Last week review:

Last week was dominated by a number of central bank meetings, where the Federal Reserve and European Central Bank raised US & Eurozone interest rates by 25 bps to 5.25-5.50% and 4.25% respectively, with market participants expecting them to move closer to the end of the rate hike cycle; while Bank Indonesia’s Board of Governors Meeting kept the BI7DRR rate unchanged at 5.75%. The Bank of Japan on Friday adjusted its yield curve control scheme, offering to buy 10-year Japanese government bonds beyond the previous 0.5% target rate while keeping the benchmark short-term interest rate unchanged at -0.1% and the long-term bond yield at zero. The move brings the BOJ more in line with other major central banks, which have been raising interest rates aggressively to reduce inflation.

For the previous week, the Nasdaq surged 2.02%, the S&P500 rose 1.01%, and the Dow Jones gained 0.66%. The gains put the S&P500 at its highest close since April 4, 2022. On Wednesday, Federal Reserve Chairman Jerome Powell said the Fed does not foresee the US economy heading into recession, yet did not rule out the possibility of further interest rate hikes, with decisions to be made based on future economic data. He also emphasized that a rate cut is highly unlikely this year as US (core) inflation is still far from the Fed’s target of 2%. Confidence in the US being able to be free from recession was supported by the US GDP report for Q2/2023  which turned out to be released stronger than expected (grew 2.4% yoy) despite the upward trend in interest rates by the Federal Reserve and European Central Bank. Meanwhile, the Labor Department announced weekly Initial Jobless Claims which was also better than expected (actual: 221k vs forecast: 235k, previous: 228k) as fewer people filed unemployment claims. One more data from the property sector, namely Pending Home Sales (June) which also turned out to be able to grow into  positive territory from a minus position in May. As a result, US Consumer Confidence for July was able to perch at the highest level in 11 months.

Adding to the positive sentiment of US bourses in the past week, more than half of the companies listed on the S&P500 have reported second-quarter earnings on Friday, of which 78.7% have exceeded analysts’ expectations, according to Refinitiv data. The corporate earnings reports grabbed traders’ attention to the exclusion of the S&P Global Composite PMI (July) survey that showed July US business activity remained at a five-month low contraction, dragged down by slowing growth in the services sector. Speaking of Global PMIs, from Japan, as well as Germany, France, Euro Zone, and the UK; none of them showed any expansionary business activity in July, from either the manufacturing or services sectors, all of which showed weakness from the previous month which was already wallowing in contractionary territory. However, the US Consumer Confidence (July) report did jump to 117 (the highest level in 2 years), as optimism regarding the tight labor market overcame fears of an impending recession. Unfortunately, the optimistic view was not felt by Germany, which described the business climate and economic outlook for the next 6 months as still gloomy as the German IFO Business Climate Index (July) was released lower than expected & unable to exceed the level of June’s reading.

From Europe, ECB President Christine Lagarde stated in her press conference that the ECB will make decisions regarding the trend of interest rates by monitoring economic data reports; and determine whether to pause or hike gradually (meeting by meeting), or at one meeting at a time. Similar to the Fed, she also emphasized that a rate cut is not possible for now. On Sunday, Lagarde said that the latest data on 2Q23 GDP in France, Germany and Spain were encouraging and confirmed the European Central Bank’s expectation that they are able to support the GDP growth scenario of 0.9% in the Euro Zone. No surprise that the Gfk German Consumer Climate (Aug) explains a slightly more optimistic consumer confidence over economic activity in August. Finally the IMF released its latest global economic projections where they cut global economic growth from the previous 3.5% to 3% this year and next year. The IMF also expects developed countries’ economic growth to drop to 1.5% this year 2023 from 2.7% in 2022, and will still drop to 1.4% in 2024; less than the achievements of developing countries which are predicted this year to stay at the same 4% level as last year and even increase to 4.1% in 2024.

New York West Texas Intermediate, or WTI, crude oil, along with London-based Brent oil have both ended gaining for the fifth consecutive week, under the catalyst of tighter supply versus OPEC+ production cut plans; plus the key to China’s continued stimulus implementation plans to further stimulate its economy. On Friday, WTI for September delivery settled at $80.58, up 49 cents, or 0.6%. The US crude benchmark hit a 3-month high of $80.69. For the past week, WTI prices rose 4.6% after a cumulative gain of 11.4% over the previous four weeks. With only one session left for July, WTI has climbed 14% this month. Brent for October delivery closed Friday’s session at $84.99 – up 75 cents, or 0.9%. Brent appreciated by 4.8% last week, adding to the previous four weeks’ price increase of 9.8%. For the month of July, Brent has jumped more than 12%.

This week’s outlook:

Performance reports from major Tech companies and US employment data for July will be the main highlights of the week. Investors will also focus on the Bank of England’s latest interest rate decision and a host of economic data from the Eurozone and China. Friday’s US Nonfarm Payrolls are expected to show that the economy added 184,000 jobs in July, while the unemployment rate remained at a historical low of 3.6% and Average hourly wages declined. The strength of the labor market has been a key factor in shaping the view that the economy is heading towards a so-called soft landing where inflation is able to cool amid fairly solid economic growth.

US corporate earnings sentiment will still grab the attention of market participants, but some investors are wary that the rally in technology stocks, partly driven by optimism over developments in artificial intelligence (AI), may soon falter as the tech-heavy Nasdaq 100 index is up nearly 44% this year, while the S&P 500  information technology sector has gained nearly 46%.

The Bank of England will hold a meeting to set its latest interest rate on Thursday and market participants are divided on whether policymakers will return to a 25 basis point rate hike after a 50 bps increase in June. UK inflation has not risen since February and there are signs that price pressures are easing. But June inflation at 7.9% is the highest among major European economies and remains well above the BOE’s 2% target, so markets should not rule out the possibility of a 50-bps hike, especially if policymakers think they may need to raise again in September. As for the BOE, it has been criticized for being behind the curve (inflation cooling) after inflation continued to rise higher than expected, despite 13 consecutive rate hikes since December 2021 which raised the possibility of a recession.

The Eurozone will release preliminary estimates of July inflation and second-quarter GDP on Monday which will be closely watched amid debate over whether the European Central Bank could raise interest rates again at its next meeting in September. The GDP data is expected to show that the bloc’s economy returned to growth in the second quarter, while inflation is expected to moderate slightly. Inflation in the Eurozone has halved since its peak last October, but the 5.5% level is still well above the ECB’s target of 2%.

PMI data from China earlier this week is likely to show a contraction in manufacturing activity for the fourth consecutive month in July, underscoring the need for stimulus measures to support the post-pandemic recovery in the world’s second-largest economy. The manufacturing PMI which mostly focuses on large and state owned enterprises, as well as a survey for the services sector, will be released on Monday. The Caixin Manufacturing PMI, which focuses on small and medium-sized enterprises, will be released on Tuesday. As for China’s economy, it grew at a slow pace in the second quarter as demand weakened at home and abroad, but most analysts say the Chinese government is unlikely to provide aggressive stimulus amid growing concerns over growing debt risks.

On Tuesday, Indonesian investors/traders will pay attention to the Inflation (July) report which is expected to ease further to 3.11% yoy (from 3.52% in June), while  Core Inflation will cool back to 2.5% yoy (from 2.58% in June). A day later, South Korea will release July CPI data where the annual and monthly positions are predicted to be at 2.4% yoy and 0.2% mom. Following that, Indonesia & South Korea release Foreign Exchange Reserves (July) data on Thursday and Friday respectively.

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