Global slowdown impairing Pakistan’s external trade

Pakistan Bureau of Statistics has released its monthly exports and imports numbers for the month of October 2022. The data showed country’s trade deficit shrinking 19.8%MoM and 40.4%YoY during the month under review. On cumulative basis, the trade deficit has eased off by 26.2%YoY during 4MFY23.

The improvement in balance of trade during 4MFY23 largely comes on the back of easing import bill, which has come off by 12.4%YoY during the period under review to clock in at US$21.1 billion. Exports have actually posted a slight increase of 1.1%YoY to settle around US$9.6 billion.

Country’s largest export oriented sector, Textiles and clothing has reported a decline of 1.3%YoY during 4MFY23 and remained at US$5.9 billion as compared to US$6.0 billion during the same period of last year.

Cotton yarn exports registered 27.7%YoY decline in July-October to US$285.315 million as compared to US$394.8 million during the same period last year.

Bed wear exports declined by 9%YoY to US$1.0 billion from US$1.1 billion during the same period.

As against this, Knitwear exports increased by 7%YoY to US$1.7 billion which contained the overall decline in textile exports.

Moving forward, the outlook of textile exports remain hazy owing to unavailability of gas to the sector during winters and a global slowdown expected to impact demand.

Country’s import bill continued to contract, declining by 16%YoY owing to slowdown in economy and high base effect.

The largest declines were registered in the categories of Petroleum and machinery groups imports, posting declines of 47%YoY and 40%YoY respectively and were the key reason for an overall decline in imports.

Food imports grew by 10%YoY during the period under review to US$3.4 billion owing to higher Wheat (local crop destruction) and Palm Oil imports (shift from crude imports to refined imports).

With global economy heading towards a slowdown as the major central banks around the world jack up their interest rates, the quantum of world trade is likely to contract significantly.

The global commodity prices are also likely to ease off significantly which bodes well for Pakistan.

Conversely, the country’s exports will also contract as the country’s largest export oriented industry struggles against the unavailability of gas. Consequently, analysts expect FY23 to close with a CAD of 3% of GDP.

Pakistan Stock Exchange benchmark index witnesses 2.5%WoW decline

Pakistan Stock Exchange (PSX) remained under pressure during the week ended on September 23, 2022, driven by renewed weakness in the PKR against the USD and concerns regarding the country’s fiscal health.

Participation in the market remained lackluster, with average daily traded volumes averaging 166.1 million shares during the week under review as compared to 183.2 million shares a week ago.

The benchmark index, KSE-100 Index lost 1,059.28 points during the week, depicting a 2.5%WoW decline. The PKR continued to lose value against the US$, depreciating 1.2% during the week.

Furthermore, the SBP conducted the T-Bill auction this week, where the central bank raised PKR1.3 trillion against a target of PKR1.5 trillion. The cut-off yields for the 3-month and 12-month tenors remained largely flat, whereas the yield for 6-month increased by 15bps to 16%.

Other major news inflows during the week were: Saudi Fund for Development confirmed a one-year extension of US$3 billion deposit, 2) Initial estimates pointed towards flood losses to be US$30 billion, 3) IMF announced that it would support Pakistan’s flood relief, reconstruction efforts under the current program, 4) Russia agreed to provide petrol to Pakistan on deferred payments, 5) In July 2022, LSMI output was down by 16.5%MoM, 6) SPI was down by 8.11%WoW, and 7) CAD dropped 42%MoM to US$703 million in August 2022.

The top performing sectors were: Tobacco, and Synthetic & Rayon, while the least favorite were: Close-End Mutual Fund and Oil & Gas Exploration Companies.

Top performing stocks were: PAKT, IBFL, UNITY, TRG and NESTLE, while laggards were: TGL, HGFA, CEPB, KEL and PPL.

Foreign investors emerged the major buyers with net buy of US$5.1 million, followed by Individuals (US$1.5 million). As against this, Insurance Companies were the biggest sellers with US$3.3 million, followed by Mutual Funds (US$2.4 million).

Going forward, the easing off in international commodity prices, particularly oil is expected to be a welcomed development as the pressures on the external account start to recede.

On the flip side, the strength in the US$ following the 75bps policy rate increase in the US is expected to put pressure on the exchange rate, which could murk sentiment.

Investors will be looking towards any policy action in the upcoming Monetary Policy, scheduled for October 10, 2022.

However, the economic slowdown—an intended outcome of the SBP’s contractionary policies—and effects of floods across the country could adversely affect sentiment going forward. Investors are to stay cautious, while building new positions in the market.

US Rail Strike Poses Economic and Political Risks for President Joe Biden

This week is shaping up to be a pivotal one for companies in the United States that rely on trains for transporting commodities, components and finished products.

Railroads and labor unions worked through the weekend to avoid a strike that could cost the world’s largest economy more than US$2 billion a day. Few signs of progress emerged, and the companies are advising customers of the likely service disruptions ahead of a potential walkout later this week.

On Sunday, Norfolk Southern said in an online notice that it “has begun enacting its contingency plans for a controlled shutdown of our network at 00:01 on Friday, September 16.” Union Pacific and CSX also announced contingency planning for a possible strike. BNSF urged its customers to call members of Congress to prevent any interruptions.

According to Bloomberg Intelligence analyst Lee Klaskow, BNSF and Union Pacific combine for 45% of Class I intermodal traffic. CSX and Norfolk Southern have 31%.

Trains accounted for about 28% of total US freight movements, according to government data for 2020, making it the busiest mode after trucks. Half of that traffic moves bulk commodities — particularly food, energy, chemicals, metals and wood products — as well as automobiles and industrial parts. The other 50% consists mostly of shipping containers carrying smaller consumer goods.

Strike or no strike, the nation’s freight-rail system is still dealing with imbalances. Earlier this month, for instance, the shipping line Maersk said it was suspending import bookings through Fort Worth, Texas, citing “severe congestion” around rail ramps and container yards in the region.

It’s not an isolated situation. The interlinked system that’s the lifeblood of the American economy is still recovering from the worst disruptions of the pandemic, and trains are a vital link in that chain.

Below are a few charts to help illustrate where the supply-chain snarls remain a challenge on the rails. The first one shows data from Hapag-Lloyd, Germany’s largest container-shipping line. The company reports dwell times for its intermodal boxes are staying steady or rising at key import and export junctures from Los Angeles to Savannah, Georgia.

Among the more prominent logjams continues to slow cargo movement around the twin ports of Los Angeles and Long Beach, California. There, nearly 80% of shipping containers are waiting more than five days on average to make their rail connections — a big jump from the beginning of the year, according to data from the Pacific Merchant Shipping Association.

Texas has the most miles of railroad tracks of any state but Illinois — and Chicago, in particular — has been the most important hub of US intermodal commerce for more than a century. According to the Association of American Railroads, 25% of all US freight rail traffic and 46% of all intermodal traffic starts and stops or passes through the Chicago region.

While 10 of 12 railroad workers’ unions have struck new labor deals, the two holdouts — the Brotherhood of Locomotive Engineers and Trainmen and the International Association of Sheet Metal Air, Rail, and Transportation Workers — account for more than 90,000 rail employees.

Their joint statement on Sunday didn’t hold back, accusing the railroads of scare tactics in the negotiating process that amounted to “corporate terrorism.”

The timing isn’t good for the trains to stop running. Harvest season across the farm belt is approaching, retailers are stocking up for the year-end holidays, and the economy already faces a stretch of weaker growth and high inflation.

The most immediate concern in the event of a rail strike would be for perishable goods. The American Bakers’ Association said, “Even a temporary interruption would create a devastating ripple effect that would create a shortage of materials and ingredients.

US Fed minutes hint more rate hikes but at slower pace

US Federal Reserve officials saw little evidence late last month that US inflation pressures were easing and steeled themselves to force the economy to slow down to control an ongoing surge in prices, according to the minutes of their July 26-27 policy meeting.

While not explicitly hinting at a particular pace of coming rate increases, beginning with the September 20-21 meeting, the minutes released on Wednesday showed US central bank policymakers committed to raising rates as high as necessary to tame inflation - even as they began to acknowledge more explicitly the risk they might go too far and curb economic activity too much.

"Participants agreed that there was little evidence to date that inflation pressures were subsiding," the minutes said.

Though some reduction in inflation, which has been running at four-decade highs, might occur through improving global supply chains or drops in the prices of fuel and other commodities, much of the heavy lifting would have to come by imposing such high borrowing costs on businesses and households that they would spend less, the minutes stated.

"Participants emphasized that a slowing in aggregate demand would play an important role in reducing inflation pressures," the minutes said.

Yet despite that arch tone on inflation as their top concern, the minutes also flagged what will be an important dimension of the Fed's debate in coming months - when to slow down the pace of rate increases, and how to know if rate hikes have gone past the point needed to beat rising prices.

While judged as generally dovish by traders who increased their bets the Fed would approve just a half-percentage-point hike at the September meeting, Bob Miller, Head of Americas Fundamental Fixed Income at BlackRock, said the minutes seemed to be giving the Fed more scope to react as data flowed in.

"The intended message was much more nuanced and reflected a need to optionality by a central bank trying to assess conflicting economic data and shocks”, he said. "Staking out some conditionality going forward seems sensible given the unprecedented nature of this particular cycle."

The pace of rate increases indeed could ease as soon as next month, with the minutes stating that, given the need for time to evaluate how tighter policy is affecting the economy, it would become appropriate at some point to move from the large, 75-basis-point increases approved at the Fed's June and July meetings, to half-percentage-point and eventually quarter-percentage-point hikes.

Some participants said they felt rates would have to reach a sufficiently restrictive level and remain there for some time in order to control inflation that was proving far more persistent than anticipated.

Many, on the other hand, noted the risk that the Fed could tighten the stance of policy by more than necessary to restore price stability, particularly given the length of time it takes for monetary policy to change economic behavior.

Referring to the rate increases already telegraphed by the Fed, participants generally judged that the bulk of the effects on real activity had yet to be felt, the minutes stated.

As of the July meeting, Fed officials noted that while some parts of the economy, notably housing, had begun to slow under the weight of tighter credit conditions, the labor market remained strong and unemployment was at a near-record low.

The Fed has lifted its benchmark overnight interest rate by 225 points this year to a target range of 2.25% to 2.50%. The central bank is widely expected to hike rates next month by either 50 or 75 basis points.

For the Fed to scale back its rate hikes, inflation reports due to be released before the next meeting would likely need to confirm that the pace of price increases was declining. Inflation by the Fed's preferred measure is more than three times the central bank's 2% target.

Data since the Fed's July policy meeting showed annual consumer inflation eased that month to 8.5% from 9.1% in June, a fact that would argue for the smaller 50-basis-point rate increase next month.

But other data released on Wednesday showed why that remains an open question.

Core US retail sales, which correspond most closely with the consumer spending component of gross domestic product, were stronger than expected in July. That data, along with the shock-value headline that inflation had passed the 10% mark in the United Kingdom, seemed to prompt investors in futures tied to the Fed's target policy interest rate to shift bets in favor of a 75-basis-point rate hike next month.

Meanwhile, a Chicago Fed index of credit, leverage and risk metrics shows continued easing. That poses a dilemma for policymakers who feel that tighter financial conditions are needed to curb inflation.

Job and wage growth in July exceeded expectations, and a recent stock market rally may show an economy still too hot for the Fed's comfort.

 

 

Russia-Ukraine conflict a major blow to the global economy

According to the blog writers of the International Monetary Fund (IMF), Russia-Ukraine conflict is a major blow to the global economy that will hurt growth and raise prices. 

Beyond the suffering and humanitarian crisis from Russia’s invasion of Ukraine, the entire global economy will feel the effects of slower growth and faster inflation. Impacts will flow through three main channels:

1) Higher prices for commodities like food and energy will push up inflation further, in turn eroding the value of incomes and weighing on demand.

2) Neighboring economies in particular will grapple with disrupted trade, supply chains, and remittances as well as an historic surge in refugee flows.

3) Reduced business confidence and higher investor uncertainty will weigh on asset prices, tightening financial conditions and potentially spurring capital outflows from emerging markets.

Russia and Ukraine are major commodities producers, and disruptions have caused global prices to soar, especially for oil and natural gas. Food costs have jumped, with wheat, for which Ukraine and Russia make up 30% of global exports, reaching a record.

Beyond global spillovers, countries with direct trade, tourism, and financial exposures will feel additional pressures. Economies reliant on oil imports will see wider fiscal and trade deficits and more inflation pressure, though some exporters such as those in the Middle East and Africa may benefit from higher prices.

Steeper price increases for food and fuel may spur a greater risk of unrest in some regions, from Sub-Saharan Africa and Latin America to the Caucasus and Central Asia, while food insecurity is likely to further increase in parts of Africa and the Middle East.

Gauging these reverberations is hard, but we already see our growth forecasts as likely to be revised down next month when we will offer a fuller picture in our World Economic Outlook and regional assessments.

Longer term, the war may fundamentally alter the global economic and geopolitical order should energy trade shift, supply chains reconfigure, payment networks fragment, and countries rethink reserve currency holdings. Increased geopolitical tension further raises risks of economic fragmentation, especially for trade and technology.