; while the 10-year US Treasury yield even touched its highest point, which is equivalent to the Great Financial Crisis of 2007. While many countries are raising interest rates, China cut its benchmark interest rate for the second time in 3 months in an effort to boost its economic growth post COVID. The Peoples Bank of China (PBOC) lowered the 1-year (short-term) lending rate to 3.45% from 3.55%; and kept the 5-year lending rate in place at 4.2%.
The economic slowdown is indeed noticeable in the release of several economic data, such as the US which reported lower than expected Existing Home Sales (July) of 4.07 million units (vs previous month’s 4.16 million units). Economic data also showed business activity weakening in the US & Euro Zone region as well as several other major European countries such as France, Germany, and the UK; as illustrated by their Composite PMI data which appeared stagnant in August or even contraction widened. Germany reported PPI (July) at an above-expected deflationary rate of minus 6% yoy. On the other hand, the Eurozone announced Current Account (June) which managed to record a massive surplus of EUR 35.8 billion, a sharp contrast to both the expected deficit and the previous month’s result of EUR 7.9 billion. The easing of Inflation in the UK also made consumer confidence there improve, at least the Gfk Consumer Confidence data for August did not fall as deep as expected at -29, but managed to be released at -25 only, a more optimistic step than the previous month at -30. German GDP 2Q23 has not been able to move from the same -0.2% recession zone as the previous quarter. Businesses in Germany are still pessimistic about their business expectations & business climate for the next 6 months as reflected in the German IFO Business Climate Index (August). It is reasonable if the US central bank will still continue the tight monetary policy, considering that the US economy is still heating up, especially with the US New Home Sales report in July experienced an above-expected increase of 714 thousand units and rose massively on a monthly basis by 4.4% mom. US Core Durable Goods Orders rose 0.5% mom in July, higher than forecast & previous month at 0.2%. Similarly, Initial Jobless Claims turned out to be only 230k (3-week lows), below the expected jobless claims to at least remain the same as in the last position of 240k; signaling the labor market is still tight.
From the eastern side of the world, Japan released BOJ Core CPI at 3.3% yoy, heating up above estimates & previous period at 3%. Inflation in the Tokyo area turned out to flatten slightly to 2.9% yoy (has been on a downtrend for the past 4 months), although nationally their August CPI rate seems to have risen slightly to 2.6% yoy. Japan also reported growth in both the manufacturing and services sectors as au Jibun Bank Japan Manufacturing PMI for August was recorded closer to the expansionary border at 49.7, while the Services PMI was firmly in expansionary territory at 54.3. However, on the one hand, Japan noted that foreign investment in their bonds and stock market experienced a significant decline. Meanwhile, South Korea released its July producer-level Inflation data which turned out to increase 0.3% on a monthly basis, but slipped -0.2% yoy on an annualized basis. South Korea also announced the Consumer Confidence level (August) at 103.1 which was above expectations although slightly down from the previous month. In terms of domestic news, Indonesia recorded a current account deficit of USD 7.4 billion in Q2/2023 and the position of foreign exchange reserves at the end of June was still high at USD 137.5 billion. Bank Indonesia explained that the current account deficit was still under control due to the impact of high uncertainty in global financial markets, amidst conditions of falling commodity prices and a slowdown in the global economy as well as rising domestic demand. Bank Indonesia also again set the benchmark interest rate to remain at 5.75%, which has happened for 7 consecutive months, considering that the current BI7DRR position is sufficient to control inflation plus strengthen efforts to stabilize the Rupiah exchange rate. USD/IDR closed at IDR 15,290/USD, having slipped from a 5-month high at the Independence Day high point on August 17th at IDR 15,391/USD.
This week’s outlook:
Approaching the end of the month, several US employment data will certainly be of interest to market participants. Starting from JOLTs Job Openings (July), then ADP Nonfarm Employment Change (August) which is predicted to grow by 195K smaller than the previous month at 324K, and at the end of the month the US monitored Average Hourly Earnings (August), Nonfarm Payrolls (August) is estimated to grow by 170K, also smaller than last month at 187K. However, the Unemployment Rate (August) is expected to remain sticky at 3.5%. In addition to all that, market participants will also monitor US Consumer Confidence (August) US GDP 2Q23, Pending Home Sales (July); and also the PCE (Personal Consumption Expenditure) PRICE index (July) predicted to rise again to 3.35 yoy, from 3.0% in June. This index is closely related to the future trend of US inflation and will give the central bank some idea of where monetary policy is heading. S&P Global US Manufacturing PMI (August) is expected to contract further to 47, down from July’s reading of 49. From Europe, Gfk German Consumer Climate (Sept) is predicted to remain relatively pessimistic in the negative zone. EU Economic Forecasts will also be highlighted this week in addition to EUROZONE Business Climate (Aug) & Consumer Confidence (Aug) which are expected to be even more pessimistic about the business & economic climate at minus 16, increasing from minus 15.1 in the previous month. At the end of August Inflation rates for a number of countries will be announced: German CPI (Aug). French 2Q23 GDP & CPI (Aug), Eurozone CPI (Aug); similarly, Indonesian Inflation is predicted to rise to 3.37% yoy in August, from 3.08% yoy the previous month.
PMI data remains a concern for market participants in the Asian region, where the Chinese Composite PMI (Aug) is predicted to remain in contraction zone at 49.5, but is expected to improve slightly from the previous month at 49.3. Investors in Indonesia will also monitor the Manufacturing PMI (Aug). From a neighboring country, South Korea will report Trade Balance (Aug) on Friday which is predicted to be back in deficit by KRW 1.2 billion after recording 3 consecutive months of surplus.
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