FOCUS ON US GDP & PCE PRICE INDEX AS KEY INPUTS TO FOMC MEETING JANUARY 30-31. The US recorded economic growth of 3.3% in the fourth quarter of 2020, down from 4.9% in the third quarter, although it surpassed economists’ expectations of 2%, driven by strong public spending. Meanwhile, the Core PCE Price Index, which is the Fed’s favorite gauge of inflation that excludes volatile items such as food & fuel, was reduced to 2.9% yoy in December, from 3.2% in the previous month and below economists’ forecast of 3.0%. Initial Jobless Claims actually came in at 214k, higher than the predictions of 200k & 189k the previous week. Rounding out the important economic indicators, the S&P Global US PMI provided a preliminary estimate for January that business activity in manufacturing & services in the US is increasingly moving in an expansionary direction. This was echoed by Core Durable Goods Orders which rose 0.6% mom in December, greater than the previous month’s estimate. Not to forget one data from the housing sector which stated that New Home Sales (Dec.) was still able to grow by 664 thousand units, this also exceeded expectations & the previous month. The above economic data is an input for the Fed for their next FOMC Meeting on January 30-31. Amidst a combination of evidence that the US economy & spending power is still strong, on the other hand Inflation has markedly eased, there are also signs of weakness in the labor sector with rising weekly jobless claims. Consumer spending, which accounts for the bulk of economic growth, surprisingly picked up, rising 0.7%, well above the expected 0.4% increase, thus supporting optimism that the Fed’s measures to cut inflation are unlikely to push the economy into a severe recession, aka a soft-landing of the US economy has been achieved, thus further fostering hopes of a rate cut by the Fed this year. The percentage chance that the pivot could happen as soon as March is still below 50% (46.2% to be exact); on the other hand, the probability that a 25 bps rate cut could materialize at the Federal Reserve’s May meeting remains steady at 50.9%, the same as last week’s forecast.

For the week, the S&P 500 jumped 1.06%, the Dow rose 0.65% and touched the 38,000 level for the first time; and the Nasdaq gained 0.94%. Earnings reports from S&P 500 companies also boosted the overall market sentiment, where having reported earnings so far, 78.2% have exceeded expectations, as indicated by LSEG data; compared to the long-term average success rate of 67%.

ASIA & EUROPE MARKETS: A number of central banks are actively launching policy moves to boost the economy, particularly in CHINA & JAPAN. China’s central bank announced their PBoC Loan Prime Rate unchanged (as expected) at 3.45% and 4.2% for 5 years respectively. The Chinese government also announced to take stimulus measures to stabilize market confidence by mobilizing around 2 trillion Yuan (USD278.53 billion) into the stock market, as reported by Bloomberg News. Not stopping there, China’s central bank also cut the amount of cash that banks must hold in reserve aka Reserve Requirements by 0.5% starting February 5, a move that is expected to support China’s fragile economic recovery. Meanwhile from the Land of the Rising Sun, the Bank of Japan also released their interest rate decision which has not moved from its super-loose monetary policy at – 0.1%; but signaled that the negative interest rate trend may be nearing its end. From Continental Europe, the European Central Bank has released its interest rate decision by holding it at 4.5%, as expected.

INDONESIA recorded that investment realization in 2023 reached IDR1,418.9 trillion. This achievement was 101.3% of the target set by President Joko Widodo of Rp1,400 trillion in 2023. This investment consisted of Foreign Direct Investment (FDI) of IDR 744.0 trillion (52.4%); the rest, Domestic Direct Investment or PMDN worth IDR 674.9 trillion (47.6%). Meanwhile, investment realization in 2023 was also higher than in 2022. The Ministry of Investment/BKPM noted that Indonesia’s investment realization in 2022 reached IDR1,207.2 trillion, of which 48.5% was in Java and the remaining 51.5% was outside Java.

COMMODITIES: OIL prices rose for the second consecutive week and settled at the highest level in nearly two months as positive US economic growth and signs of Chinese stimulus boosted demand expectations, while supply concerns due to Middle East conflicts kept prices up. Both benchmark oil prices, WTI & Brent recorded weekly gains of more than 6%, marking the biggest weekly gain since the week ending October 13 after the start of the Israel-Hamas conflict in Gaza.

This week’s outlook:

This week will be an action-packed week in the financial markets, with the Federal Reserve’s first meeting of the year, plus the continued performance reports of major tech companies, and the latest US employment report. The Bank of England also holds its first policy meeting of the year while PMI data from China is expected to remain dismal.

FOMC MEETING: The Federal Reserve is expected to keep interest rates unchanged at 5.25% – 5.50% on Wednesday and investors are looking forward to indications that officials believe they have made enough progress in the battle against inflation to begin lowering rates sooner. However, investors have shifted expectations of the Fed’s first rate cut to May from March, following the recent release of strong US economic data as well as statements from Fed officials suggesting that this year’s pivot may not be as aggressive as expected. As noted, data on Friday showed that inflation moderated but consumer spending remained strong, raising concerns that price pressures will start to pick up again. Looking ahead, investors will be watching Fed Chairman Jerome Powell’s post-FOMC Meeting press conference to get an idea of how officials interpret the latest economic data.

U.S. EMPLOYMENT REPORT: Soon after the Fed’s interest rate decision, the US will release its January Nonfarm Payrolls report on Friday, with the economy expected to add 177,000 new jobs, slowing from 216,000 in the previous month. As for the recent stock market rally that has pushed the S&P 500 to record highs, it is driven by expectations of a “soft-landing” of the US economy where growth remains steady while inflation eases. Weaker-than-expected economic indicators could suggest that the 525 basis points of rate hikes that the Fed has been imposing since 2022 are finally starting to pay off, whereas stronger-than-expected labor figures could instead strengthen the case for the central bank to keep interest rates high for longer. The economic calendar also includes JOLTS job openings and Consumer Confidence data on Tuesday, followed a day later by ADP Nonfarm Payrolls for the private sector as well as weekly Initial Jobless Claims on Thursday.

EARNING SEASON: Earnings reports will be the main focal point of the week as we look forward to the results of five companies from the “Magnificent Seven” namely Alphabet, Microsoft, Apple, Amazon, & Meta; as well as other Technology stocks that have underpinned the market rally. With the S&P 500 officially in a bull market, the Magnificent Seven results will be crucial in determining whether the index can maintain its momentum. Collectively, the market capitalization of Alphabet, Microsoft, Apple, Amazon and Meta accounts for nearly 25% of the S&P 500, thus exerting a huge influence on the overall performance of the index.

EUROPE: Market participants will be watching the 4Q23 GDP & German Inflation (Jan.) figures as Europe’s strongest economy on Tuesday & Wednesday, followed by Eurozone CPI (Jan.) on Thursday. The Bank of England is also expected to keep interest rates on hold on Thursday and it is likely that they will indicate that interest rates should remain capped for an extended period of time. The latest UK employment report showed that wage growth rose at the slowest pace in almost a year in the 3 months to November, but inflation unexpectedly rose to 4% in December. The UK economy started 2024 on a stronger footing but data last week showed that supply disruptions in the Red Sea reignited inflation in the manufacturing sector. As noted, the BoE has raised interest rates 14 times between December 2021 and August 2023, peaking at 5.25% after inflation surged to a 41-year high of 11.1% at the end of 2022.

CHINA: will release PMI data on Wednesday which is likely to show that the world’s second largest economy is still in a fragile state. China’s economy grew by 5.2% in 2023, but the post-pandemic recovery remains weak, with the prolonged property sector crisis, rising deflation risks, and slowing global growth further clouding the outlook this year. China’s central bank last week announced a number of stimulus measures such as a 50 basis points cut in bank reserve requirements, the largest in two years, plus a USD278 billion stock market rescue package, which signaled strong support for the fragile economy and plunged the country’s stock market to a five year low. Even so, analysts say more stimulus is still needed this year to make economic activity more robust.

INDONESIA: As with the rest of Asia, PMI & Inflation (Jan.) will be in the spotlight this week.

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