Positive Sentiment towards the Fed's Policy, S&P 500 strengthens 2.47%

The United States stock market, the S&P 500, closed up 1.76% throughout last week's trading. The beginning of last week started with a decline after the European Central Bank (ECB) announced an interest rate increase of 50 bps (0.5%). Interestingly, market players seemed to ignore the weekly employment report which showed a decline in the unemployment rate to 192 thousand, compared to the consensus figure of 205 thousand, which means it still shows strong employment. This week's catalyst came from market players' expectations that the Fed would provide a temporary pause on interest rate increases, after events in the banking sector, especially SVB (Silicon Valley Bank) and Silvergate. Apart from that, banking shares in the US also appear to be starting to stabilize. 9 of the 11 S&P 500 sectors closed green, with the highest gains in the Technology and Communication Services sectors. The 2 sectors that closed in red were Consumer Staples and Real Estate.

BI maintains interest rate at 5.75%

As consensus expected, Bank Indonesia (BI) kept its benchmark interest rate unchanged at 5.75%, maintaining that the interest rate level was sufficient to withstand inflationary pressures and support the Rupiah exchange rate. BI also emphasized that monetary policy will be based on domestic factors such as inflation and growth prospects, not following the path of other central banks' interest rate increases. Responding to recent market turmoil caused by the collapse of several US regional banks and problems at Credit Suisse, BI said it had intervened in the foreign exchange market to stabilize the rupiah. BI also expressed confidence in the resilience of the local banking sector, citing strong capital adequacy ratios, low levels of non-performing loans and diverse funding sources. The BI stress test shows that local banks are able to withstand external shocks without a significant impact on their performance.

Indonesia's Trade Surplus above the February Consensus

The trade surplus in February exceeded market expectations by a considerable margin, reaching USD 5.5 billion compared to the consensus estimate of USD 3.3 billion. The surplus was driven mainly by a decline in imports, with non-energy products recording a significant surplus of USD 6.7 billion. However, the oil and gas sector still recorded a deficit of USD 1.2 billion, although this has improved compared to a deficit of USD 3 billion in July 2022. This decrease in deficit was largely due to an increase in crude oil shipments, which jumped 45% during the month, while commodity imports it fell 30% YoY. From a regional perspective, Indonesia's trade balance has exceeded the performance of other Asian countries such as Vietnam (USD 2.8 billion) and Taiwan (USD 2.4 billion). However, this increase in trade surplus was not entirely positive because it was mainly caused by a sharp decline in imports. We estimate the surplus is likely to return to normal (USD 3-4 billion) as imports are delayed, which implies further risks for the IDR in the short term.

Key Takeaways

The United States stock market S&P 500 rose 1.76% last week, after market players ignored the employment report and focused on expectations that the Fed would delay raising interest rates after events in the banking sector.

For the domestic economy, BI maintained its benchmark interest rate at 5.75%, stating that the interest rate was sufficient to withstand inflationary pressures. BI also emphasized that monetary policy would be based on domestic factors. Apart from that, BI also expressed its confidence in the resilience of the local banking sector with its strong capital adequacy ratio and diverse funding sources. In other economic news, Indonesia's trade surplus in February reached USD 5.5 billion, exceeding market expectations by a large margin. However, the increase in surplus was largely due to a sharp decline in imports, which could imply further rationing for the IDR in the short term.

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