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Market Commentary: 12/05/97
Market News:
ÿÿÿÿ The U.S.ÿ economy remains strong but the Fed is not expected toÿ pushÿ interestÿ ratesÿ higherÿ atÿ their next FOMC meeting on Tuesday December 16th due to the financial crises inÿ Asia.ÿ U.S. constructionÿ spendingÿ isÿ upÿ 3.7%ÿ year to date.ÿ The November purchasing managers NAPM index declinedÿ slightlyÿ butÿ indicates theÿ manufacturingÿ economy remains strong.ÿ The October index of leading economic indicators increased .2% matching itsÿ September increase.ÿ Chicagoÿ Fedÿ Presidentÿ Michaelÿ Moskow said that the U.S.ÿ economy will probably slow nextÿ yearÿ andÿ inflationÿ will increaseÿ Moskowÿ alsoÿ notedÿ thatÿ theÿ problemsÿ inÿ Asia have complicated the task of economic forecasting.ÿ Octoberÿ newÿ home sales are up 6% year to date. New home sales this year may be the bestÿ sinceÿ 1978.ÿ Perÿ theÿ Fed'sÿ December Beige Book the U.S. economy remains strong while inflation remains contained. Per the Fed's December Beige Book the financial problemsÿ inÿ Asiaÿ began impactingÿ the U.S.ÿ economy last month as Asian exports began to slow a little bit.ÿ But the impact of the Asian financialÿ crises isÿ not all negative as declining import and commodity prices are helping companies containÿ costsÿ despiteÿ risingÿ domesticÿ wage pressureÿ dueÿ toÿ theÿ tightÿ domesticÿ jobÿ market.ÿ A group of University of Chicago economists saidÿ thatÿ U.S.ÿ economyÿ would faceÿ severalÿ challengesÿ nextÿ yearÿ citing concerns about U.S. productivity,ÿ the Asian currency crises and theÿ possibilityÿ of increasingÿ inflation.ÿ Theÿ economistsÿ projected that 1998 U.S. gross domestic product would be 2.5% with inflation at 2%.ÿ House minority leader Richard Gephardt would like to see a sustained 3% grossÿ domesticÿ productÿ over the next decade which he indicated would keepÿ Socialÿ Securityÿ solventÿ andÿ allowÿ forÿ increased spending on education and job skills required by the increasingly technicalÿ composureÿ ofÿ theÿ worldÿ economy.ÿ The Senate Budget Committee projects that the strong U.S.ÿ economy will result in a cumulative government budget surplus of $74 billion over the next ten years.ÿ Third quarter nonfarm business productivity increased atÿ an annual rate of 4.1% in the third quarter revised down from 4.5% lastÿ month.ÿ Thirdÿ quarterÿ productivityÿ gainsÿ wereÿ the largestÿ quarterlyÿ gainsÿ sinceÿ the last quarter of 1992.ÿ U.S. Trade representative Charlene Barshefsky has statedÿ thatÿ itÿ is criticalÿ thatÿ Japanÿ implementÿ theÿ 1995ÿ U.S.ÿÿ andÿ Japanese automobile agreement.ÿ Barshefsky stated that deregulation in the Japaneseÿ automobileÿ industry has essentially stopped.ÿ Domestic unemploymentÿ claimsÿ declinedÿ byÿ 3,000ÿ forÿ theÿ weekÿ ending Saturdayÿ November 29th.ÿ Analysts had expected a modest increase in the unemployment numbers due to the Thanksgiving holiday.ÿ The Novemberÿ employmentÿ reportÿ indicated the economy added 404,000 new jobsÿ nearlyÿ twiceÿ theÿ projectedÿ increase.ÿ Theÿ November unemployment report declined to 4.6% a twenty four year low.ÿ The tight domestic job market lifted average earnings up sevenÿ cents an hour up 4.7% year to date. The percent of domestic workers who indicate they are concerned about losing their jobs declined from 46%ÿ inÿ 1996 to 44% in 1997 the first decline in six years.ÿ Job securityÿ andÿ theÿ tightÿ laborÿ marketÿ areÿ citedÿ asÿ factors supportingÿ recentÿ wage increases.ÿ President Clinton it touting the November employment report as an indication that theÿ economy is the strongest it has been in a generation. Clinton stated that nearly fourteen million new jobs have been added in the last five yearsÿ and that real wages are rising.ÿ Consumers increased their use of credit in October at the fastest rateÿ inÿ fifteenÿ months indicatingÿ aÿ strongÿ spendingÿ outlookÿ movingÿ into Christmas. October domestic credit purchases were the strongest increaseÿ in creditÿ cardÿ expenseÿ sinceÿ a $12.1 billion increase in July of 1996.ÿ Eastman Kodak lost a trade dispute with Fuji Photo atÿ the Worldÿ Tradeÿ Organization(WTO).ÿ Aÿ three member WTO panel ruled Friday that Kodak had failed to prove its caseÿ thatÿ Fujiÿ Photo andÿ theÿ Japaneseÿ government had conspired for three decades to keep Eastman Kodak out of the Japanese photo film market.ÿ Boeing hasÿ receivedÿ noÿ orders for the long range model of its new 777 jetliner and has slowed design workÿ onÿ theÿ newÿ jetÿ whileÿ it evaluatesÿ theÿ program.ÿ Transportationÿ problemsÿ atÿ the Union Pacific railroad are increasingÿ businessÿ atÿ domesticÿ trucking companies as a large amount of daily rail cargo is not being sent by truck. Trucking firms are running at 100% capacity and hauling prices are inching higher due.ÿ The increase in trucking business is expected to mean large profits for someÿ truckÿ companiesÿ but notÿ allÿ truckingÿ companies will participate.ÿ For example many truckingÿ companiesÿ onÿ theÿ Westÿ coastÿ areÿ beingÿÿ hurtÿÿ by bottlenecks at ports in Long Beach and Los Angeles.ÿ
Market Indexes:
ÿÿÿÿ U.S.ÿ marketÿ indexesÿ movedÿ upÿ last week.ÿ The Dow closed Friday at 8149.13 up a strong 326 points for theÿ week.ÿ Theÿ Dow isÿ onlyÿ 110.18 points below is all time closing high of 8259.31 set on Wednesday,ÿ August 06.ÿ The Dow moved higher each day last weekÿ withÿ bigÿ ralliesÿ on Monday and Friday.ÿ The year end Dow rally is getting under way and if the Fed does not pushÿ interest ratesÿ higherÿ on Tuesday the 16th we should new Dow highs before the end of the year.ÿ Year to date the Dow isÿ upÿ 26.38%ÿ making threeÿ consecutiveÿ years of strong double digit returns.ÿ At the beginning of the year few market analysts projected the Dow would gain more than 10% during 1997. Strong employment growth for most of the year has investors projecting strong earnings throughÿ the firstÿ halfÿ ofÿ nextÿ year.ÿ Theÿ strongÿ U.S.ÿ economyÿ is in a reasonable position to deal withÿ theÿ slowÿ downÿ inÿ theÿ Asian economies.ÿ Theÿ Dow utility index moved fractionally higher last week. Monday the Dow utility index closed at 261.16 a new closing high for the first time in more than four years.ÿ The Dow utility indexÿ isÿ consideredÿ anÿ indicator of the direction of interest rates with a rally inÿ theÿ Dowÿ utilityÿ indexÿ indicatingÿ that interestÿ ratesÿ willÿ remain low.ÿ Utility companies use a large sums of borrowed fundsÿ toÿ supportÿ theirÿ heavyÿ investmentÿ in capitalÿ equipment.ÿ Utilityÿ stocksÿ areÿ oftenÿ ownedÿ by yield consciousÿ investorsÿ andÿ areÿ oftenÿÿ referredÿÿ toÿÿ asÿÿ bond substitutes.ÿ Utilityÿ companiesÿ areÿ generally local businesses with littleÿ Asianÿ exposureÿ whichÿ currentlyÿ appealsÿ toÿ many investors.ÿ Inÿ theÿ fiveÿ yearÿ periodÿ through mid November the Morningstar utility fund index hasÿ postedÿ anÿ annualizedÿ total returnÿ ofÿ 11.88 well below the return of the other major market averages.ÿ The Dow transportation index moved higher lastÿ month. Year to date the Dow transportation index is up a sharp 47%.ÿ The broaderÿ S&P500ÿ indexÿ movedÿ higherÿ lastÿ weekÿ and made a new closing high on Friday at 983.79. The old S&P500 closing high was 983.12 setÿ onÿ Tuesdayÿ Octoberÿ 7th.ÿ Secondaryÿ marketsÿ moved higher last week but were weaker than the large cap indexes.ÿ
Bonds & Interest Rates:
ÿÿÿ Bondsÿ andÿ interestÿ ratesÿ wereÿ mixed to higher last week. Because of the economic problems in Asia the Fed isÿ expectedÿ to holdÿ the line on interest rates this month.ÿ The big bond market news last week was Friday's strongÿ Novemberÿ employmentÿ report. Fridayÿÿ theÿ Laborÿ Deptÿ reportedÿ thatÿ Novemberÿ unemployment declined toÿ aÿ 24ÿ yearÿ lowÿ ofÿ 4.6%ÿ addingÿ 404,000ÿ workers considerablyÿ strongerÿ thanÿ theÿ projected 215,000 new workers. Under more normal marketÿ conditionsÿ bothÿ theÿ bondÿ andÿ stock marketÿ wouldÿ have moved lower on this news but Friday the stock market rallied while the bond market moved lower after the report was released but recovered well by the end of the day. The factor influencing the U.S.ÿ bond andÿ stockÿ marketÿ isÿ theÿ financial crisesÿ in Asia which most people feel will preclude the Fed from pushing interest rates higher untilÿ someÿ timeÿ nextÿ year.ÿ The economic problems in Asia will slow economic growth in Asia which is expected to slow to some degree growth in the U.S. due to weak Asian exports of manufactured goods and agricultural commodities. Weakenedÿ Asian currencies are also expected to decrease the cost of Asian exports going to the U.S.ÿ whichÿ shouldÿ helpÿ mitigate U.S.ÿ inflation. Also the recent decline in oil prices due to the increase in OPEC oil quotas and anticipation that Iraq willÿ sell moreÿ oilÿ shouldÿ reduceÿ the inflationary pressures on the U.S. economy.ÿÿ Anÿ employmentÿ reportÿ asÿ strongÿ asÿ theÿÿ November employment report would normally push bond yields up .10% to .15% butÿ Friday the bond yield were up only .05%.ÿ The October market crash and the economic problems in Asia caused bond investorsÿ to sellÿ their corporate bonds and move into Treasury debt.ÿ Year to date corporate bonds have underperformed Treasury bondsÿ forÿ the first time since 1990. The sell-off in corporate bonds means many ofÿ themÿ areÿ atÿ theirÿ cheapestÿ pricesÿ allÿ yearÿ whichÿ has encouraged brokerages toÿ sellÿ them.ÿ Butÿ evenÿ withÿ brokerage supportÿ corporateÿ bondsÿ haveÿ not been able to rally since the problems developed in Asia as many largeÿ corporateÿ bondÿ buyers remain cautious.ÿ
Foreign Exchange:
ÿÿÿÿ Theÿ dollarÿ held up well last week hitting 130 yen,ÿ a five and one-half yearÿ highÿ againstÿ theÿ yen,ÿ whileÿ fightingÿ off speculationÿ that Japan might intervene in the currency market to support the yen.ÿ The dollar receivedÿ supportÿ Fridayÿ fromÿ the strongerÿ thanÿ expectedÿ November employment report.ÿ The dollar received some support on Thursday when Japan announced that their gross domestic product in the July through September quarterÿ was upÿ onlyÿ .8%ÿ belowÿ theÿ projectedÿ forecast of 1.2%.ÿ The weak Japanese economy over the last six years isÿ theÿ resultÿ ofÿ the collapseÿ ofÿ the 1980's bubble economy where speculation in land and stocks was fueled by easy credit.ÿ Currency markets will also beÿ affectedÿ by decreasing volume as many large currency traders start to close out for the year.ÿ The Australian dollar(A$) moved to a new four year low against the U.S. dollar as the A$ followed goldÿ prices lower.ÿ The commodities dependent Australian economy is very sensitive to changes inÿ theÿ priceÿ ofÿ preciousÿ metals especiallyÿ gold.ÿ Expectÿ theÿ dollarÿ toÿ be the dominant world currency as long as the U.S. remains strong and foreign economies remain weak.ÿ
Commodities:
ÿÿÿÿ The CRB index closed Friday at 235.79 down .13 for the week. A number of commoditiesÿ toÿ includeÿ gold,ÿ copper,ÿ crudeÿ oil, heating oil,ÿ natural gas,ÿ cotton, orange juice, yen, Australian and Canadian dollars are depressed.ÿ Its interesting that asÿ the gold market crashes to new lows Chinese gold production increased 28%ÿ inÿ the first eleven months of 1997 to 137.1 tons and output for the year is expectedÿ toÿ exceedÿ 150ÿ tons.ÿ Copperÿ futures pricesÿ areÿ atÿ their lowest level since 1993 and dont look like they are ready to bottom.ÿ Crude oil have been moving lower after OPECÿ decidedÿ to lift their oil quotas and Iraq has indicated it wants to sell more oil.ÿ Of course the yen has been movingÿ lower dueÿ toÿ the economic problems in Japan and Asia.ÿ The Australian and Canadian dollars are very commodity sensitive andÿ wontÿ perk up until the commodity markets improve in those countries. Cotton futuresÿ areÿ atÿ theirÿ lowest level since October 1994 as price pressure increaseÿ fromÿ theÿ economicÿ problemsÿ inÿ Asia.ÿ Asia normally consumes about 2% of world cotton production. Last month theÿ U.S.ÿ Deptÿ ofÿ Agriculture increased its projection for the U.S. cotton crop by 2% making the current crop the fourth largest on record. Silver continued moving higher last week due to strong demand and decreasing supplies.ÿ Coffee futures moved higher last weekÿ dueÿ toÿ continuedÿ delaysÿ ofÿ newÿ shipments from Central America.ÿ Soybean and grain pricesÿ movedÿ higherÿ onÿ Fridayÿ on speculationÿ thatÿ lowÿ prices will stimulate export demand.ÿ But soybeans are under pressure from the prospects of aÿ strongÿ crop inÿ Brazilÿ andÿ India.ÿ Cornÿ isÿ alsoÿ underÿ pressure from the prospects of a strong corn harvest in Argentina and Brazil.ÿ
Foreign Markets:
ÿÿÿÿ European market indexes moved higher last week.ÿ The English FT-100ÿ closedÿ Fridayÿ atÿ 5142.90ÿ up 311.10 for the week.ÿ The German DAX-30 closed Friday at 4191.81 up 219.73ÿ forÿ theÿ week. The French CAC-40 closed Friday at 2910.09 up 50.90 for the week. U.K.ÿ Novemberÿ manufacturingÿ increasedÿ fractionally reaching a seven month high.ÿ The British governmentÿ announcedÿ aÿ proposal for a new tax-free savings plan to encourage people to save.ÿ The new U.K.ÿ taxÿ shelteredÿ savingsÿ planÿ containsÿ provisionsÿ to preventÿ individualsÿ fromÿ shelteringÿ largeÿ amountsÿ of money.ÿ German September retail sales increased .5%. The strong dollar is putting pressure on the mark which isÿ puttingÿ pressureÿ onÿ the Germanÿ economy.ÿ Germanÿ October industrial production increased 1.8% reversingÿ twoÿ consecutiveÿ monthlyÿ declines.ÿ Theÿ German economyÿ expanded .8% in the third quarter and is up 2.3% year to date.ÿ German consumer demand for large ticket items recently hit a seven year high.ÿ French business failures continue to decline.ÿ French October producer prices declined .1%.ÿ Franceÿ willÿ start sellingÿ inflationÿ linkedÿ bonds in early 1998 to encourage more peopleÿ toÿ buyÿ Frenchÿ debtÿ asÿ Europeanÿ Monetaryÿ Union(EMU) approaches.ÿ Frenchÿ thirdÿ quarter national output increased .9% and is up 2.7% year to date.ÿ The currentÿ economicÿ problemsÿ in Asiaÿ areÿ notÿ expected to have a significant effect on European growth or the European Monetary Union.ÿ
ÿÿÿÿ Asian market indexes wereÿ mixedÿ lastÿ week.ÿ Theÿ Japanese Nikkei-225ÿ closedÿ Fridayÿ at 16424.48 down 211.78 for the week. The Hong Kong Hang Seng closed Friday at 11527.60 up 1000.68ÿ for theÿ week.ÿ Japaneseÿ November new car sales declined 23.5% their largest decline in more than 23 years. Japan's growth is expected toÿ pickÿ upÿ nextÿ yearÿ afterÿ pausingÿ thisÿ yearÿ asÿ private consumption recovers from the increase in the national sales tax. Inÿ 1998ÿ theÿ Japanese economy is projected to grow at 2.1% well above this years projected growth at .8%. Japanese Prime Minister Ryutaro Hashimotoÿ vowedÿ heÿ willÿ doÿ everythingÿ necessaryÿ to safeguard the financial system and his top priority is protecting depositors.ÿ Theÿ Japaneseÿ economyÿ grew at 3.1% during the July through September quarter rebounding fromÿ aÿ sharpÿ declineÿ the previousÿ quarter.ÿ Japanÿ economicÿ officialsÿ indicate that the economy might move into a recession conceding thatÿ itÿ isÿ atÿ a standstillÿ instead of on a recovery track.ÿ The Japanese cabinet has endorsedÿ anÿ economicÿ reformÿ packageÿ developedÿ byÿ Prime Ministerÿ Ryutaro Hashimoto and will submit the reform package to Parliament. Japanese October household spending increased for the third time in four months. Last week Thailand's currency moved to new lows against the dollar while itsÿ stockÿ marketÿ alsoÿ moved lower. China has decided to maintain duty free imports of capital equipmentÿ forÿ foreign projects approved before March 31,ÿ 1996. China is projecting slower growth next year which is projected to reduce its foreign tradeÿ surplusÿ byÿ 50%.ÿ Admittingÿ thatÿ its economy requires serious repair Malaysia said it will only attain 50% of the growth rate of 8% projected for next year.ÿ |
