STAR Insight, Market Update 7 Juni 2021

Entering high inflation era

  • US inflation to be announced this week
  • UK retail market improved as economy reopens; adding concern that inflation will exceed BoE target
  • Foreign inflow to Indonesian stocks and bond resumed

Bond yield improved despite good employment data
US May inflation will be announced on Thursday. The market expects May’21 inflation at 4.7%, higher than 4.2% recorded last month, and significantly higher than The Fed’s inflation target of 2.0%. The US reported better than expected labor data with ADP Employment Change reached 978k (vs. estimate of 642k) and Unemployment Rate which recorded at 5.8% in May’21, slightly lower than the consensus expectation of 5.9% and improving from 6.1% recorded in Apr’21 (Fig. 1). Following this data release, the S&P 500 rose by 0.88% on Friday, resulting in a 0.61% increase for the week. US 10Y treasury yield dropped 4.1bps last week, despite high inflation expectation and decent labor data, several signs of economic recovery, which earlier this year had caused a sell-off in the bond market as investors expected that The Fed will raise interest rate soon.

UK Inflation likely to go up as economy reopens
UK economy reopen had spurred retail sales. British shoppers were keener to spend on clothes and shoes last month as social-distancing restrictions eased, enabling people to meet at pubs and restaurants, according to the British Retail Consortium (BRC). However, the BRC’s shop price index for May’21 remained 0.6% lower than last year. Increasing retail prices (clothes and apparel) could potentially push UK inflation to exceed the Bank of England’s target of 2%. Note that before the UK re-open its economy in May’21, inflation had reached 1.5% of Apr’21 which was mainly caused by higher energy prices. Supply chain disruption linked to COVID had also pushed up the cost of furniture and electrical goods. Prices in the UK were likely to rise further later this year.

Foreign investors recorded another net buy of Indonesian stocks and bond
JCI increased by 3.7% last week, as Bank Indonesia maintained the 7-day reverse repo rate at 3.5%. Technology (+40.2%), Infrastructures (+3.3%), and financials (+2.12%) sectors were leading JCI’s positive performance last week. Foreign investors recorded a net buy of Rp2.5tn in the regular market last week. The highest inflow came to BBRI (Rp1.05tn), BBCA (Rp742bn), and TLKM (Rp215bn).

Indonesia’s 10Y government bond yield decreased slightly by 1.1bps while the spread to US 10Y treasury yield slightly increased to 4.84%. Despite government bond yield was relatively flat, foreign investors booked Rp5.8tn inflow to the Indonesian government bond market last week.