The US Bureau of Labor Statistics released another below-than-expected inflation data for the month of July. The headline Consumer Price Index (CPI) grew by 0.2% on a monthly basis and 2.9% from one year ago, the first time it came below 3% since 2021. The shelter index, the CPI’s largest component, accounted for 90% of July’s increase as it rose by 0.4%, higher than June’s 0.2% which was the lowest in 3+ years. Meanwhile core CPI, the measurement excluding food and energy prices, recorded its smallest annual gain since April 2021 at 3.2%. 

With July’s data, the US’ inflation has eased for four consecutive months on an annual basis and this should cement Fed’s September rate cut further with most expectations ranging between 75 - 100 bps cuts by the end of 2024. As a result, the S&P 500 gained 0.38% by end of Wednesday and marked its fifth consecutive daily gains. In all, this is positive news for global capital markets fund flow and the Rupiah, which strengthened by 1.26% for the past week.

Simpan Views

We see US CPI inflation slowdown continue to drive the global market’s positive foreseeable outlook. The slowdown’s pace may have given positive signals for the Fed’s rate cut chances as it has sustainably declined to their 2% target. With rate cut chances seemingly improving, the question now revolves around the rate cut’s intensity. Our concerns lie on the notion that if the Fed continues to be reactive on economic data instead of being anticipative, it may induce further global market volatilities. It could be argued that the UST (US Treasury) market has been pricing in a 50 bps rate cut as the UST 2Y and 10Y yield spread continues to tighten, which is a good indicator for economic strength.

We think that regardless of the rate cut’s intensity, its positive impact on the Indonesian economy and capital market should be a sure-fire. As domestic consumption has noticeably weakened for the past few months, an injection of monetary easing should enable the consumer market to start recovering. As for our funds, we are upbeat that our equity and fixed income selections should position the funds for future gains.