‘Classic case of good news is bad news’

Every day in the markets is a trip to school these days. Last week began with hopes of the Federal Reserve pivoting away from its hawkish squeeze on monetary policy at its next meeting in early November as equities rebounded after three weeks in the red in the world’s largest economy. But it ended with all major benchmarks crashing,

Treasury yields galloping and the dollar rising once again as a lower than expected unemployment rate – 3.5pc against 3.7pc – and higher than expected nonfarm payrolls – 263,000 against 250,000 – led money markets to raise the probability of a fourth straight 75 basis points rise in the interest rate on Nov1-2 to 92pc from 83pc before the date came out.

Ordinarily, a solid jobs report is just what the doctor ordered. In this case, though, it means that all the Fed’s harsh tightening hasn’t yet dented growth in the US economy, and it will still have to bite deeper into inflation to keep the economy from overheating; to the point of inducing a recession in the US, and therefore the global economy.

“This was a classic case of good news is bad news,” global strategist Bill Sterling told Reuters shortly after the numbers came out. “The market took the good news of the robust labour market report and turned it into an ever-more vigilant Fed and therefore potentially higher risks of a recession next year.”

All this means that for things to get better, which means for inflation to come down, the Fed will have to tighten the screws till unemployment rises, despite the political cost just around crucial midterm elections.

And with no chance of a tightening pause in the US anytime soon, markets will naturally look to China for looser policy, both fiscal and monetary. But Chinese services activity contracted for the first time in four months in September as Covid restrictions hurt already weak demand and shrank business confidence. That only means that bad news from China is not good news for the markets; at least not so far.

Now the IMF (International Monetary Fund) and World Bank have also joined the chorus of warnings about an impending global recession and revised growth downwards accordingly. That’s very bad news for emerging markets and developing countries which will continue to import inflation from, and export hot money investment to, a US market too used to printing dollars to buy itself out of crises.

Yet four consecutive 75bp hikes will take it into uncharted territory and, as analysts are constantly pointing out, once unemployment – a leading recession indicator – begins to rise it does so very sharply and it becomes difficult to control its momentum. That’s when you’re looking at a recession and a hemorrhaging US labour market spreading trauma all over the world.

Pakistan has been strangely isolated from all sorts of global trends since Finance Minister Ishaq Dar came back to the ministry a couple of weeks ago. The rupee pendulumed the other way and became the best performing currency in the world, shortly after being the worst performing, which was also after it was the best, and so on, and consumer price inflation as quoted in the news is beginning to soften; even if there’s little evidence of it in the retail market.

That’s led even the government-friendly press to wonder if someone is cooking the books just like once upon a time when Dar was in the seat some years ago. The SBP (State Bank of Pakistan) has also probably just become the first central bank to pivot away from raising rates over the last few months, leaving them unchanged this week.

Dar is patting himself on the back for a job well done, no doubt, as he heads to the US to attend the annual IMF/World Bank meetings. But his interactions with officials there may well make him realise that propping up the rupee and trying to cut rates at this time is good news for him, because it’s his script, but it’s bad news for the country in the long term.

Copyright Business Recorder, 2022