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To: Lee Lichterman III who wrote (23433)	8/19/1999 1:25:00 PM
From: Les H	Read Replies (1) \| Respond to of 99985

Another Record High US Trade Deficit Bank of Montreal bmo.com The US trade deficit for goods and services ballooned to a record high of US$24.6 billion in June from US$21.2 billion in May and US$13.8 billion in June 1998. The deterioration was much larger than expected and was widely based among the US?s major trading partners, including Canada, Mexico, West Europe, China, Japan and most Southeast Asian countries. A 3.9% jump in imports to a record high of US$103.0 billion accounted for all of the widening in the trade deficit. The gain in imports was led by purchases of computers, telecommunications equipment, consumer goods, oil, automotive products and industrial supplies. Exports rose a lesser 0.5% to US$78.4 billion, led by sales of automobiles and parts. The June trade deficit was roughly US$3« billion larger than assumed by the Commerce Department in its initial tally of Q2 GDP growth. As a result, today?s report, together with earlier data showing largely offsetting revisions to retail sales and business inventories, will likely result in a downward revision to the advance 2.3% estimate of Q2 growth to a range of 1.5%-1.8%, annualized. Despite the negative implications for GDP growth, the June trade report contains bearish implications for the inflation outlook. First, the widening trade deficit reflects strong imports rather than weak exports. The strength in imports stems from continued buoyant consumer and business spending, which, because of the extreme shortage of labour and some materials, cannot be fully satisfied by US producers. Persistent growth in demand in excess of supply is a harbinger of higher inflation. Second, the widening US trade deficit translates into a widening current account deficit, which in turn implies a need for a lower-valued US dollar in the long run. Not surprisingly, the US dollar weakened against both the yen and the euro following today?s report. The falling dollar implies rising import prices and higher inflation. The June trade report, by indicating continued strong domestic demand and the potential for further dollar weakness, will heighten the Fed?s concern about the inflation outlook. Thus, the report raises the odds of the Fed tightening beyond a widely anticipated quarter-point rate hike at Tuesday?s policy meeting. In response, debt markets weakened slightly following today?s report. News of still low jobless claims in the week ended August 14 (up 4,000 to 287,000), along with higher oil prices, also weighed on the debt market.