Interest Rate in Indonesia

     The Bank of Indonesia (BI) decided to increase base interest rate by 25bp, from 7.50% to 7.75%, on November 18 to stabilize inflation rate, and strength the Government’s fuel subsidy reform. The BI aimed to lower the inflation expectation, and ensure that inflationary pressures remain under control. Indonesia’s inflation rate spiked up from 4.8% to 6.2% in a month after the Indonesian president Widodo started his term on October 20. Indonesia already experienced a steep uprising inflation rate when fuel price increased by 22% in mid-2013. Indonesia is again experiences spiking inflation rate even before the reform is implemented.

     This 25bp increased interest rate expects to stabilize consumer price, which strengths the President Widodo’s energy reform. If price is stabilized while fuel subsidy is reduced, the government is likely to save almost IDR120 trillion ($9.6 billion) to use for infrastructure and social welfare including education and medical industries. The government expects this policy to attract more foreign investments.

     Yet there is a concern about the BI’s monetary policy that goes opposite to current monetary policy trend to low the interest rate. The PBOC cut interest rate by 40bps, from 6.0% to 5.4%, and indicates additional interest rate cut in the future, the BOJ put additional stimulus around 80 trillion yen ($682 billion) by expanding quantitative easing, the ECB is expected to add as much as 1 trillion euros ($1.24 trillion).

     Some say that Indonesia’s economic structure is vulnerable to external economy that this increased interest rate will delay economic growth. After quantitative easing is over, rupiah can be dramatically depreciated that another financial crisis will be occurred. Rupiah has been depreciated around 23% from a year earlier, and its current account decreases as oil import increases to catch up the local demand. While GDP rose only 5.01% in Q3, Indonesia’s current account deficit is declined to 3.07%, similar level with financial crisis period.

Figure 1Indonesia Current Account to GDP. It is similar level with financial crisis period.
Source: Bank of Indonesia, tradingeconomics.com

     But there is a bright side of Indonesia economy. Unlike financial crisis period, Indonesia’s foreign exchange reserves grows almost 8 times larger; it is large enough to protect exchange rate. Import in oil, which was the majority reason for decline in current account, is decreasing as its consumption declines as a result of energy reform. Indonesia’s financial market is still vulnerable to external sources, but Indonesia has a large domestic market to stabilize economic growth when other countries implement Exit Plan.

Figure 2Indonesia Foreign Exchange Reserve. It is continuously increasing.
Source: Bank of Indonesia, tradingeconomics.com

     The BI’s decision to rise interest rate aims at both stabilizing inflation rate and economic growth at the same time. Even though its economic growth slows down last two quarters, this new interest rate will help the president Widodo’s policy to increase government spending and foreign investment, and recover its growth rate.

December Week 1

   The S&P 500 rose 2.56% this week as several economic indicators brightened economic forecast. ISM Manufacturing PMI decreased from 59.0 to 58.7, above expectation of 57.9 while ISM New Order slightly increased from 65.8 to 66.0. With low oil price, manufacturing managers are more confidence with economic forecast that is likely to boost U.S. economy along with strength labor market.

   Federal Reserve Vice Chairman Stanley Fisher signaled to increase interest rate in a mean time as labor market improves more than expected. Unlike past couple of months, this news had a positive view on the market. Vice Chairman Fisher said that the Fed. will not surprise the market when it increases the interest rate, which means that there will be a plenty of signal when it does.

   Unemployment rate stays the same from last month at 5.8%. What surprised the market were nonfarm payroll and average hourly earnings. The nonfarm payroll increased from 243k to 321k, and average hourly earning also rose from 0.2% to 0.4%. It seems like Black Friday helped manufacturing industry that increased payroll. This level is expected to stay until next month as another holiday season is coming, Christmas.

Europe generally had a good week as crude oil price increased. Manufacturing and service PMIs declined but it didn't largely effect on the market. Low oil price already dragging European economy down that low PMIs were expected.

   All major European markets increased; DAX for 1.57%, CAC 40 for 1.37%, and FTSE 100 for 1.10%. As oil price increased, market participants expect to stabilize inflation rate; fading deflation fear away. The ECB president Mario Draghi still is indeterminate whether the ECB will implement the quantitative easing. It decreased market to -1.0% on Thursday. But on Friday, EU GDP was announced to 0.8% YoY; stagnated for three consecutive months. Improved U.S. labor market also signaled positive view on European.

   As a result, the DAX rose by 2.39%; cover -1.0% loss on Thursday. Unlike other European markets, FTSE 100 wasn't largely effected by the president Draghi's speech. Of course, not only it is not part of EU, the BOE's monetary policy is working fine. U.K. Service PMI surged to 58.6 from 56.2, and housing price is also stabilizing. The BOE is unlikely to rise interst rate soon; the FTSE is likely to continuously improve.

 


 


USD continuously strengthens this week. While crude oil increased by 1.45%, JPY and EUR depreciated 2.24% and 1.38% against USD respectively. JPY increased up to 120 yen/dollar this week. This strong dollar is expected to continue as oil price keeps low level, and quantitative easing still implemented, or expected to implement in those markets.

November Week 2

   From last two weeks, financial markets had been fluctuated by political issues and company earnings, rather than economic data. This increases volatility in the market, therefore more investors look for taking margin in a short term. Without significant economic data, the investors loose confidence on the markets, showing a box pattern. This pattern will be shown until political issues like Japanese tax-sales settle down.

   The S&P 500 increased by 0.27% without a significant movement recognized this week. As investors are already influenced by interest rate issues, U.S. market focused more on company earning and other financial market indexes. Yet there were several economic indicators that affect on the market. JOLTS Job Opening decreased and Initial Jobless Claim increased, but they are still considered in the "safe" level that labor market is still improving. Retail sales increased by 0.3% and import price declined by 1.3%. As oil price continuously declined, retail price had got cheaper and increase consumer spending. It might be helpful for U.S. economy, but it can restrain inflation rate. The President of Federal Reserve Bank of Philadelphia Charles Plosser, on the other hand, urged that the markets should acknowledge the interest rate may begin to increase sooner than previously anticipated. It means that even though strong dollar and decrease in oil price are temporary factors that the Fed. believes that inflation will move close to the Fed.'s goal quickly. There are still different views in the Fed. that the investors are taking moments before moving their steps.

   Asian market continuously rose as Chinese government implemented Hu-gang Tong that links Shanghai-Hong Kong to exchange shares. Japanese government might delay sales-tax that planned in April. There are still high political risks and uncertainties, but the market is positively reacting as the cabinet pushing hard to delay the proposal.

   While Japanese Yen kept depreciating, the delay of sales-tax gave a positive outlook on the market. While real income stagnated, increasing sales-tax would give opposite results that decreasing consumer consumption, which eventually put the economy into temporary recession. The problem of Japanese economy is not only inflation rate. In a long term, the government needs to worry about government debt and keeping the market confidence without government stimulus. Because the government is unsure about whether the companies can keep up its growth after sales-tax increase, it now tries to delay it.

   With depreciated Japanese Yen, Japanese Adjusted Current Account rose more than expected. But the increment caused by weak Yen, not increase of exports. Chinese Industrial Production declined to 7.7% as the global economy slows down.

   European economy needs more time to recover than previously anticipated. The Bank of England Inflation Report projects that United Kingdom will experience growth of 3.5% this year, 2.9% next year and 2.6% for each of the following two years; it is slightly weaker than growth projection in August. Its inflation rate is projected to fall to 1.2%, and expect it to fall below 1% at some point during next six months. As a result, the BOE is pessimistic about increasing interest rate in a short term; it will keep current low interest rate for a long time. It brought a positive perspective on the market, reading FTSE 100 to 1.11% increase this week.

   Other than U.K., EU economic indicators generally show positive economic outlook. Even though its CPI and GDP stagnated at 0.4% and 0.8%, German GDP got out of technical recessions. But there were high tensions between Ukraine and Russia this week, which restricted market movement in Germany. The ECB is still pessimistic about additional stimulus; it seems like investors need better economic outlook to believe in market. The ECB President Mario Draghi stated on Wednesday that the ECB is already implemented three stimulus program: TLTROs, ABS and covered bonds purchasing programs. He explained that those stimulus need more time to have an impact on the market, which suggests that the ECB would not put additional stimulus in a short term.

                                                   

   Yen still depreciated as it adds more and more stimulus, and U.K. Pound also depreciated as the BOE decided to keep low interest for a long time. With strong USD coming from low oil price, most of the currencies against USD depreciated this week, and this phenomenon is likely to continue for a mean time.

   Crude Oil has been an ongoing issue that hurts global economy for last six months. Because supply has increased while the consumption has not caught it up as the global economy slows down, oil price continuously decreased. As matter of fact, recent industrial production data in China and EU doesn't show a big improvement that this low oil price is likely to continue.

November Week 1

   The S&P 500 rose 0.49% this week as there were mixed views of economic indicators and monetary policies. ISM Manufacturing PMI shows a positive industrial outlook that it exceeds market forecast. Investors worried that slow in China economy and slowdown in eurozone would decelerate U.S. economy as well, but it turns out that manufacturers have more optimistic view. Along with the PMI, Factory Order declined by 0.6% but this decline was lead by airplane order; it had a restricted impact on the market.
   In fact, there was a controversial economic data was released on last Friday: labor market. While unemployment rate declined to 5.8% and the Participant Rate rose by 0.1%, Average Hourly Earnings and Nonfarm Payroll have declined. These indicators suggest that U.S. labor market still has a room for improvement that they wouldn't pressure the Fed. to increase the interest rate in anytime soon. Janet Yellen added on Friday that "normalization could lead to some heightened financial volatility." It means that the Fed. will conduct additional stress test or give more time for investors to adjust into new interest rate.
   As a result, the S&P 500 had a restricted movement this week.
 


   European market had more issues than U.S. market this week, but it showed a restricted movement.

   Main issues throughout the week were PMIs, report from European Commission, higher geopolitical tensions between Ukraine and Russia, and Draghi's speech on Thursday. Unlike U.S., eurozone showed weak Manufacturing PMIs. German PMI decreased to 51.4, which was below forecast of 51.8, and EU PMI also declined to 50.6, also below the forecast of 50.7. Service PMI was even worse that U.K. Service PMI declined to 56.2, below forecast of 58.5.
   Those poor economic indicators were expected in a way. Geopolitical tensions last too long, which continuously weakened eurozone economy, especially manufacturing industry in Germany. Surprise came from U.K. Service PMI that that had a sudden decline from past month. But the facts that it still maintains high level  and the housing price stabilization resulted as a restricted market movement.
   After the BOJ announced additional stimulus on October 31, there were voices that the ECB should implement the quantitative easing. As a matter of fact, the European Commission statement implied additional stimulus on the market, given the consideration that eurozone growth will be only 0.8% in 2014 and 1.1% in 2015, and inflation rate will be 0.6% in 2014 and 1.0% in 2015. Mario Draghi added on the speech that he is still considering stimulus on the market. The thing is, he had kept saying that for months now. It is still "promise" rather than "action." The market will not have strong respond unless the ECB actually implements new stimulus in the market.

 

October Week 3

     S&P 500 sparked up 4.24% this week with bright light from eurozone and China. China showed a stronger GDP than its forecast; it inclined by 7.3% YoY (forecast 7.2%). It shows that global economy in Q3 was stronger than what the market saw. The strong GDP implies that the world economy will rebound back in the following time period, which increases investors expectations along other issues. In the market on Tuesday, there was a rumor that the ECB will purchase corporate bond, which later claimed that it is not confirmed 'yet.' But this rumor was huge enough to impact on the market.

      Within the U.S. market, several companies showed unexpectedly positive earnings, which led to an increase of S&P 500. The UPS, Catapillar, Boeing Inc, Apple and P&G all showed high earnings while IBM, Amazon Coca-Cola and McDonald had an below-expected earnings. But those large companies with high earnings, low gas price, stabilizing job market and CPI led a market this week.

 


      Europe had a good week; the DAX increased by 2.03%, FTSE 100 for 1.38% and CAC 40 rose by 3.15%. Like the U.S. market, the EUwas affected by China GDP and rumor of the ECB corporate bond purchase. Along that, strong PMI in Germany and EU led the market this week. The markets finally started to bound back.

     Last week, one of the reasons EU markets declined was from Germany that its ZEW Economic Sentiment unexpectedly fell down (actual was -3.9 compared with 6.9 previous month). Yet this week Germany showed a strong PMI of 51.8 (forecast 49.5). The EU Manufacturing PMI was 50.7, which was also higher than the forecast of 49.9. Those strong economic indicators led the market increase. Also U.K. GDP resulted as 3.2% increase in this quarter, which is declined by 0.2% from previous quarter. Yet this 3.0% increase still meets the government target, it had a limited affect on the market this week. With stabilizing housing price and retail sales, U.K. market seemed to follow EU economic sentiment.

     This week's global issue came from Asian market. The above-expected China GDP helped the U.S. and Europe but not Asian markets.

     The Shanghai Composite Index declined by 1.87% this week as the strong GDP and labor market suggested less government stimulus in the market. The reason the Chinese government considered additional stimulus in the market was they were worried about slow economy, especially in manufacturing sector and real estate market. Yet the strong GDP and labor market, and high PMI shows that the Chinese economy is doing much better than that they thought. As the expectations faded away, the Shanghai Composite Index declined with positive economic indicators.

 


     EUR/USD unchanged this week, and USD/JPY increased by 1.26%. The Japanese prime minister, Abe Shinzo, stated this week that they might postpone sale-tax increase. Along with the current government policies, it had a positive impact on the market to depreciate the JPY.

 

October Week 2

     S&P 500 declined by 1.13% this week. It hit the new low of 200-day average of 1,882.99 on Wednesday as German Economic Sentiment significantly declined due to continuing geopolitical risks from Russia and Ukraine, and Drgahi's speech that it is unlike to implement quantitative easing in a short period. Even the ECB is exercising ABS program, but it is hardly affecting the market. The other reason is decline in oil price. The price of crude oil declined by almost 30% compared with its peak 3 months ago. It had the largest drop of 3.76% on Tuesday. There are high supplies of oil as OPEC expected high economic growth in the third quarter. But the reality is that Europe and China are still suffered from recession that the demand of oil far behind than what they expected.

     

     Speaking of the European market, there was no sign of improving. The ECB expected the bank to increase money supply by purchasing bad assets, the ABS program, but there was no significant impact on the market. In the past, the market continuously improved with poor economic data is that the investors expect the ECB to implement actual quantitative easing. As the expectation faded away, the investors were afraid of higher deflation risk, as EU CPI stagnated even after the ABS program.

     However, there was bounce back at the end of the week as positive economic data came from the U.S. market. It showed that U.S. economy is still improving with high consumer spending, and strong housing and labor market. The stronger USD also explains that there are more investors involved in the market. The most important issues were speech from the president of the Deutsche Bundesbank, Dr. Weidman, and the president of Federal bank OF St. Louis, James Bullard.

     The president Weidman stated that the deflation risk in Europe is temporary from the low oil price. Even he disagreed with the quantitative easing, his speech was good enough to ease tensions in the market. President Bullard stated on Thursday that the Fed. should delay the quantitative easing. Since the Fed. considered to exit the quantitative easing last meeting, his speech strengthened the market.

     Despite global deflation risk, especially Europe and Japan, China's market is outperforming other countries. The main reasons are recent quantitative easing implemented by the PBOC and high demand of goods from the U.S. consumers. The manufacturing sector of China is also boosted by low commodity price. Even the low commodity price implied the low demand of goods, but it is a good news of China as they can get the resources with lower price. Besides, the investors expect more stimulus from the central bank as its CPI and estimated GDP are below the target.

September 26, 2014

Two major issues pulled DJI up for 0.99% today. Corrected U.S. GDP and Michigan Consumer Sentiment proposed strong economic growth. The 4.6% growth GDP was mainly dragged by high consumer spending, which increased by 2% compared with 1.4% growth in Q1, as consumers gain confidence back.

Notice that nonresidential fixed investment increased by 9.7% compared with 1.6% in Q1. It highlights that companies are willing to invest more as the economy gains its strength back. Yet there is a concern that this significant increase was due to weather. It rises a question whether companies are still willing to invest during Q2 and Q3.

Michigan Consumer Expectations was above expectation. It highlights that consumers are still looking at the bright side of economy and willing to consumer. Along with recent strong labor market data, it brights the U.S. economy.

Recently Nikkei continuously increased as additional stimulus was expected. Japan still suffers from inflation rate. National Core CPI decreased by 0.2% YoY from last month, arises a question about the BOJ's monetary policy. Since low inflation rate policy is not working well, market expects larger stimulus package. As a consequence, USD/JPY rate keeps increasing.