Many financial market observers had their eyes glued on Bank of Jamaica’s Overnight rate and missed what was happening to interest rates in the Money Market. Interest rates declined from just under 12 percent on 28 day BOJ CDs in March to just 7.03 percent this Wednesday, with the central bank cutting the Over Night rate from 7 percent to 6.75 percent a fall of nearly 3.57 percent but the fall in CD rate was a huge 41 percent.
Rates are heading lower but investors seem to hardly notice the sharp change in market conditions with the cut in CD rates starting in April, at least that is what the performance of the Jamaica Stock Exchange is showing as the market declined in recent weeks, particularly the Junior Market.
What is going on? The argument is that stocks move conversely to interest rate movements. A look back at the 2015 to 2017 period possibly holds the answer. Back then, the Government of Jamaica Treasury bill rates declined by 23.18 percent from May to March 2017 but the All Jamaica Index rose by just 11.58 percent. While Treasury bill rates declined between May and October by 15.12 percent, the market index was going in the opposite direction with a fall in the value of 4.75 percent. The market index moderated in November to just a decline of 1.2 percent following the recovery of losses previously. In December, the market moved positively and carried on that path for several months as interest rates continued to fall. Overall, it took 5 months for the market to hit bottom, before moving higher.
Should CD rates be used as the measure for a decline in rates that will trigger the Stock Market to move higher or Treasury bill rates that have been steadier than CDs around the 8 percent level from 2023?
Stock market moves in opposite direction to interest rates sometimes with a lag.
Why CD rates are more important? While interest rates are important to market developments, the short term CDs are used to pull liquidity from the market, with the amount taken from the market peaking at $160 billion in March and are now at $120 billion. That means more money is in the financial system looking for a home than in the early months of the year. With rates now lower than for some time, investors will be looking for the best place to invest.
Now that inflation is running at an average of 4 percent per annum and economic growth is sputtering, further decline in interest rates can be expected before the end of 2024. Some of these funds will definitely go into stocks. The trend in 2015-2017 is a guide, but not definitive. While interest rates were at recent high levels, several stocks posted solid price gains resulting from rises in profits of these companies. Some of the leading winners with gains for 2024 to the end of August, are Lasco Manufacturing up 62 percent, Caribbean Assurance Brokers 56 percent, Blue Power 49 percent first rock 38 percent, General Accident 32 percent, Everything Fresh, Honey Bun and Wigton 30 percent.
Real estate will also benefit as the cost of borrowing to purchase properties falls in the future. All in all cost of financing will decline as the months roll on.
