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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Lee Lichterman III who wrote (28685)	10/7/1999 3:35:00 PM
From: pater tenebrarum	Read Replies (1) \| Respond to of 99985

Lee, i agree with this assessment. it was interesting that in yesterday's big rally neither the NH/NL nor the a/d line got off the mat. we'll see what tomorrow's jobs report will bring, but the bond has continued to be weak and imo will get a lot weaker still before a meaningful bottom is in. i really wonder how the stock market will take even higher yields. earnings can only carry this thing up to a point. regards, hb

To: Lee Lichterman III who wrote (28685)	10/7/1999 6:36:00 PM
From: Jacob Snyder	Read Replies (2) \| Respond to of 99985

exerpts from Fed 8/24/99 meeting: The members believed that the prospects for major liquidity problems associated with the century date change were remote, but some strains were already in evidence, and they agreed that it would be prudent to provide the Manager with added leeway and flexibility for a limited period. The nominal deficit on U.S. trade in goods and services widened substantially in the second quarter, as the value of imports increased much more than that of exports. The rise in imports was spread widely across the major trade categories; sharply higher prices for imported oil, along with a moderate addition in the quantity imported, accounted for much of the rise, but there also were sizable step-ups in imports of computers, semiconductors, and industrial supplies--notably building materials. The increase in exports was concentrated in agricultural goods, automotive products, industrial supplies, computers, and semiconductors. Recent information suggested that economic recovery in Europe was continuing to gain momentum through the second quarter while the Japanese economy was showing some signs of having bottomed out over the first half of the year. At its meeting on June 29-30, 1999, the Committee adopted a directive that called for a slight tightening of conditions in reserve markets consistent with an increase of ¬ percentage point in the federal funds rate to an average of around 5 percent. The members noted at that meeting that there were few current indications of rising inflation; nonetheless, with financial markets and foreign economies recovering since the Committee had eased policy last fall, the persisting strength of demand was enough to put added pressure over time on already very tight labor markets and at some point lead to a pickup in inflation that could threaten the sustainability of the economy's expansion. In foreign exchange markets, the trade-weighted value of the dollar depreciated slightly over the intermeeting period in relation to the currencies of a broad group of important U.S. trading partners. The dollar declined against the currencies of the major industrial countries in response to indications of improved economic performances in Europe and Japan and to higher long-term interest rates in many of those countries. The staff forecast prepared for this meeting suggested that the expansion would gradually moderate to a rate commensurate with the growth of the economy's estimated potential. The growth of domestic final demand increasingly would be held back by the anticipated waning of positive wealth effects associated with earlier large gains in equity prices; the slower growth of spending on consumer durables, houses, and business equipment in the wake of the prolonged buildup in the stocks of these items; and the higher intermediate- and longer-term interest rates that had evolved as markets came to expect that a rise in short-term interest rates would be needed to achieve a better balance between aggregate demand and aggregate supply. Price inflation was projected to rise somewhat over the forecast horizon, in part as a result of higher import prices and some firming of gains in nominal labor compensation in persistently tight labor markets that would not be fully offset by rising productivity. In the Committee's discussion of current and prospective economic developments, members commented that the expansion of economic activity continued to display substantial underlying strength with few indications of slowing in the growth of consumer and business expenditures. The members generally anticipated a rebound in the rate of economic expansion over the balance of the year and in 2000, possibly to a pace averaging around the economy's long-run potential. Growth at this rate would represent a noticeable slowing from the pace that had prevailed in recent years, and its realization depended importantly on the damping effects on domestic demand of the less accommodative financial conditions that had developed in recent months--higher long-term interest rates and a flattening of equity prices. Given the persistent strength of domestic demand and improving economies abroad, many members saw the risks to this outlook as tilted to the upside, especially if short-term interest rates were to remain at their current levels. Against this background, the risks in the outlook for prices also seemed to be tilted toward somewhat higher inflation. Price inflation had been held in check by accelerating productivity and declines in oil and other import prices. Evidence was mixed on whether the acceleration in productivity was persisting, but the earlier favorable developments in import prices were already dissipating, adding to the inflation risk posed by the possibility of further tightening in labor markets should domestic demand fail to moderate. With regard to the outlook for key sectors of the economy, members referred to the favorable prospects for continued robust growth in employment and incomes that likely would sustain appreciable further expansion in consumer expenditures. However, substantial uncertainty surrounded the outlook for stock market prices whose sharp rise and the associated increase in wealth over the course of recent years had helped to foster a high level of consumer confidence and willingness to spend. The absence of further large gains in stock prices, should recent trends persist, would remove this stimulus and probably induce some moderation in the growth of consumer spending. However, as the experience of recent years had amply demonstrated, stock market trends were very difficult to predict. In the course of the Committee's discussion of the outlook for inflation, members commented that there was no persuasive evidence in recent statistical measures that price inflation was currently picking up or that inflation expectations were rising, though the declines in both inflation and expectations experienced over the course of recent years no longer seemed to be occurring. Members nonetheless expressed concern about the risks of some acceleration under foreseeable economic circumstances. They cited a variety of statistical and anecdotal signs that could be viewed as harbingers of rising price inflation. Those included an upturn in commodity prices, notably that of oil whose effects tended over time to spread relatively widely through the economy, and the direct and indirect effects of the dollar's depreciation. Members also reported some indications of reduced discounting by business firms and plans for, or actual implementation of, higher prices that businesses now saw as less likely than earlier to be reversed for competitive reasons. However, these reports were still relatively scattered. The members' basic concern about the outlook for inflation related to the possibility that continued strength in demand might not be accommodated without placing greater pressures on labor compensation and prices. The greatest risks would come from a further tightening of labor markets, but many members were also concerned about the possibility of accelerating costs even at current levels of labor resource utilization. The major uncertainty was the extent to which labor productivity would continue to accelerate and hold down the rise in unit labor costs. Recent data from the product side of the national income and product accounts suggested some slowing in productivity growth and pressure on unit labor costs, but these tendencies were not confirmed by a close reading of income side data. In these circumstances, the outlook for price inflation remained subject to considerable uncertainty. many members continued to see a possible increase in inflation pressures as the main threat to sustained economic expansion.