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Strategies & Market Trends : Cents and Sensibility - Kimberly and Friends' Consortium -- Ignore unavailable to you. Want to Upgrade?

To: Jorj X Mckie who wrote (100636)	4/27/2000 6:15:00 AM
From: puborectalis	Read Replies (2) \| Respond to of 108040

Cross your fingers........Inflation stalks market GDP, ECI to show price pressures, analysts say By Rex Nutting, CBS MarketWatch Last Update: 8:01 PM ET Apr 26, 2000 NewsWatch Latest headlines WASHINGTON (CBS.MW) ? Financial markets are braced for more bad news on inflation from the government Thursday morning. Two major reports ? the employment cost index and gross domestic product -- will be released at 8:30 a.m. Eastern. ?We?ll be seeing numbers that show economic growth is strong, that there are upward pressures on wages and that there?s some upward pressure on costs,? said Hugh Johnson, chief investment officer at First Albany. ?It?s not going to have a major impact on the stock market because it?s a well-known story,? Johnson said. Two weeks ago, a strong consumer price index led to the big meltdown on Wall Street. Could it happen again Thursday? The market?s reaction depends on whether the inflation or growth numbers are stronger than anticipated. Readings far above the consensus expectations could bring on more speculation that the Federal Reserve will boost overnight interest rates by a half percentage point on May 16, Johnson said. It used to be that bond traders were the first to react to economic numbers, said John Ryding, senior economist at Bear Stearns. But lately, it?s been S&P 500 futures traders who set the tone for the day, with bonds following the lead of the equity and equity futures markets. Equity traders are looking for any evidence that the Fed will be more or less aggressive in the coming months. Strong data would push the Fed to raise rates higher or faster, while a slowdown could end the current tightening cycle. See Economic Preview. The street is looking for a gain of 6 percent in the GDP for the first quarter, far above the 3 to 3.5 percent the Fed would prefer. But it?s not strong growth that?s scaring investors or the Fed: it?s inflation. See Economic Forecast. The twin reports will look at inflation from both sides: the ECI measures the costs for businesses to keep an employee on the payroll while the GDP report includes several price deflators that have become the Fed?s favored gauges of price pressures. The ECI is the more important report from the Fed?s point of view because the central bank has argued that strong demand is leading to tight labor markets, which will eventually lead to higher employment costs and then to higher final prices. The market expects the GDP price deflator to rise to 2.2 percent (annualized) in the first quarter. That doesn?t sound too high, but it excludes all import prices, including all that expensive crude oil. The domestic purchases deflator, which includes imports, could be even higher. So far, employment costs have been contained. The consensus for the first-quarter ECI is a 1 percent gain following a rise of 1.1 percent in the fourth quarter. The figures are quarterly numbers, which means that the annualized increase in employment costs could be getting above 4 percent. ?I don?t see a problem,? said John Ryding, senior economist at Bear Stearns. ?If productivity is rising at 4 percent, then the ECI should be rising at 4 percent too.? As long as workers are producing more output per hour, firms can afford to pay them more in wages and benefits without raising prices or cutting into profits. Johnson said the market reaction to the reports will be muted unless the GDP number is above 6.5 percent or the ECI is above 1.4 percent. ?That would stir forecasts of a 50-basis point hike in May,? he said. Ryding thinks the ECI will rise 1 percent, but predicts a market rally if it?s 0.7 or 0.8 percent and the deflator is ?OK.? ?I don?t care what the GDP is, it?ll be a good day,? said Ryding. A strong GDP with a weak inflation number would be doubly good for equities, because growth boosts profits. In the long run, even a 1.1 or 1.2 percent gain in the ECI could get a benign interpretation when they?re compared with the stellar productivity numbers that will be released next week, Ryding said. Regardless of the actual numbers or the market reaction, the Fed is probably still on course for one or two more rate hikes by the end of the summer. The Fed?s squeeze on money supply hasn?t had much impact on the real economy yet, but it?s been the key factor behind the huge downdraft on Wall Street. Equity investors are looking for the tightening to hit the real economy, ?so the Fed can take its foot off the brake.? He can dream, can?t he?