MSCI Review and US Inflation Data Set to Rattle IHSG and Rupiah

Indonesian financial markets are expected to feel slightly more relieved, though they will still face challenges today, primarily because the war has yet to find any clear resolution.

On Wall Street, all major indices weakened during Tuesday’s trading session, or early Wednesday morning Indonesian time. The indices were pressured by major technology stocks. Investor hopes that the Strait of Hormuz would be reopened began to fade, reinforcing lingering doubts about the possibility of the United States and Iran reaching a broader resolution to the conflict.

The broader market index fell 0.32%, recording a decline for the second consecutive day and closing at 7,728.20. The Nasdaq Composite slid 0.60% to 26,445.45. Meanwhile, the Dow Jones Industrial Average weakened by 184.13 points, or 0.34%, to 53,791.85.

The communication services sector was the worst performer in the S&P 500, plunging more than 2%, as Alphabet and AppLovin shares fell 3.8% and nearly 6% respectively. Alphabet shares have been under pressure recently and recorded their fourth declining session in five days after Google announced a restructuring of its artificial intelligence division last week.

The information technology sector was also in the red. Nvidia shares erased morning gains and closed slightly below their previous level. The chipmaker announced on Monday a partnership with six major asset management firms to raise more than US$500 billion to finance artificial intelligence infrastructure. Apple shares also weakened by more than 1%.

These market movements occurred as oil prices rose amid uncertainty over the Middle East conflict. The Secretary of Iran’s Supreme National Security Council reiterated that the Strait of Hormuz would not be reopened until Iran’s demands were met, according to Reuters.

West Texas Intermediate crude futures closed up 1.3% at US$83.20 per barrel. Meanwhile, Brent crude, the international benchmark, rose around 1.4% to US$88.91 per barrel.

Iranian Foreign Minister Abbas Araghchi said earlier this week that there was “no possibility of resuming negotiations” as long as the US continued to violate the June memorandum of understanding and failed to compensate Iran for those violations, according to the semi-official Tasnim news agency.

However, investors interpreted a statement by Pakistani Defence Minister Khawaja Asif as a positive signal on Tuesday. He said the situation was moving back towards a peace deal or an agreement.

Attention will now turn to a series of important inflation data releases. Consumer inflation data for July will be released on Wednesday, followed by the producer price index on Thursday. These data have become increasingly important after a weak US employment report complicated the outlook for Federal Reserve policy.

The inflation data could place the Federal Reserve in a difficult position. Rising oil prices have reignited concerns about inflationary pressure, while a sharp slowdown in hiring raises questions about the strength of consumer spending and the overall economy.

“I expect the CPI report to continue showing a downward trend, which further strengthens the case for the Federal Reserve to hold rates rather than raise them, even after the weak employment report last Friday,” said Dennis Follmer, Chief Investment Officer at Montis Financial, as quoted by CNBC International. “Service sector inflation may still be a stubborn problem, but that sector is not very sensitive to interest rates, so it should not overly disrupt the case for holding rates steady,” he added.

Indonesian financial markets on Wednesday (12/8/2026) will face two important agendas: the release of US inflation data and the announcement of the MSCI August 2026 Index Review. The inflation data will determine the direction of the US dollar, US Treasury yields, the rupiah, and global equity markets. Meanwhile, the MSCI review results are of particular interest to domestic investors because they could affect the weighting of Indonesian stocks and foreign flows.

Investors have already received data showing that Indonesian retail sales remain in contraction. US existing home sales also fell again in July, although the realisation was slightly better than market expectations.

The government has released data showing Indonesian retail sales fell 3% year-on-year in June 2026. The result improved from a 3.9% contraction in May but was weaker than the initial estimate pointing to 1.8% growth. This means retail sales have contracted for three consecutive months, although the pace of decline has begun to ease.

The Real Sales Index stood at 225, up 0.7% month-on-month after falling 1.5% in May. The improvement was supported by public demand during the religious holiday period and school holidays. On an annual basis, sales of spare parts and accessories grew 18.8%, household equipment rose 2.8%, while other goods increased 1.1%.

However, several categories remained weak. Sales of food, beverages and tobacco fell 3.6%, clothing contracted 3.1%, while information and communication devices plunged 20.2%. These results indicate that household consumption is beginning to improve on a monthly basis but is not yet strong enough to generate annual growth. This condition could limit sentiment towards retail and consumer goods stocks.

For July, retail sales are expected to return to growth of 0.9% year-on-year. The improvement is projected to be supported by the food and beverage group, vehicle spare parts, and household equipment.

The government is reviewing restrictions on subsidised Pertalite fuel purchases, particularly for upper-income groups. Finance Minister Purbaya Yudhi Sadewa said one scheme under consideration is limiting subsidies for the ninth and tenth deciles. “This is a possible implementation of Pertalite subsidy restrictions for the upper levels, perhaps deciles 9 and 10,” Purbaya said at the Ministry of Finance on Tuesday (11/8/2026).

The government is still preparing the system and has not determined the implementation timeline. Purbaya said Pertamina’s system is considered sufficiently ready. Energy and Mineral Resources Minister Bahlil Lahadalia stressed that subsidies must be given to those who are entitled to them. He argued that wealthy people, including users of luxury vehicles such as BMW and Mercedes-Benz, should not enjoy subsidised Pertalite. “How can we subsidise the rich,” Bahlil said. Motorcycles, however, will not be restricted and will continue to be allowed to purchase Pertalite as usual.

The government will expand access to financing for micro, small and medium enterprises. Coordinating Minister for Economic Affairs Airlangga Hartarto proposed raising the MSME financing target to Rp2,000 trillion from the previous Rp1,500 trillion. Airlangga said the increase is aimed at expanding access to financing, especially for MSMEs that have not received adequate funding. The government hopes the additional financing will encourage MSMEs to grow and move up the value chain.

“I would like to convey that we will raise the MSME financing target from Rp1,500 trillion to Rp2,000 trillion,” Airlangga said at the UMKM Finance Summit 2026 held by the Financial Services Authority on Tuesday (11/8/2026). According to Airlangga, expanding financing is one step towards closing the MSME funding gap, which still has significant room to grow.

US existing home sales fell 1.7% month-on-month in July to 4.06 million units on an annualised basis. Although weaker than 4.09 million units in June, the realisation was slightly higher than the market forecast of 4.05 million units. On an annual basis, sales still grew 0.7%. However, high financing costs remain the main obstacle to US housing market activity.

The average 30-year mortgage rate has reached 6.69%, the highest level in more than a year. Meanwhile, the median existing home price rose 2% year-on-year to US$434,100, a record high for the month of July. These results provide mixed signals. The slightly better-than-expected realisation suggests demand is not as weak as feared. However, the monthly decline in sales confirms that high interest rates continue to weigh on people’s ability to buy homes.

Because the difference from consensus is relatively thin, the data is not expected to significantly alter expectations for Federal Reserve policy. The market’s main focus remains on US inflation.

The main agenda on Wednesday evening is the release of US inflation data for July. Annual inflation is expected to ease to 3.4% from 3.5% in June. However, on a monthly basis, consumer prices are expected to rise again by 0.1% after falling 0.4% in June. The previous month’s decline was largely influenced by weaker energy prices.

Core inflation, which excludes food and energy prices, is expected to fall to 2.5% year-on-year from 2.6%. On a monthly basis, core inflation is projected to rise 0.2% after remaining unchanged in June. The market will pay greater attention to core inflation because this indicator reflects more fundamental price pressures. Its components include housing costs, health services, transportation and various other services.

Beyond the headline figures, investors need to watch the movement of services and housing prices. Persistent pressure in both components could indicate that the disinflation process is not yet proceeding evenly. Lower-than-expected inflation could increase the likelihood of a Federal Reserve rate cut and pressure the US dollar and Treasury yields. Conversely, higher figures could prompt the Fed to maintain tight monetary policy for longer.

In addition to US inflation, domestic investors will be watching the announcement of the MSCI August 2026 Index Review, scheduled for Wednesday (12/8/2026), or early Thursday (13/8/2026) Western Indonesia Time. Changes from the review will take effect from 1 September 2026 but will enter a transition period from the announcement date.

However, this rebalancing is not proceeding normally for Indonesian stocks. MSCI is still maintaining a freeze on a number of index changes due to concerns about transparency of share ownership structures, accuracy of free float calculations, and alleged coordinated trading activity. In the August review, MSCI will not add Indonesian stocks to the MSCI Investable Market Indexes. Increases in the Foreign Inclusion Factor and the number of shares counted in the index also remain frozen.

Furthermore, there will be no upgrades for Indonesian stocks based on market capitalisation size, including moves from the Small Cap index to the Standard index. Nevertheless, MSCI can still remove stocks that fall within the High Shareholding Concentration framework. The index provider can also adjust free float estimates based on disclosure data for shareholders with ownership above 1%.

This means the opportunity for new stock additions and weighting increases remains closed. Conversely, weighting reductions or the removal of certain stocks can still occur. This condition could weigh on sentiment towards the IHSG because it opens the risk of foreign fund outflows without providing a balanced opportunity for inflows.

MSCI acknowledged the reforms announced by the Financial Services Authority, the Indonesia Stock Exchange and the Indonesian Central Securities Depository. These measures include improving disclosure of shareholders above 1%, more detailed investor classification, implementation of the High Shareholding Concentration framework, and plans to raise the minimum free float requirement to 15%.

However, MSCI wants to see consistent implementation and a tangible impact on transparency and ease of investment. Therefore, November will be an important deadline for the Indonesian stock market. If Indonesia’s progress is deemed insufficient by November, MSCI may consider various options, including initiating a consultation on the possible reclassification of Indonesia from Emerging Market to Frontier Market.

Indonesia will not automatically be downgraded to Frontier Market in November. MSCI has only stated that a reclassification consultation could begin if the improvements made have not shown adequate results. Nevertheless, this risk remains important because it could affect global fund exposure to Indonesian stocks.