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The slightly hotter-than-expected US PPI inflation data raised concerns about the possibility of another Fed rate hike in 4Q23 (see Global Economic News). Investors responded to this situation with a sell-off in the global bond market, as reflected in the decline of the S&P bond indexes (for developed markets) and EMBI (for emerging markets) by -0.3%, and the increase in UST 10Y and Bund yields, each by 5 and 10 bps to 4.15% and 2.62%. This sentiment negatively impacted INDON 10Y and 5Y yields, both of which rose by 6 and 5 bps to 4.98% and 4.99%. Meanwhile, INDOGB yields were relatively unaffected, due to the decline in 7M23 net SBN issuance (-17.8% yoy) thanks to 7M23 budget surplus, which stayed at 0.72% (see Domestic Economic News and Fixed Income News). We expect the INDOGB 10Y yield to stay within the range of 6.3-6.4% today, while rupiah might depreciate towards the range of IDR 15,200-300 per USD.
Fixed Income News: Net SBN issuance fell -17.8% yoy to IDR 184.1tn (25.8% of the 2023 State Budget target of IDR 712.9tn) in 7M23. The decline was mainly caused by the Ministry of Finance's policy to limit the issuance of new SBNs. Although the total incoming bids made at SBN auctions in 7M23 reached IDR 1,210.6tn (7M22: IDR 1,200.4tn), the total SBN issuance value was only IDR 474.2tn (7M22: IDR 549.7tn). In our opinion, this policy will help maintain the domestic bond market's bullish momentum, keeping INDOGB 10Y yield at 6.2-6.4%. (DJPK)
Global Economic News: Slightly hotter-than-expected US PPI inflation in July (0.8% yoy; Jun: 0.2% yoy; Cons: 0.7% yoy). The mom figure came in at 0.3% mom (Jun 0% mom; Cons: 0.2% mom). The hotter-than-expected data sparked concerns among market players that the disinflationary momentum in the United States was weaker than what was indicated by the CPI inflation data. Market players responded to the data by increasing the probability of a second Fed rate hike (25 bps) in 2H23 to 34% (November; prev: 28%) and 30% (December; prev: 26%). However, the probability for September hike dropped to 10% (Prev: 14%). We believe that the situation could hurt global and domestic bond markets. (CNBC)
Domestic Economic News: 7M23 budget surplus came in at IDR 153.5tn or 0.72% of GDP (6M23: IDR 152.3tn or 0.71%; 7M22: IDR 106.6tn or 0.54%). The growth in state spending (1.1% yoy to IDR 1,461.2tn) was slower than in state revenues (4.1% yoy to IDR 1,614.8tn), which helped boost the surplus. We believe the data shows that the government has sufficient fiscal space to provide fiscal stimulus well into 4Q23. (Kemenkeu)
Recommendation: FR0037, FR0040, FR0056, FR0084, FR0086, FR0090, PBS032, PBS036.
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