Monthly Market Commentary
Monthly Market Commentary - September
September recorded a monthly deflation of 0.18%, which translated to annual inflation of 2.88% yoy (vs. 3.20% in August). Falling raw food prices was the main contributor for the deflation, especially broiler chicken meat. Rupiah depreciation and oil price increase have not yet reflected in consumer inflation, due to delayed pass-through from producers, as well as unchanged administered prices.
August trade balance came at USD 1bn deficit, higher than consensus estimate of USD 674mn deficit. Imports growth was relatively in-line as it grew by 24.7% yoy on the back of accelerating oil and gas imports that grew 50.4% yoy in August as both volume and price played a factor. Meanwhile exports came much below expectation as it only posted 4.1% yoy growth (from 24.7% in July) as volume of commodity-related exports subdued with exports to China slowed down the most, as trade-war impact might start showing impact. Concern towards third-quarter current account deficit (CAD) is looming after two straight months of high trade deficit (USD 2bn in July and USD 1bn in August) means the country needs to post at least USD 1bn surplus to maintain third-quarter CAD below 3% to GDP. Government continue their pro-active measure by revising income tax (PPh22) for 1,147 items of consumer goods imports on top of the B20 (Biodiesel) implementation as it is expected to reduce total imports by around USD 3bn (CAD impact of around 0.2% - 0.3% to GDP).
Following the US Federal Reserve move, Bank Indonesia (BI) also increased its policy rate by 25bps to 5.75% in September, bringing year-to-date hike to 150bps. The decision is consistent with efforts on pushing CAD as well as maintaining the financial attractiveness of the country (i.e. real interest rate differential) amidst global uncertainty. Furthermore, BI remain on a hawkish tone stating that future policy move will be largely data dependent, including but not limited to CAD, exchange rate, financial system stability and inflation. Additionally, BI also issued a regulation opening the door to Domestic Non-Deliverable Forwards (DNDF) contract to be traded onshore. This was aimed to strengthen Rupiah stability through foreign exchange market deepening and providing banks/corporations an alternative hedging instrument. For the balance of the year, economists in the market are still expecting another round of rate hike to be performed in the fourth quarter on the back of both external and internal factors.
The Jakarta Composite Index (JCI) retreated from its gain the past two months as it posted 0.7% monthly loss in September as concern on the country’s (CAD) and Rupiah volatility resurfaces. External factors such as increasing oil price due to Iran oil sanction and expectations of Fed rate hike came as the main culprit in Rupiah depreciation. In the equity market, September's average daily transaction value decreased to IDR 5.3tn from IDR 6.2tn recorded in August. Local investors remained as the main supporter of the equity market, while foreign posted IDR 983bn of net outflow in September, bringing YTD outflow to IDR 51.2tn.
By sector, consumer was the best performer with 2.8% gain driven by Unilever which posted 7.2% gain as the stock resurrect after months of underperformance to other consumer names and the JCI index thanks to plan of active product launches in the next twelve months. Second best was miscellaneous industries with 1.1% gain as Astra up 1.4% after its auto market share remaining resilient above 50%. On the other front, constructions, property and real estate came as the worst performer with 5.8% loss as concerns on rising interest rates impacted highly geared construction companies. Agriculture sector came second worst with 3.1% loss as crude palm oil price went down to its 52-week low on news that Malaysia’s August stockpiles hits 9-month high.
Rupiah may still be challenged in near term due to pressure in the trade balance which may lead to a weak 3Q-18 CAD number, which will be announced in November. The spike up in the Fed yield which hit 3.25% will also put pressure on our fixed income market.
Furthermore, we still see downside risk on earnings announcement in the 3Q-18, which will start to reflect higher cost from weaker Rupiah and higher energy cost, hence we expect earnings to be downgraded by the street after the 3Q-18 results is announced. We also think the government push on social subsidy program will improve the purchasing power in the grass-root level.
The bond market saw increased volatility in September, with 10-year benchmark yield (FR64) increasing sharply from 8.09% to 8.55%, before returning to 8.07% by the end of the month. Emerging market bond sell-off occurred in the second week of the month in the midst of US economic recovery and rising oil prices, before positive sentiments returned by the end of the month. Currency stability also remained an issue with IDR weakening by 1.31% to 14,903 during the month.
On the global market, the Fed increased its key interest rate by 25 bps to a range of 2% to 2.25%, being the third hike this year. It signalled one more hike in 2018, by removing the description of monetary policy stance as accommodative. Furthermore, it expects that further gradual increases will be consistent with sustained expansion of US economic activity, strong labour market conditions, and inflation objective of 2% in the medium term.
In order to maintain domestic financial market attractiveness, BI increased its 7-day reverse repo rate to 5.75%. The decision is also consistent with efforts to bring down current account deficit (CAD). It will continue to monitor CAD, exchange rates, financial stability and inflation for further rate decisions. To help stabilize the currency, BI also plans to implement Domestic Non-Deliverable Forward (DNDF). This is aimed to accelerate forex market deepening and to provide an alternative hedging instrument for banks and corporations. Technical details are yet to be provided, i.e. the need of underlying transactions and settlement mechanisms.
By the end of September, the government has issued IDR 637tn of bonds or around 80% of its gross issuance target in 2018, assuming a budget deficit at 2.19% of GDP. Foreign ownership in IDR government bonds decreased by almost IDR 5tn due to the recent market volatility. Foreigners account for 36.9% of total outstanding government bond, down from 37.6% recorded in August.
We will continue to watch the current volatility and the trend of rising interest rates both domestically and globally. We will also continue to monitor the pace of Fed tightening, which may depend on US economy and labour market situation.
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