Until recently, the stock market was moving higher along with the global equities markets to reach a peak of above 6,900 in early April. However, some disappointment in corporate earnings, probably because of inflated retail investor expectations, brought the index down to the 6,200 level in recent weeks (latest is up at around 6,400), according to Riyad Capital's monthly report, “Saudi Economic Outlook: Still on Track,” that was issued on Tuesday.

Most of the leading indicators are green, the two coincident indicators are evenly distributed between green and red, while both the lagging indicators are neutral, thus leading to the conclusion of continued bullishness, said the report, which has been prepared by Khan H. Zahid, chief economist at Riyad Capital.

Oil prices — a key leading indicator and driver — has raised its trading range extend to $90 a barrel in recent weeks. Bank lending to the private sector has erased its temporary hiccup in August, while inflation shows two months of easing till October.
 

Global oil prices reached a 2010 high of $90 a barrel (WTI crude) this week despite having fallen to around $84 in the wake of the EU-Irish crisis and the strengthening of the US dollar. The year-to-date average now stands at above $78 a barrel compared to Riyad Capital's assumption of $75 for the whole year.

The interest rate story remains unchanged with Saudi rates tracking the ever-lowering US benchmarks. The US Fed's second round of quantitative easing (QE2) is lowering interest rates across the entire spectrum of the yield curve (i.e., at all maturities). Thus, Riyad Capital expects long-maturity Saudi riyal interest rates to fall further and support borrowing and Saudi economic growth.

Volatility in the monetary base (MB) has increased sharply in recent months. It rose to SR13 billion in September after falling to SR2.3 billion in August and SR13.5 billion in July, thus almost completely wiping out the two previous months’ drops, the report said.

On a net-net basis, it seems that banks have gone back to increasing reserves with SAMA (Saudi Arabian Monetary Agency) instead of using them to create more loans. This suspicion is confirmed by the fact that bank lending to the private sector grew by SR7 billion in September while bank reserves with SAMA increased by SR8 billion.

New letters of credit issued by Saudi banks dropped sharply in September to a level not seen in eight months. This suggests that the substantial increase in August was another temporary phenomena.

The Saudi stock market is turning out to be a concern in recent months. Riyad Capital has been bullish on local equities as the Tadawul All-Share Index (TASI) climbed to a recent record of 6,913 on April 27.

The index, however, failed to recover lost ground after the summer. Tadawul's recent lackluster performance has also been at odds with its positive correlation with the global equity markets and oil prices earlier in the year — now it is falling or flat even as global market and oil prices rise.
 
Coincident indicators

Broad money supply (M3) shows a second straight month of increase in September thus seeming to have reversed a decline that started way back in April 2009. SR28 billion of new money was pumped into the economy by the banking system in September, compared to a SR11 billion withdrawal in August. On the liability side of the banking sector balance sheet, demand deposits, time/savings deposits as well as quasi-money deposits all showed increases.

The proxy indicator for consumer spending, “total ATM+POS transactions,” dropped sharply and well out of line with past trends in September. It dropped from SR50 billion in August to SR40 billion in September. Almost the entire drop of SR10 billion was in ATM transactions (withdrawals).
 
Lagging indicators

Bank lending to the private sector seems to have recovered from the small pause it took in August. Loan growth on an annualized basis increased to 2.6 percent in September, which is more in line with the previous seven months compared to the 1.7 percent growth in August. Thus, the August slowdown in growth is more a one-off phenomenon than a new trend. On a month-to-month basis, bank lending to the private sector increased from SR726 billion in August to SR733 billion in September, an increase of about SR7 billion or one percent. Thus, the recovery in private sector lending continues but slowly.

For the first time since April, inflation in Saudi Arabia declined in September and that decline continued in October. From a recent high of 6.1 percent in August, CPI inflation dropped to 5.9 percent in September and 5.8 percent in October, the Riyad Capital report said.