MARKET WAITING FOR DEFINITE INCREASE OF FFR BY THE FED

Players of the moneymarket, global and domestic alike, were waiting for definite increase of FFR by the FED. The latest news was that Janet Yellen signaled there would be increase of interest by the Fed this year end provided inflation was stable and economy was strong enough to jack up employment.

Yellen, who spoke one week after suspension of FFR increase saw that development of global economy would not govern the Fed’s policy significantly. The statement included mentioning that weakening of inflation in the USA was only temporary and might shock investors. They rated that the Fed’s last week’s decision as signal that tight policy was not an urgent matter and would probably be executed next year.

According to Yellen, for the most part price downturn was due to particular reason such as strengthening of USD and declining of oil price which would soon end. Such might cause inflation to increase above the targeted 2% or above the average global inflation. In the other part of her statement Janet predicted that America would be able to maximize employment and stabilize prices.

The result was that USD would go on a rally as Yellen stated she predicted the Fed might increase FFR this year end. Yellen in the speech delivered at the University of Masachussettes, Amherst stated that US economic betterment “might need initial increase this year end followed by progressive monetary policy thereafter.”

Yellen’s statement was made one week after the Fed maintained FFR at near zero percent up to 0,25% in a two-day meeting September 16 – 17 last which was effective since 2006. Yellen stated that decision makers were monitoring development abroad “but never expect that weakening of economy in China or other places would cancel the Fed’s plan to increase FFR.”

Yellen’s statement was noteworthy in that they were progressing toward increasing FFR this year. Yellen had a strong argument that FFR should be increased this year. Previously the Fed sent varied messages to stockmarket. Last week for example, Yellen showed anxiety over weakening global economy. Yellen said: “A bearish global situation must be watched on.”

The statement could be interpreted as the Fed being “dovish” about timing of FFR increase. However, a few days later contradictory statement was made by other Presidents of the Fed who tend to be “hawkish”.

Spontaneously, investors of the stockmarket were trying hard to understand The Fed not to increase FFR on September 17 last and always predict timing of FFR increase. As known on September 17 last Yellen announced The Fed would not increase FFR.

Although The Fed was optimistic about US economy, Yellen referred to global economic slowdown as reason to suspend increase of FFR. Anxiety over China’s economic slowdown and the emerging markets caused wild movement of the financial market.

Furthermore on September 19, two days after Yellen’s speech, President of the Fed of San Fransisco John Williams said that the decision to increase FFR was getting near. Such was contradictory to the Fed official statement, which showed that 9 out of 10 members of the Fed refused increase of FFR.

The only one who agreed was Jeffrey Lacker, President of the Fed Richmond, who wished that the Fed would uplift FFR. Williams was of opinion that US economic performance was not guaranteed by bank economic performance was not guaranteed by bank interest close to zero percent. According to Williams, US economy policy was applied.

Furthermore on September 21, it turned out that Williams was not the only President who made statement contradictory to Yellen’s statement. President of the Fed St. Louis Bullard also agreed to increase FFR. He believed that there was a big obstacles today to increasing FFR. On the same day, President of the Fed Atlanta Andrew Lockhart said that most probably FFR would be increase this year as long as the stock market was peaceful.

Back to the statement made by Yellen, the more certain FFR was increase the better it would be to the global and domestic market.

The Money Market

So far pressures on Rupiah was continuing, Rupiah even touched Rp.14,600 per USD last week. BI’s mid rate showed Rupiah was at Rp.14,623 Per USD – lower than last week’s position at Rp.14,463. Per USD or lower than the latest position last week at Rp.14,463 and yet only last month (3/8) Rupiah was still at the position of Rp.13,492 per USD.

When many circles urged BI to lower BI rate to energize domestic economy, the Governor of BI Agus Martowardjo confirmed BI would not change benchmark rate until positive data comes into view.

If the existing data showed betterment, BI could analyze them, especially data which showed inflation was under control, deficit in current account was minimized, and global sentiments were relaxed.

Data of JISDOR showed that by Wednesday (23/9) last Rupiah settled at Rp.14,623 per USD, a downturn against the previous position of Rp.14,486. The Governor of BI said that Rupiah weakening was due to external turbulence. The world was afraid that economic slowdown in China might affect countries whose export was still relying in natural goods. Under the circumstances BI would always be in the market and run prudent policy to tame inflation.

In tune with the Governor of BI, the Coordinating Minister of Economy Darmin Nasution admitted Rupiah would soar through Rp.14,623 per USD as marketplayers were speculating on China’s future. Commodity prices was down as market speculated about China’s economy. Darmin did not see domestic factor influencing Rupiah slump.

Indisputably Rupiah that weakened to as low Rp.14,700 per USD was on account of external and internal sentiments, i.e. the Fed who suspended increase of FFR, weakening China’s economy and Indonesia’s weak fundamental economy.

Other sentiments that made Rupiah slump was revised projection of Indonesia’s economic growth by ADB from 5.4% to 4.9% this year refuted in negative market’s perception and Rupiah deeper sinking.

Beside there was released economic data like export which was not high enough and projected domestic economic growth which failed to reach above 5% - all posed as negative sentiment to Rupiah.

If Rupiah weakening was due to external sentiment, the Government must respond to it by uplifting market trust. It was right indeed for the Government to issue Chapter II of Economic Policy Package which was expected to affect Rupiah positively.

However it must be borne in mind the Government’s strategy alone would not automatically rescue Rupiah, sound action was still needed before any tangible result could be seen. The Government must constantly encourage businesspeople to build solid foundation so the strategy could bear quick result.

In the draft of Economic Policy Package Chapter II which was still being dissected, the objective of strategy was focused on Industry and Agriculture. The Policy Package would consist of rules and deregulations, mainly aimed at promoting export.

As told, President Joko Widodo had released Economic Policy Package Chapter I on September 9, 2015 in which 134 rules had been deregulated; the 134 Regulations were extracted from the previous 154 Regulations.

Of the above regulations some plans were to be underscored, i.e. acceleration of industrial estate development projects as mandated in the National Middle Term Development Plan (RPJMN). Directly or indirectly the impact would be seen in the Rupiah stabilization process.

The effort to build domestic economy foundation was important in building market trust in Indonesia’s economic prospect amidst rumors of the Fed increasing FFR this year. The Fed suspended increase of FFR at the FOMC meeting two weeks ago because the US manufacturing sector was not performing well. Unimpressive performance of the US Purchasing Index (PMI) which only inch up from 53.0 to 53.1 in August.

The Government of RI was also preparing an instrument to jack up national forex reserves whereby USD could be expected to stay longer in Indonesia.

Last week the Ministry of Finance Bambang Brodjosumantri attended meeting on increasing forex reserves at the Vice President’s office. The meeting which was chaired by Vice President Jusuf Kalla was also attended by Governor of BI Agus Martowardojo. The point of discussion was how to increase forex reserves by jacking up export.

The Government claimed they needed vast amount of forex reserves to prevent capital outflow due to global economic turbulence as soon as export was increased, the next step was to drive forex-from-export into the domestic banking system.

At the moment Indonesia’s forex reserves was still at safe level, at lease overseas debt. Still it was very urgent for the Government to increase forex. Governor of BI Agus Martowardojo reported that the position of national forex reserves on Monday (21/9) came to USD 103 billion, which was les than that of August 2015 at USD 105,3 billion.

Statement of the Governor of BI was in line with revised assumption of Rupiah value in RAPBN Budget 2016 which at the moment the basement level was increased to Rp.13.700 – Rp.13,900 per USD against the previous Rp.13,400 – Rp.13,900 per USD. The Governor of BI estimated pressures in Rupiah would still continue till Q I/2016.

Speculations of global economy over FFR increase by the Fed, devaluation of Yuan and lowered commodity prices would slow down capital inflow or even drive capital out of the country. By calendar year, by September 18, 2015 last, foreign capital market and government’s bonds was down to only around Rp.39 trillion against the same period in 2014 amounting to Rp.170 trillion.

Although there was still widening deficit in financial transaction, generally speaking DTB end of 2015 could be downsized to 2.2% of GDP. The amount was still close to around 3% of GDP.

Meanwhile BI estimated growth of Indonesia’s economy at around 5.2% - 5.6% in 2016. The Government lowered growth assumptions 5.3% against 5.5% in 2016.

From the above review Rupiah position in 25/9 was still volatile in the range of Rp.14,000 – Rp.14.600 per USD. This week Rupiah was projected to be in the range of Rp.14.400 – Rp.14,500 per USD because there was overshoot in Rupiah collection so chances for strengthening was still open.

The Capital Market

Index of IHSG was closed to weaken quite significantly at 2.29% (99.61 points) by end of session on Wednesday (13/9) last. IHSG dropped to the level of 4,144.427. Index of LQ 45 was also down by 3.02% to 707.864. IHSG’s lowest position was at 4,239.135.

IHSG nose dived as the global market was again worried about China’s economy. China’s manufacturing data dropped to the lowest level in the last 6.5 years. Jakarta Islamic index (JII) also dropped by 2.53% to 367,99 points. Index of Sri KEHATI dropped by -3.09% to 240.92 points. Net sell by foreign investors was worth Rp.689 billion while transaction value was Rp.4,896 trillion with trade volume of 7.016 billion shares.

Meanwhile index at Asian stockmarket weakened during closing session last Wednesday (23/9). China’s Manufacturing data dropped to 47.0% in September, the lowest in 6,5 years. The data flared up anxiety once more about China’s economic growth.

Negative sentiment was still lurking although China’s President Xi Jin Ping made his defensive statement that China’s economy remained at growth and remained stable. President Jiiping delivered his first speech during his state visit to the USA.

All in all Index of Hang Seng dropped by 2.26% (493.67 points) to the level of 21,302.91 points. Index of Shanghai also weakened by 2.19% (69.73%) to the level of 3,115.89 points. The same was with Straits Times Singapore which weakened by 0.56% (15.96 points) to 2,852,51 points. Meanwhile index of shares in Europe’s market strengthened in fluctuative trading amidst axiety China’s economy.

Benchmark index of Europe’s stockmarket inched up by 0.3%. Index FTSE 100 England rose by 0.37% to the level of  5.957.77 points. Index of DAX 30 Germany rose by 0.20% to the level of 9.589.70 points. Index of CAC 540 France inched down by 0,02% to the level of 4,427.79 points. The notable thing was that Weall Street was closed negative in the past 3 days since Tuesday till Thursday last week.

Uncertainty of FFR increase by the Fed and global economic slowdown accounted  for low stockmarket. Beside there was pressure To sell on Caterpillar, the biggest producer of mining and construction in The world fell by 6.3% to USD 65.8 because the company planned to dismiss 10,000 workers due to low economic condition with effect on mining and energy sector. STOP AT 03.35

Index of Dow Jones fell by 78.57 points (0.48%) to 16,201.32. Index of S&P 500 dropped by 6.52 points (0.34%) to 1,932.24. meanwhile index of nasdaq fell by 18.27 points (0.38%). There were around 7.7 lots being transacted above daily average numbering 7,5 billion shares.

Caterpillar shares dropped by 6.3% after announcing axing of cost in anticipating energy and minery crisis. Caterpillar could dismiss more than 10.000 workers and 20 facilities until 2018. Other industrial giants were also weakening including member of Dow General Electric and Honeywell International, both slumped by 15 points.

Governor of the Fed Janet Yellen said that she was expecting FFR could be increased this year. The stockmarket feared global economic slowdown as Yellen made the statement.

As the Fed decided to increase FFR respond came from players of the stockmarket from all over the world especially developing countries like Indonesia. All in all IHSG remained to be under pressure.

In fact the Fed’s decision to maintain FFR at low level in the past few years could mean positive signal to IHSG.

As Yellen signaled that the Fed might probably increase FFR, it could mean opportunity to players of the stockmarket to be more aggressive in buying cheap shares. Moreover there was news that realization of state’s expenditure by August 31, 2015 had reached Rp.1,054.2 trillion or 53.1% of total ceiling of expenditure in APBN-P 2015.

Meanwhile realization of state’s income had reached Rp.867.5 trillion or 49.2% of target in APBN-P 2015. Marketplayers were expecting budget absorption could be the catalyst of Indonesia’s improved economy in Semester 2 this year which would strengthen IHSG.

Development of the infra-structure sector including construction, energy, food including agro product and maritime business including tourism could be the catalysts for domestic stockmarket performance.

So it was advisable for the Monitory authorities in Indonesia to scheme up a strategy to keep capital from flowing out by accelerating executing of Economy Package policy Chapter I and to make chapter II come sooner. Hence the position of IHSG last week end moved in the range of 4,250 – 4,300 and to continue this week in the range of 4,300 – 4.350 as local investors returned after correction on IHSG and sectoral index which was too sharp in the weeks before. (SS)

Business New - September 30, 2015