RIYADH, 26 July 2004 — Global stock markets which are labeled as a leading indicator of the economic business cycle don’t seem to be indicating much, well at least for the recent situation. It seems as if the markets build up to some expectations and price in the change but as soon as the occasion or condition is implemented, markets go the other way as if caught by surprise. While sometimes it’s the most expected outcome that occurs due to completely different reasons. Since recently, as we have been saying that markets are directionless, however one thing was clear that markets spent quite a few months sinking, before the June 30 rate rise.
Whereas after the hike markets went up again since the expectations of a possible 50 bps rate rise were not met indicating continued weaknesses in the economic recovery. However, last week was different; we can actually say that it came from the horse’s mouth.
The Fed chairman, Alan Greenspan continuously blew his whistle for upcoming rate hikes. The outcome of the testimony to the Banking Committee and the Senate was that the Fed will continue to raise interest rates at every meeting from now on until a balance is hit. He cited a quarter point rise at every meeting which could go higher if the Fed feared rising inflation, but no way was it going down.
He also identified that the current US economy was on a firm footing and recent weaknesses would prove to be only temporary.
He said that inflation was under control and being closely watched, and a tinge to a sour note in inflation could lead to a bigger than the usual 25 bps rate hike. Well if we considered the same market which reacted negatively to a minute sign of a rate hike some time ago, we were confused to see that this week’s weaknesses in stocks was to be blamed more on the sector weaknesses, weak earnings forecast, below expectation earning results higher oil prices and finally a little on the rate hike scenario.
It seems as if the market had emphasized more on the corporate earning season and may take some time to focus on the upcoming rate hikes. However, there is one more twist to the story.
It’s perhaps that the market disregarded the Fed chairman’s comments citing weaknesses in the economy due to the recent surge in oil prices, weak economic data and geopolitical situation further pressuring the economic growth to a slowdown.
It’s a proper wait and see game as a brief pause in corporate earning season could help the market in analyzing Greenspan’s comments. It would be wise to keep next weeks movements under the microscope. Greenspan also indicated that OPEC was not driving up oil prices in fact doing everything possible to stabilize the market. He mentioned that rising oil prices were due to increasing demand and failure of supply to fill the gap.
(Khan H. Zahid is chief economist and vice president at Riyad Bank. He is based in Riyadh.)
