goldsnow: Japan and the rest of the world appear to be coming out from their recession real good.
I agree with you.
No more " cheap foreign goods " here to mop up
Washington's burgeoning debt.
Consumers will get another hit on their pocketbooks along with oil and healthcare.
And no, goldsnow, a declining market is not going to give them " confidence ".
Time to ask for higher wages?
TA
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Barron's Oct 4, 1999
OCTOBER 4, 1999
While the FOMC Should Stand Pat This Week,
Signs Still Point to Higher Rates; a New
Benchmark?
By William Pesek Jr.
The big news from the Inter national Monetary Fund's confab last week didn't
relate to gold or cash-flow problems in Ecuador. It wasn't confusion about what
the Bank of Japan will or won't do to cap the yen. And it certainly wasn't about
absolving poor countries of their debt.
No, the real news actually was what wasn't discussed much: the improving
health of the global economy.
It's so healthy, in fact, that the cast of global
policy-makers visiting Washington had little time for or interest in talking about
risks still hovering over the international financial system. Even the
once-overwhelming push for reforms of emerging-market banking and financial
systems took a back seat to sexier topics like "concern" over Japan's economy
and central banks' curbs on gold sales.
As much as fears of inflation and Federal Reserve rate hikes, the consensus
view held that the renewed vigor in the global economic village was behind the
rise in U.S. interest rates last week. Europe is gaining steam, while Southeast
Asia's recovery continues. Latin America, despite Ecuador last week becoming
the first nation to default on Brady bonds, is on the mend. And Japan is
regaining its footing, a trend that's expected to be confirmed Monday with the
release of the quarterly Tankan survey.
"There's far more confidence in the
global recovery story," says Henrique
de Campos Meirelles, president of
BankBoston.
The U.S., meanwhile, isn't slowing
down. Personal spending jumped 0.9%
in August and income advanced 0.5%,
strong figures indicating that
third-quarter gross domestic product
will be far more robust than the 1.6%
second-quarter growth rate. Indeed,
the stock market continues to exert its
influence on Main Street, despite the
Dow's recent troubles. With the
national savings rate now minus-1.5%,
there's little doubt all those past pluses in mutual-fund statements have been
encouraging consumers to spend away.
The bond market also got ugly news on the inflation front. The National
Association of Purchasing Management said prices paid by manufacturers rose
at the fastest rate since May 1995, while overall manufacturing activity grew
for the eighth consecutive month. The prices-paid index jumped to 67.6 in
September from 59.8 in August, while the overall index advanced to 57.8 from
54.2. (A reading above 50 means expansion.)
With U.S. retailers short of inventories and global growth on the upswing, the
advance in manufacturing should come as no surprise. But that doesn't mean
there won't be some nail biting among Fed policy makers meeting Tuesday.
While Fed watchers don't expect a rate hike this week, the stubborn strength of
the economy increases the odds the Federal Open Market Committee will adopt
a tightening bias.
From all indications, the Fed remains in wait-and-see mode. After boosting the
federal funds rate by a quarter-point twice this year, to 5 1/2 %, policy makers
seem comfortable with standing pat to see how higher borrowing costs affect
the economy. Sure, the economy is thriving, but the rate of gain in core
consumer prices -- which exclude food and energy -- is at a 33-year low. And
for every indication that inflation may be perking up, there are others bolstering
the view that prices are under wraps and won't accelerate any time soon.
Wall Street, of course, seems less torn
on the inflation outlook. The
bond-market vigilantes were back in
the driver's seat last week, driving the
yield on the 30-year Treasury up to
6.14% from 5.97% a week earlier. In
many ways, bond investors have gotten
used to getting hammered this year.
According to Ryan Labs, the total
return on the 30-year bond was a
negative 11.26% for the first nine
months of 1999. The 10-year has
returned minus-6.11% in the first three
quarters.
Concerns about short-term rates are
partly to blame. For the Fed, notes Stone & McCarthy economist Dana
Saporta, recent data show the economy continues to flex its muscles and that
deflation in the manufacturing sector has given way to renewed, though modest,
inflation. If the economy doesn't moderate and labor markets remain tight, the
Fed could move later in the year. Right now, she assigns a 40% chance for a
hike on November 16.
Saporta thinks the NAPM report's so-called supplier-delivery-time index could
raise eyebrows among policy makers. On occasion, Fed Chairman Alan
Greenspan has highlighted this measure of the strains on manufacturers'
capacities. Slower deliveries (or higher index readings) ultimately serve as a
harbinger of rising inflation trends. The September delivery-times reading --
55.9 versus 51.1 in August -- was the highest since April 1995, a level indicating
increased business activity and improving global demand.
Last week's gold rush may toss another interesting wrinkle into Fed policy
decisions. The metal staged a powerful rally last week after 15 European
central banks said they would limit sales and loans of gold reserves over the
next five years. Since Greenspan has long considered the price of gold a useful
barometer of inflation expectations, will he be unnerved by recent increases?
Doubtful.
The gold surge, to more than $300 an ounce from $268 a week earlier, says
little about the prospects for inflation. David Ranson of H.C. Wainwright & Co.
notes that the price has to remain above $290 in order to show a positive
year-over-year change. Looked at from this standpoint, any inflation signal is
dim at best. Ranson's advice? "Keep your eye open, but don't panic."
The Fed's likely to be far more
concerned by the upshift in global
growth. Merrill Lynch global economist
Michael Hartnett notes that generous
monetary conditions and international
growth trends are likely to result in rate
hikes in Europe, Canada and Australia
soon.
Not surprisingly, the euro is benefiting
from expectations for higher European
rates. The euro ended the week at
$1.0728, compared with $1.0447 at the
start of the week. Versus the yen, the
dollar did slightly better, closing the
week at 104.96 yen, compared with
104.17 a week earlier.
The greenback's inability to gain ground against the yen probably frustrated the
Group of 7 nations, which have been struggling to hold down the Japanese
currency. Those hopes hit a snag when the Bank of Japan seemed to renege on
a pledge to pump up the money supply. At the same time, U.S. officials haven't
voiced much concern about the trend. One reason is that the buck doesn't look
so weak on a trade-weighted basis. Also, with the U.S. current-account deficit
heading toward $325 billion this year, there's a belief that an orderly decline in
the dollar isn't such a bad thing.
For the better part of the 'Nineties, market participants have debated whether
the 10-year Treasury note would be a better U.S. benchmark than the 30-year
bond. It offers a better international comparison, since few other nations issue
30-year bonds. The 10-year note also is the yardstick of choice for sellers of
corporate, mortgage and asset-backed securities, as well as swaps and other
derivatives transactions.
Now there's evidence that the markets are favoring the 10-year issue over the
bond. Data from the Chicago Board of Trade show that open interest -- the
number of positions left on a futures contract -- is rising for the 10-year note
contract. In fact, last Wednesday marked the very first time that open interest
in the 10-year contract exceeded that in the T-bond futures. Advises James
Bianco at Bianco Research: "A new standard could be on the way."
-----------------
Message #41844 from goldsnow at Oct 2 1999 8:44AM
A good Tankan could spur another wave of international
investment in Japanese stocks, boosting demand for yen, analysts
said.
``Expectations are that (the survey) is going to be a marked
improvement and probably the yen will work its way up to 100 (yen
per dollar),' said James Culnane, senior trader at Norddeutsche
Landesbank. That would bring the currency to its strongest level
against the dollar since the end of 1995.
quote.bloomberg.com.
PS Inertia is a very powerful mechanism....That IMO explains how sharp people like Kudlow's of the World fail to grasp that cheap influx of forein made "disinflation" is just
about over, that vicious competition for oil/commodities has resumed....It is just we are in such a weak state of mind, cought unprepared for rising interest rates, clinging
to New Paradigm?Productivity invincibility..
I bet you no intervention could breathe much life into the sagging dollar....It is harvest time for Strong Dollar policy fiasco...Would be interesting to see Clinton's approval
rate polling in next few months..<gg>
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