ECONOMIC UPDATE - What to Expect
FOMC Meeting, Trade Talk and Indonesia’s inflation
Our “what to expect” edition will help us to summarize important events / macroeconomic releases from both domestic and global sides that may affect Indonesia’s financial market significantly in near future.
Global sentiment to drive domestic market this week
We see global sentiment will be more dominant to affect Rupiah and Indonesia financial market this week. As the release of US GDP and PCE (personal consumption expenditure) inflation data will be delayed due to government shutdown, global main focus may concentrate on FOMC meeting on Jan 29-30 and also US China trade talk starting on Jan 30. Besides, Brexit progress is also worth to watch. On domestic side, BPS will release inflation data on Feb 1 and we predict it will be around 2.95% YoY. We do not see the inflation data will significantly affect Rupiah as investors attention focus on global sentiment. GDP, forex reserve and CAD data release in next week will give more significant impact.
FOMC Meeting: How patient is the Fed?
Since the latest FOMC meeting in December, FOMC members repeatedly said that it would be more patient in future monetary policy. We see that it is a signal that it will hold the interest rate hike, at least in 1H19 while they assess the development of US economics, especially after significant decline price, trade war and diminishing tax cut effect. As US 4Q18 GDP and December PCE inflation data release are delayed, we believe the tone of Fed’s statement will remain wait and see while it retains FFR at 2.25%-2.50% in the January meeting. It will still not emphasize clearly how much FFR hikes it wants in 2019. Fed will give more clarity on its FFR hikes stance in its quarterly projection in March. However, the market was quite bullish as Bloomberg world interest rate probability shows that investors priced in no FFR hike in 2019. Fed itself still predicted 50 bps FFR hike in December meeting. We see this as a risk as the market may start volatile if there are some hawkish comments on January meeting.
Trade war: How progressive the trade talk will be?
Global market attention will also focus on trade talk between Vice-Premier Liu He and the US Trade Representative Robert Lighthizer. This trade talk came 30 days before the trade war truce ended. If the talk failed, President Trump has promised to raise the tariff rate on USD 200 bn in Chinese imports to 25% from 10%. The negative effect of previous tariff has been seen in China’s December export performance that declined 4.4% YoY and import which declined 7.6% YoY, denoting its slowing down. We see the uncertainty in this trade war will remain high until the truce deadline as President Trump decision often unpredictable. However, the pressure to Chinese government will be higher as the sign of its slowing down economic has been seen from the trade data which may push them to fulfill some of US demands.
Indonesia’s Jan inflation: pressure from LCC airlines’ free baggage deletion
Indonesia’s statistics office (BPS) is expected to release January inflation data on Feb 1. In its latest survey, Bank Indonesia expected January inflation to edge down to 2.98% YoY as we predict monthly inflation at 0.48% MoM. We see January inflation will be mainly driven by transportation sector, especially air transport. Deletion of free baggage facility in some LCC (Low cost carriers) airlines will give another pressure to air transport inflation. Moreover, the airlines fare remains high even though the yearend season has ended. On food sector, the inflationary pressure should be significantly lower as some food price declined. January food inflation should be around 0.35% MoM, significantly lower than 5 year average at around 1.71% MoM. We expect January inflation will be around 0.45% MoM or 2.95% YoY.