Fixed Income Update 16 Jan 2025
KBVS WEEKLY FIXED INCOME UPDATE
Thursday, 16 January 2024
A More Inward Looking (and ProCyclical) Policy
The protectionist measures and tariffs likely to be implemented by President Trump shortly after his inauguration appear to have already been anticipated by global markets. This anticipation has seemingly driven a "flight to quality" in recent months, as evidenced by the DXY remaining at its highest levels in the past two years. Nevertheless, the weakening of the US Core CPI is expected to provide a breath of fresh air, potentially creating room for a slightly larger Fed rate cut than previously anticipated.
This sentiment of inward-looking (and procyclical) policy also appears to be reflected in Bank Indonesia's actions, interpreted through its decision to lower the BI Rate. This move aligns with expectations of a weakening domestic economy, indicated by inflation and economic growth rates hovering at the lower end of Bank Indonesia's target range.
However, we are concerned that such a policy stance could exacerbate capital outflows and further weaken the Rupiah, especially given the ongoing global flight to safety (risk-off sentiment). These concerns are further compounded by the possibility of a continued current account deficit in the 4Q24.
Regards,
KBVS Research Team