RIYADH, 17 May 2004 — Rising interest rates have become a waiting game in the US but the anticipation seems to be almost over. Expectations of a US rate rise are apparently the next big thing on the frontier.
Increased economic optimism is seeping in. However, investors seem divided as whether the good news is rock solid or just a bubble waiting to burst from the pressure of a rate rise. This was recently observed in an outcry from the global stock markets and last week it sucked the market down into a tailspin. Global stock markets were rattled on Monday after last week’s smashing performance by the non-farm payroll (which came 120,000 above expectations).
Fearing a rate hike, global markets opened the week on a negative note. On Monday, the US Dow index fell 120 points, FTSE had its worst fall in a year, but the honeymoon was really over for the Nikkei. Nikkei usually shows a delayed effect since it closes before the US markets open. After scaling heights of above 11,000 in recent weeks, the Nikkei fell 554 points on Monday, recording its worst one-day loss since the Sept. 11 attacks. This shows signs that the markets are not ready for the rate rise although the global economy is churning out mixed but generally positive numbers.
US economic data came out mixed. A government report said that consumers cut down on their purchases of clothes and cars causing April’s retail sales to fall lower than expected. April retail sales decreased -0.5 percent where the market expected only a -0.1 percent decrease. Higher energy costs have taken their toll as the US Producer Price Index recorded its biggest gain in over a year. Inflationary pressure seemed to build as the US PPI increased 0.7 percent.
Similarly, the appetite of a growing US economy increased its demand for imported goods. Given high energy prices, the US trade gap increased to a record level as international trade of goods and services soared to $45.96 billion in March from $42.16 billion in February. Data from Europe showed that for the first quarter of 2004, the euro zone economy grew at its fastest pace in three years. The economic bloc grew 0.6 percent in the first quarter of 2004, and is forecasted to grow between 0.3 percent and 0.7 percent in the second. However, this growth is still weaker than that of the US. Japan’s economic recovery prospects were clouded by significantly weak machinery orders in March prompting analysts to question the strength of a Japanese recovery. Machinery orders for March 2004 dropped 3.2 percent, completely the reverse of an expected rise of 5.9 percent.
On a different note, a Reuters poll of top bankers showed that “persistently high oil prices could trim almost a third of a percentage point off the world’s $50 trillion economic output in 2004, softening but not crushing the recovery.”
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)