“Everything before the word “but” is horse sh*t”. This quote by Jon Snow might not have gained much attention until the continuing rhetoric of good news by few in Pakistan when it comes to the economic challenges facing the country.
Today, the word “but” suggests that what follows may be more in line with the speaker’s actual thoughts or intentions, potentially challenging the previous statement. A few quotes from last week:
– The economy is growing, but structural reforms…
– Inflation will fall, but…
– Rupee strengthens but…
– Election dates have been announced, but…
… & So, uncertainty continues with Pakistan’s economy still very fragile.
Interest rate outlook
One of the uncertain segments is interest rates. When CPI reached around 26% in October, the market started buying bonds, anticipating a rate cut. The subsequent rise in gas prices and 2 consecutive SPI numbers of more than 40% raised serious doubts. As a result, yields rose last week and everyone is now looking for the next round of data to project the future rate of inflation.
While most analysts are not considering a rate hike, they insist that no change will be akin to a hike as the market has heavily factored in a cut. However, a cut looks difficult if CPI gets above 30% (as is the market consensus), especially amid a hawkish Fed and Turkey’s unique interest rate trajectory – in which they raised rates by another 5% yesterday to reach 40%.
Outlook in rupees
Rupee lost few paisa in last 2 trading sessions. The key triggers were declining reserves, which deteriorated by USD 232m and higher REER, which weakened from 91.7 to 98. 6. However, most analysts believe that the lion’s share of rupee weakness came when the SBP executed Sell Buy swaps, to support premiums and subsequently start shopping. dollars from the market to increase reserves. Despite the lucrative premiums, exporters were not active in selling forwards.
In the coming week, we see the Rupee being range-bound and vulnerable to news flows. Importers and exporters should just wait and see which comes first – positive or negative news.
Fed decides to ‘tread cautiously’
The minutes from the FOMC were arguably slightly on the dovish side, with the committee now seemingly taking the view that no further hikes would be needed, with the language instead focusing on the need to proceed with caution.
Eurozone and UK PMIs were stronger than expected yesterday, but weaker in the US. Despite the notion that eurozone growth pessimism may have peaked, interest rate differentials still point to a weaker EUR/USD and EUR/GBP.
