75% Chance of the Fed Holding Interest Rates

The United States stock market, the S&P 500, closed up +0.39% throughout last week's trading. Investors have largely refrained from making big moves ahead of the interest rate decision at the Fed's June 13-14 meeting, as well as the consumer inflation report for May. According to the CME FedWatch tool, market players predict a 75% chance that the Fed will keep interest rates unchanged in June. Economic data during the week shows support for the Fed's pause narrative. The Institute for Supply Management's U.S. services activity index almost showed stagnation for May, while factory orders for April rose less than expected. Additionally, initial jobless claims jumped to the highest level since October 2021. The data shows signs of cooling in the economy while also indicating that cracks are starting to appear in the previously very resilient labor market. In the spotlight of global developments, at the end of last week, Saudi Arabia decided to cut production by 1 million bpd, reducing its total output to the lowest level since June 2021. This step is predicted to avoid weakening oil prices.

May inflation drops to 4%

Inflation in May showed the lowest annual inflation in the last 12 months, at 4%, compared to 4.33% in April. This 4% figure has been included in Bank Indonesia's inflation expectations for 2023. This decrease was caused by food inflation and core inflation which were lower than expected. The lower than projected slowdown in food inflation was likely driven by a better harvest season, as reflected by lower chili prices followed by stable rice prices. In addition, transportation and clothing prices recorded deflation after the Eid celebrations.

In terms of core inflation, there also continues to be a slowdown to 2.66% in May, from a peak of 3.36% at the end of 2022. Apart from the impact of the second round of controlled increases in fuel prices and a stronger rupiah, the core slowdown may be a sign that demand domestic has not received a significant boost. This premise is also supported by slowing money supply data, as M1+ (money supply + savings) only grew 3.4% in Apr 2023, marking the slowest pace since 2012.

Sri Mulyani Proposes an Increase in the 2024 Infrastructure Budget

Minister of Finance Sri Mulyani proposed an infrastructure budget of 396.9 – 477.5 trillion rupiah for 2024, higher than 392 trillion rupiah this year. The budget will increase by 1.2 – 21% annually. This budget will mainly be used for the construction of the new National Capital City (IKN) in East Kalimantan. Apart from that, another priority of this budget is to complete the construction of toll roads in Sumatra.

Key Takeaways:

The United States stock market, the S&P 500, closed up +0.39% throughout last week's trading. According to the CME FedWatch tool, market players predict a 75% chance that the Fed will keep interest rates unchanged in June. Economic data during the week shows support for the Fed's pause narrative. The Institute for Supply Management's U.S. services activity index almost showed stagnation for May, while factory orders for April rose less than expected. Additionally, initial jobless claims jumped to the highest level since October 2021. The data shows signs of cooling in the economy while also indicating that cracks are starting to appear in the previously very resilient labor market.

For the domestic economy, inflation in May showed the lowest annual inflation in the last 12 months, at 4%, compared to 4.33% in April. This 4% figure has been included in Bank Indonesia's inflation expectations for 2023. This decrease was caused by food inflation and core inflation which were lower than expected.

In other economic news, Minister of Finance Sri Mulyani proposed an infrastructure budget of 396.9 – 477.5 trillion rupiah for 2024, higher than 392 trillion rupiah this year. This budget will mainly be used for the construction of the new National Capital City (IKN) in East Kalimantan. Apart from that, another priority of this budget is to complete the construction of toll roads in Sumatra.

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