Cantillon: The markets, where good news is bad

We are in the strange place in the markets where good news is “ bad” and vice versa. And so US equity markets reacted poorly to news yesterday that the number of job openings in the US economy last month was more than expected – 5.75 million, up from 5.32 million in June. Normally such figures would be welcomed.

Now, however, they feed into the seemingly endless “will they, won’t they” debate about whether US Federal Reserve Board will increase interest rates at next week’s meeting of its key policy-making committee.

For what it’s worth, a majority of analysts believe that the Fed will hold off on increasing rates next week, but there is less consensus on whether they might then move in October or December, or even wait until next year.

With interest rates currently close to zero – the Fed’s guidance for its key funds rate is 0 to 0.25 per cent – you would wonder why there is such a fuss over when rates might be nudged up by a mere 0.25 of a point. After all, it is at most a small lift of the foot off the accelerator pedal.

What lies behind the nervousness, however, is something more fundamental. The recovery, even in the US, has not been normal. The unemployment rate is now below 6 per cent, but the rate of inflation remains abnormally low and well below the 2 per cent target level. Meanwhile many companies and households have emerged from the crisis heavily in debt. Finally there are the countless potential knock-on implications of rising US rates for the rest of the world, explaining some of the market turmoil in currencies and equities in particular.

Can the world wean itself off the drug of central bank liquidity? Everyone has chosen to ignore this up to recently, as equity markets headed upwards for most of the year.

Now the reality that rock bottom interest rates cannot last forever is hitting home. Investors are now wondering whether the Fed will try to pre-empt inflation by moving next week, or in October, or wait for signs of price pressures to appear before moving. For the moment, however odd it may seem, news of a strong US economy may be the very thing that upsets the markets.