RIYADH, 31 May 2004 — For two weeks now, the hype of increasing US rates which had the markets worrying over higher cost of capital, seems to have eased slightly. Investors were forced to think of factors other than interest rates following last week's mixed comments from Fed officials and terrorist attacks.

Events this week seem to have slowed the surging US economy and left investors rethinking. A set of mixed economic data over the week channeled mixed signals toward the great rate hike. But the greatest friction creator was oil prices. It seems as if there is no cooling to this energized extravaganza.

Despite US energy stock increases and promises to supply more oil by OPEC, oil prices do not seem to be tuning to the "slow down" channel and remains at 21-year highs. Persistently high oil prices coupled with weak economic data, have led the markets to doubt this frail (but expected) recovery.

Data from the US was mixed over the week. New US home sales suffered its largest drop in 10 months, falling 11.8 percent to just over 1 million units. Analysts still believe the housing boom may not be over as long as the number remains above 1 million. Durable orders also suffered their largest monthly decrease since Sept. 2002.

The second revision of the first quarter US GDP also recorded a slim rise. It was revised up from 4.2 percent to 4.4 percent. Consumer spending rose unexpectedly as shoppers contributed to the economy. Personal spending was up 0.3 percent in April while March was revised to 0.5 percent. The same report, which also checks the price index for consumer spending, signaled slowing inflation, with the index gaining only 0.1 percent from 0.3 percent in March. Finally consumer confidence as measured by University of Michigan also declined for the second month in a row. It fell to 90.2 from 94.2 in April, touching its lowest point since Oct. last year.

Japan came out a winner last week with excellent economic data after its first quarter 2004 GDP increased 1.4 percent released last week. Japan's industrial production rose 3.3 percent in the month of April. It was evidence of Japan's export led recovery.

On a year-to-year basis it gained 8.5 percent, its biggest rise on record, re-enforcing the view that Japanese products are heavily demanded or undersupplied. This scenario was further supported by last week's trade surplus, meaning that the export led recovery stays strong. Other data showed that Japanese consumer spending increased 9.3 percent month-to-month or 7.2 percent year-to-year in April.

Indications of a full-fledged Japanese recovery are fully visible but deflation and unemployment continues to haunt the Japanese economy. The Japanese CPI fell 0.2 percent in April compared to the same period last year while unemployment stays high at 4.7 percent.

Locally, the all share index for Saudi Arabia recorded its worst fall in history. The Tadawul index cut its yearly gains from 35 percent last week to 15 percent this week. It fell 918 points last week. For the year 2003, it recorded a gain of 76 percent.

(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)