If it is not one thing, it is another. Now that the Fed decision is behind us, the next thing will be corporate earnings. The Fed moved exactly as expected, raising interest rates by a quarter percentage point to 1.25 percent on Wednesday. Since this was already priced into markets, most analysts would have expected little adjustment after the news. But that is not what happened the next two days.
The disappointing employment data on Friday moved markets down as it should have, but the market’s bigger drop on Thursday could not be justified by what analysts said was its cause — downgrade of one technology stock (Intel) by one analyst (Deutsche).
This may reinforce many investors’ helpless perception that analysts always find something to justify any market move. We are also left with an uneasy feeling that market behavior has become too erratic and difficult to explain. The market today has become a witches brew of long-term investors, short-term investors, hedge funds, speculative funds, institutional investors, program traders, commodity funds, options, futures, and futures options, analysts’ expectations and expectations of expectations, Fed watchers and watchers of Fed watchers.
Economists (particularly, those of the “rational” breed) promise us that markets will be efficient when they have full information and can hedge against future or current uncertainties. Yet, what we see, with the plethora of hedging assets/tools and almost instantaneous information, markets never seem to be able to attain that Economists’ favorite — “equilibrium” price — on a straight path. Of course, economic data do not always help, sending conflicting signals this week.
The US consumer confidence index in June rose to its highest reading (101.9) in two years (good signal!). But payroll rose 112,000, less than half of what was expected (bad signal), while the ISM index and construction spending were both close to expectation (neutral signal). It should be pointed out that none of these indicate a danger to the US economic expansion.
The upcycle is clearly here, as the US Fed has started tightening credit. What is of concern is the pace of the expansion (slow or fast). In this season of mixed messages (more coming as the second quarter earnings season starts), it is welcome to note that Japan, the world’s second largest economy, has stopped sending mixed signals in recent months.
The latest Tankan survey of business sentiment was positively glowing! The diffusion index (percent who think that business condition is improving minus those who think it is weakening or stagnant) rose to its highest level in 15 years! In other economic news, the European Central Bank (ECB) left interest rates unchanged but signaled that the next move will be up, not down.
Saudi economy seems undeterred by terrorism. SAMA’s official reserves remain at a comfortable SR22 billion; interest rate spread with the US dollar decreased 10 bps this week, and the stock market is back on the upswing again.
(Khan H. Zahid is the chief economist and vice president of Riyad Bank)
