Banc of America Capital Management releases "U.S. Economic
Projections" report for the week of Feb. 19, 2001
BusinessWire, Friday, February 16, 2001 at 15:55
Note to editor: The "U.S. Economic Projections" report that follows is
written each week by Lynn Reaser, chief economist and senior market
strategist for Banc of America Capital Management, Inc. The report is
a publication of Banc of America Capital Management, which is the
primary investment management group of Bank of America. Banc of
America Capital Management develops investment management
products and services for distribution to individual and institutional
clients, and advised $277 billion in assets as of Dec. 31, 2000. Robert
H. (Rob) Gordon and Michael E. (Mike) Kenneally, CFA, serve as
co-chairmen of Banc of America Capital Management, Inc., a
registered investment advisory firm that is a subsidiary of Bank of
America, and a key organization within Banc of America Capital
Management.
SAN FRANCISCO/ST. LOUIS/CHARLOTTE, N.C.--(BUSINESS
WIRE)--Feb. 16, 2001--Banc of America Capital Management releases
latest "U.S. Economic Projections" report today.
Economy Takes A "U-Turn"
Current MARKET Focus
While nearly everyone assumed that the U.S. economy was following
a one way street of zero growth and no inflation, January figures
indicated a possible change in direction. Retail sales and housing
starts accelerated, industrial production attempted to switch from
the shoulder to the slow lane, and producer prices ran a red light.
The question now is: Is this just a temporary detour?
Consumers exhibited more confidence last month than had been
suggested by various surveys. Retail sales jumped 0.7%, with
widespread increases in outlays for cars, home furnishings and
apparel. Meanwhile, housing starts accelerated 5% and building
permits surged by 13%. Warmer weather made for much better street
conditions for January's economy, but lower interest rates also
helped.
One major roadblock that has been impeding economic progress also
appears to be easing. After sharply curtailing production last quarter,
companies saw their inventories edge up only 0.1% in December.
Total industrial output still fell 0.3% last month, as more normal
weather held down output at utilities and auto companies cut truck
production. However, other manufacturers eased up on the brakes
and boosted output 0.3%.
The Federal Reserve Board, however, might suggest that this
apparent "U-turn" was not totally legal. Producer prices bolted 1.1%,
led by higher costs for natural gas, food, cigarettes and new cars.
Even abstracting from those elements, prices still rose 0.3%. These
numbers suggest that some companies are trying to flex pricing power
to protect profit margins.
The WEEK Ahead
Markets will pay close attention to the data road during the coming
week to ascertain if they are going north or south. Wednesday's
report on consumer prices will represent a major intersection. The
release should show a more benign inflation reading than that
afforded by producer prices, although higher costs for natural gas and
cigarettes may assume the right-of-way and boost the total by about
0.3%.
Market observers will probably give little attention to Wednesday's
report of some easing in the trade deficit. However, on Thursday
these observers will take note of an expected upturn in January's
Index of Leading Economic Indicators, providing another indication
that the flow of data has changed direction, at least for now.
The Stock Market
The stock market was shocked to see the downhill route of the
economy, pricing power and interest rates come to a possible dead
end before earnings start to show a more favorable trend. It was not
ready for a change in direction this soon. Traffic snarls reigned on
Friday, with all of the major indices moving lower.
However, equity investors could become more comfortable taking a
detour. While interest rates might not provide the green lights they
desire, signs of an improving economy and profits could.
In the coming week, stock market drivers will pay special attention to
the Consumer Price Index and the last of the earnings traffic. Key
retailers, such as Wal-Mart and Home Depot, will give us a critical
read of possible road conditions ahead. Look for them to advise
caution.
The Bond Market
The bond market ended the week not knowing which side of the road
was correct. After stronger reports on housing and producer prices
sent Treasury securities prices sharply lower, a report by the
University of Michigan indicating a further drop in consumer
confidence shifted prices into reverse. By late trading on Friday,
10-year Treasury notes were yielding 5.11%, down from their prior
day's close but up from the 5.03% reported a week earlier.
The bond market is encountering the same problems reading road
maps as the equity market. Will weak consumer confidence persist,
and do recent surveys understate actual buying behavior? Will
incipient price pressures pose a roadblock to more easing by the
Federal Reserve? Bond traders and investors will scrutinize every
milepost in the days ahead.
Mutual Funds
Mutual fund investors also had difficulty reading road signs this past
week. Most investors remain uncertain which direction the arrows
point.
Indeed, as the week came to a close, the Nasdaq Composite Index
appeared likely to be off from the prior week, while the Dow Jones
Industrial Average was still hanging on to a gain. The winners and
losers among individual sectors also displayed a mixed performance.
Some of the areas that might benefit from an economic turnaround,
such as consumer cyclicals, capital goods and basic materials, scored
gains. A more diverse group, including communications, health care,
energy and technology registered losses for the week.
Mutual fund investors would be well advised to drive slowly and
carefully until the investment road starts to straighten out.
Indicators to watch
Indicator Consumer Prices - January Release Date Wednesday,
February 21, 8:30 a.m. EST
December 0.2%
Forecast 0.3% (0.2% too 0.3%)
Comments Look for a much slower rise in consumer
prices than reported at the producer price
level. However, higher costs for natural
gas and cigarettes will likely push up the
overall number. Excluding food and energy,
anticipate a rise of 0.2%, a number which
would suggest that underlying inflation
remains in check.
Indicator International Trade - December Release Date Wednesday,
February 21, 8:30 a.m. EST
November -$33.0 billion
Forecast -$32.2 billion (-$32.4 billion to -$32.0 billion)
Comments Anticipate a reduction in the monthly
trade deficit to the lowest level since
last August. Exports should show some
improvement after their sizable drop in
November. Look for an even bigger decline
in imports, reflecting lower oil prices in
December and a general cutback in orders
from companies attempting to control
inventories.
Indicator Initial Claims for Unemployment Insurance - week
ended 2/17/01 Release Date Thursday, February 22, 8:30 a.m. EST
Prior Week 352,000
Forecast 350,000 (348,000 to 352,000 range)
Comments Look for a slight easing in jobless
claims, although the higher level, thus
far in 2001, suggests that companies have
reacted swiftly in responding to slower
sales by cutting labor and other costs.
Indicator Index of Leading Economic Indicators - January Release
Date Thursday, February 22, 10:00 a.m. EST
December -0.6%
Forecast 0.3% (0.3% to 0.4% range)
Comments Look forward to a more positive sign from
the Index of Leading Economic Indicators,
suggesting that economic conditions could
indeed improve over the next several
months. An increase in the length of the
average work week and money supply are two
components that should help the overall
Index record a sizable advance.
Economic Forecasts
2000Q3 2000Q4e 2001Q1f 2001Q2f
Real GDP(% chg. annual rate) 2.2 1.4 1.0 2.5 CPI (% chg. annual
rate) 3.1 2.8 2.1 1.8 S&P 500 Operating Earnings (% chg. over prior
year) 9.3 6.0 4.0 3.0 Federal Funds Rate( %, end of period) 6.50 6.50
5.50 5.50 10-Year Treasury Note Yield (%, end of period) 5.80 5.12
5.25 5.30 Euro (euro/$, end of period) 0.88 0.94 0.96 0.99
2001Q3f 2001Q4f 2000e 2001f
Real GDP(% chg. annual rate) 3.7 3.8 5.0 2.3 CPI (% chg. annual
rate) 2.8 2.3 3.4 2.5 S&P 500 Operating Earnings (% chg. over prior
year) 10.0 13.0 12.0 7.0 Federal Funds Rate( %, end of period) 5.50
5.50 6.50 5.50 10-Year Treasury Note Yield (%, end of period) 5.40
5.50 5.12 5.50 Euro (euro/$, end of period) 1.00 0.98 0.94 0.98
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