Summary:

Last Week Review

• GOODBYE SOFT LANDING, HELLO EMERGENCY LANDING. The Federal Reserve has said that they will consider the possibility of cutting interest rates if a significant weakening in the labor sector is detected. Last week’s data has finally started to answer their wish, even to the level where labor growth has slowed down considerably and has the potential to put the US economy in recession territory. Starting from JOLTs JOB OPENINGS (June) which seemed to be still fine when the number of job openings growth in June was around 8.18 million, still higher than the estimate of 8.02 million although it was slightly down from the previous month’s 8.23 million.

• But then successively ADP NONFARM EMPLOYMENT CHANGE (Jul) and INITIAL JOBLESS CLAIMS came out worse than expected, and finally closed with a surprise NONFARM PAYROLL (Jul) whose figure fell below estimates, actual : 114k versus forecast: 176k & previous: 179k. Not to mention confirmed by the US Unemployment Rate which increased 0.2% to 4.3% in July, and Average Hourly Wage growth dropped to 0.2% mom, below 0.3% forecast. CB Consumer Confidence and Chicago PMI that crept up in July did not seem to lift market sentiment.

• As a result, this was the perfect reason and timing to collapse the US stock market which was seen by the market as an overvalued market, supported by the rally in the Technology sector. Not only the US market, the sell-off also hit global equity markets and US Treasury yields to their lowest point in months. Financial institutions started forecasting that the Fed will cut interest rates 2-3 times this year (In September, November, and December) with the first rate cut of 50 bps likely to happen even in September.

• The US stock market is considered to have started falling in a correction phase as NASDAQ has fallen 10% from its highest peak of 18,647.45 on July 10. According to Reuters analysis based on LSEG data, in a span of 44 years, the NASDAQ went into correction territory after hitting a high 24 times, or once every 2 years. The last time the index entered correction territory was after touching the high of January 19, 2022.

• As for this year, NASDAQ still posted a gain of 11.8% YTD. Meanwhile, the S&P500, which has lost 6% from its peak, is still up 12.1% for the year. Fund managers also see the same seasonal sell-off pattern in August 2023, although this year it feels more vigorous. September and October are typically very volatile months for the US stock market. The CBOE Volatility index (a measure of Wall Street investor fear) jumped to an average of 21.8, the highest since 1992, according to LSEG data.

• ASIA & EUROPE MARKETS: Equally uninspiring conditions also came from the Asian & European continents, especially after preliminary GERMAN GDP estimates called the country into negative economic growth in Q2. EUROZONE’s July CPI which warmed up again by 0.1% to 2.6% yoy might be a pressure for EUROPEAN CENTRAL BANK to prepare to cut rates for the second time soon, following what BANK OF ENGLAND did last Thursday when they made a surprise move to cut rates by 25bps to 5.00%. Speaking of other central bank decisions, BANK OF JAPAN unexpectedly raised their benchmark rate by 15bps to 0.25% after they saw Inflation rate started picking-up thanks to rising Wages. While neighboring Bamboo Curtain CHINA is still struggling to make their Manufacturing sector more vibrant into expansionary territory.

• INDONESIA: Last week, we were presented with mixed economic data: starting with Foreign Direct Investment which grew to 16.6% yoy, up from 15.5% in the previous period. Amidst the fall of Indonesia’s Manufacturing sector to its lowest level since Sept 2021 (Into contraction territory 49.3), on one hand Inflation (Jul) was safely contained at 2.13% yoy. The good news is that foreign capital inflow has started to enter a positive figure of IDR 333.63 billion, a sign that foreigners are starting to slowly invest back into the Indonesian stock market which seems to be a laggard, after the release of the 2nd quarter financial statements has started to appear.

• COMMODITIES: OIL prices were at an 8-month low on Monday morning as fears of a recession in the US, the world’s number one oil consumer, obscured the reality of escalating MIDDLE EAST CONFLICT potentially disrupting global oil supplies from the war-torn region. Despite concerns about rising tensions in the Middle East, benchmark BRENT & US WTI prices plunged more than 3% last Friday to end at their lowest levels since January. Last week, both contracts marked the fourth consecutive week of losses, the biggest drop since November. Oil prices were dragged down by US recession fears and after OPEC+ stuck to its plan to halt voluntary production cuts from October.

This Week’s Outlook

• Concerns about the economy are expected to remain a key focus this week amid thoughts that the Federal Reserve may have kept interest rates high for too long, which could hurt economic growth. Other high-profile corporate earnings reports will be released and Oil prices are expected to remain volatile amid a combination of recession fears and geopolitical risks. Here’s a look at what’s happening in the markets for the week ahead.

• ECONOMIC INDICATORS: After Friday’s weak US labor report (July) sparked fears of a possible recession, the economic calendar for next week is much lighter. The Institute of Supply Management will release its Services sector PMI on Monday which is expected to show moderate growth. Investors will get their usual update on jobless claims on Thursday, and will have the opportunity to hear from San Francisco Fed President Mary Daly and Richmond Fed President Thomas Barkin after the central bank kept rates unchanged last week, but kept open the possibility of a rate cut in September.

• EARNINGS SEASON: While most big caps have already reported, some high-profile companies’ performance reports are expected to appear in the coming days, such as Catterpilar & Walt Disney.

• CHINA: How the economic recovery in China develops in the second half of the year, will be watched by market participants with this week’s economic data series. Starting with the Services PMI survey, followed by trade data on Wednesday and Inflation readings at the end of the week. Recent data still points to a gloomy outlook for the world’s number two economy, and the recent surprise interest rate cut reflects a growing sense of urgency in Beijing’s efforts to strengthen growth. Officials will be paying close attention to Friday’s Inflation figures for clues on how much more needs to be done to boost sluggish domestic demand.

• COMMODITIES: OIL prices fell on Friday, settling at lows since January as weak economic data from the US and major oil importer China raised concerns about the demand outlook. Oil traders also eyed the MIDDLE EAST CONFLICT, where the Iran-backed Hezbollah group in Lebanon said that its conflict with Israel has entered a new phase. Meanwhile, the OPEC+ meeting on Thursday decided to leave the group’s oil output policy unchanged, including plans to start gradually reducing production cuts from October.

• INDONESIA will also be hit by a wave of important economic data this week: starting with 2Q GDP which is forecasted to remain at 5.0% yoy. This is followed by July Foreign Exchange Reserves and Consumer Confidence; capped off by Retail Sales (Jun), Motor & Auto Sales (Jul) at the weekend.

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