STAR Insight, Market Update 21 Juni 2021

Dovish view from The Fed

  • Dow posted the worst week this year
  • US infrastructure bill will likely be passed despite lower than Biden’s initial proposal
  • JCI and government bond price corrected as foreign flow reversed

US equity market drop following mixed signals from The Fed
US retail sales dropped 1.3% MoM on May’21, worse than consensus expectation with 0.8% contraction while industrial production came in slightly better than expected on May’21 with 0.8% MoM growth (Fig. 1). Last week, Dow recorded the worst week since Oct’20 with a 3.4% correction as James Bullard, St. Louis Federal Reserve President stated that The Fed should lift its benchmark interest rate as early as late 2022. Bullard also expressed his view of supporting an end to the purchases of mortgage-backed securities with concerns mounting around a potential bubble in the housing sector. Bullard’s statement followed statements earlier last week from the FOMC which highlighted the potential of two rate increase by the end of 2023.

US full employment could be reached faster than expected
US Senate supported the infrastructure bill costing approximately US$1 trillion despite disputes continued on Sunday over how it should be funded. Biden had initially proposed about US$4 trillion to be spent for infrastructures, fighting climate change, and providing care for children and the elderly. The market expects US infrastructure spending will help boost economic recovery higher than the pre-pandemic level by 2022. Deloitte on its release of 2Q21 US GDP Forecast stated that the main short-term impact of this spending impulse will be to get the economy back to full employment faster than it would occur otherwise. This would allow The Fed to start to renormalize financial markets earlier than expected.

JCI and Indo government bond price corrected with minor foreign outflow
JCI decreased 1.4% last week, as Transportation and Logistic Sector recorded 3.8% correction and Property, Energy and Consumer sectors dropped 3.5%, 3.3%, 3.3% respectively. However, the Technology sector recorded a 19.7% gain last week which was mainly driven by the movement of small-cap and non-liquid stocks. Foreign investors recorded a net sell of Rp61.5bn in the regular market last week (vs. Rp475bn net buy last week) with the highest outflow from BBRI (Rp660bn).

Foreign investors booked a minor outflow of Rp130bn from the Indonesian government bond market last week while Indonesia’s 10Y government bond yield increased by 18.2bps, allowing the spread to US 10Y treasury yield to expand to 5.18% as US treasury yield was relatively flat last week.