INDONESIA: VIEW: JP Morgan Expects BI On Hold Until June Depending On Trade
Bank Indonesia’s decision is announced today and is expected to leave rates at 5.75% given rupiah weakness against a range of currencies. Also with recent volatility, a rate cut may signal that the central bank has deeper concerns. JP Morgan expects BI to be on hold in March with IDR volatility and FX reserve drawdown making it hard to ease, but the risks are skewed towards a 25bp cut to “pre-emptively act amidst still-elevated US trade policy uncertainty”.
- JP Morgan is forecasting a June rate cut “with the bias for more easing if global/domestic growth conditions deteriorate”.
- “IDR volatility remains elevated, likely reflecting both regional (e.g., tariff overhang) and country-specific (e.g., lower commodity prices) concerns. February also recorded a US$1.6 billion drawdown in gross FX reserves as foreign portfolio outflows continue.”
- “The latest export earnings retention rule (GR8/2025) could boost onshore US$ liquidity and provide the degree of freedom for BI to cut rates. However, the full, positive impact of GR8/2025 on reserve accumulation may only kick in starting June once the FX redemption pressure from the previous ruling subsides. While our baseline scenario projects a substantial increase in FX reserves (US$50 billion in gross; US$15 billion in net) in the next 12 months, much depends on compliance and enforcement, and as such, BI may also intend to monitor the effectiveness of GR8/2025.”
- BI should “look through Jan-Feb CPI prints on temporary electricity tariff discount … We expect a payback in headline CPI prints, from 0.3%oya in Jan-Feb to 2.8%oya for the rest of 2025, with a full-year average of 2.3%, close to the mid-point of the 1.5-3.5% inflation target. In addition, core inflation momentum is on the rise, quelling concerns of weak demand-pull inflation for now.”
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JGBS: Futures At Cheaps, Curve Twist-Flattening, 20Y Supply Tomorrow
JGB futures are weaker, -24 compared to the settlement levels, and at session lows.
- Japan's preliminary Q4 GDP was above market expectations. Q3 also saw positive revisions. The q/q annualized outcome was +2.8% versus 1.1% forecast. In q/q terms, this was 0.7% (0.3% was forecast, while Q3 was revised up to 0.4% from 0.3% originally reported).
- December industrial production was revised down to -0.2% in the final report, while the operating ratio fell to 102.4 in December compared to 102.6 in the previous month. December’s Tertiary Industry Index rose 0.1% m/m.
- “Morgan Stanley MUFG Securities revises its forecasts higher on Japanese bond yields to reflect recent market moves, strategists including Koichi Sugisaki write in a note.” (see BBG link)
- Cash US tsys are closed for the Presidents Day holiday. TYH4 is slightly weaker.
- Cash JGBs are 2bps cheaper to 1bp richer, with a flattening bias. The benchmark 10-year yield is 1.2bps higher at 1.374% versus the cycle high of 1.377%.
- Swap rates are 1-2bps higher. Swap spreads are wider.
- Tomorrow, the local calendar will see Tokyo Condominiums for Sale data alongside 20-year supply.
OIL: Crude Makes Up Earlier Losses To Be Little Changed Today
Oil prices are off their intraday lows to be little changed today. Brent is up 0.1% to $74.81/bbl after a low of $74.19, while WTI is flat at $70.73 following a trough of $70.12. Brent held above support at $74.10 but WTI traded below it at $70.43 but has since recovered. Oil prices have struggled on developments suggesting greater supply. The USD index is down 0.1%.
- There has been increased talk of negotiations for a truce to bring peace to Ukraine which may ease sanctions on Russia and allow it to export more fossil fuels. Currently, a deal is a long way off though, with concerns that Ukraine is being excluded from talks between the US and Russia.
- There have also been positive developments in Iraq with the president of its Kurdistan region saying that the area should be able to export crude from the end of March after a two year dispute. This could add up to 300kbd to global supplies.
- Later the Fed’s Harker, Bowman and Waller speak, while there isn’t any US data due to the Presidents Day holiday. Euro area December trade data print and the Eurogroup meeting takes place.
AUSSIE BONDS: Cheaper Ahead Of RBA Policy Decision Tomorrow, 25bp Cut 83% Priced
ACGBs (YM -3.0 & XM -3.0) are weaker with US tsy futures (TYH5 at 109-06+, -0-03+ compared to closing levels) ahead of tomorrow’s RBA Policy Decision. Cash US tsys are closed today for the Presidents Day holiday.
- Tomorrow’s RBA decision takes centre stage, with economists widely anticipating a 25bp rate cut.
- The RBA statement and updated forecasts will be released at 1430 AEDT, with Governor Bullock’s press conference at 1530 AEDT.
- There are also Q4 wages on Wednesday and January jobs data on Thursday.
- The Q4 WPI is forecast to post another 0.8% q/q rise bringing the annual rate down to 3.2% from 3.5% in Q3. January employment is projected at +20k, with the unemployment rate rising 0.1pp to 4.1%.
- Cash ACGBs are 3bps cheaper.
- Swap rates are 3-4bps higher.
- The bills strip is flat to -4, with a steepening bias.
- RBA-dated OIS pricing is flat to 4bps firmer across 2025 meetings today, with Dec-25 leading.
- A 25bp rate cut in April remains fully priced (117%), while the probability of a cut tomorrow stands at 83%.
- AOFM plans to sell A$800mn of the 2.75% 21 June 2035 bond on Wednesday and A$700mn of the 2.50% 21 May 2030 bond on Friday.
