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Strategies & Market Trends : Waiting for the big Kahuna -- Ignore unavailable to you. Want to Upgrade?

To: Real Man who wrote (67207)	11/7/2003 9:15:38 PM
From: mishedlo	Read Replies (1) \| Respond to of 94695

The Baton Is Passed - A Must read! northerntrust.com Highlights of merit....... Housing and consumer spending have been the “runners” to date in this economic expansion. Although both of them were sprinting in the third quarter, they are in the process of passing the economic baton to the capital spending and export sectors. (short retail/housing Finally? - mish) We are leaving 2004’s Q4/Q4 real GDP forecast at 3.5%, recognizing that an inventories spike could take the actual outcome higher. Countering this upside risk, however, is the downside risk being suggested by recent weakness in money supply growth. We continue to believe that the Fed will not touch those interest-rate dials until June 30, 2004, at the earliest – more likely, not until August 10, 2004. (I am a huge winner if this forecast is true- mish) Don’t look now, folks, but we are in the early stages of a global economic recovery. Although the U.S. economy is one of the teams behind which other economies are “drafting,” China is the other. China’s trade surplus with the U.S. may be expanding, but its overall trade surplus is shrinking. China’s voracious demand for raw materials and components has ignited a manufacturing recovery in Asia, including Japan, as well as mining and agricultural recoveries in Latin America. Chinese demand for imports also has re-floated the ocean shipping industry. (They see a recovery that I do not but to be fair I must point it out.) One of these quarters in the not too distant future, inventory building is going to make a gargantuan contribution to GDP growth. (more recovery talk) We keep expecting housing to flag, but it certainly did not in third quarter, as evidenced by the 20.4% annualized growth in real residential expenditures. Housing affordability may have dropped, but housing starts have not. Because it takes about six months to complete a house once it is started, residential investment expenditures will keep making positive contributions to GDP growth at least through the first quarter of next year, albeit at a substantially slower pace than in the third quarter. (OK housing longs - well done - take some profits - mish) (most important to me follows) Well, with the economic expansion on firmer foundations, is the Fed ready to take back some of the monetary slack it has cut the economy since 2001? The fed funds futures market is reflecting at least a 25 basis point increase in the rate no later than May 2004. As mentioned at the outset, we beg to differ. We believe that the first policy move up in the funds rate will likely be at the August 10, 2004 FOMC meeting, though we are willing to entertain a June 30th rate hike, too. Why do we perceive a reluctance on the part of the Fed to raise interest rates sooner? For starters, we believe that the GDP growth headlines going forward will be much more subdued than that of the third quarter. Although the October employment data were a pleasant surprise and although we believe the labor market has made a turn for the better, we also believe that the unemployment rate will be “sticky” moving down when the hoard of discouraged workers comes flooding back into the labor market as job prospects improve. With households leveraged up to their eyebrows and longer-maturity interest rates trending higher, solid wage and salary growth will be necessary to keep consumer spending growing after the tax-cut stimulus wanes. So, the Fed will want to make sure that there is strong momentum in employment growth before stepping on the monetary brakes. Moreover, the Fed is convinced that core inflationary pressures are far off. Well, even though core inflation may be low today, why does the Fed have confidence that inflationary pressures will remain muted even in the face of stronger aggregate demand growth? Productivity growth, Benjamin. So, in the Fed’s view, there is no reason to rush to judgment with an interest rate hike. Of course, the longer end of the fixed-income securities spectrum might get a little nervous with the Fed’s patience, but that’s its prerogative. Any caveats to this rosy scenario? Yep. Money supply growth, or lack thereof......If money supply growth does not rebound soon, then our forecast of 3-3/4% annualized economic growth for the first half of 2004 may have to be revised down. We do, however, expect a rebound in money supply growth as banks accommodate the federal government’s growing demand for credit and as businesses start to tap banks for inventories financing. (Well if under the best of scenarios the FED is not hiking until June, what happens in the mediochre to worst scenarios? mish) All in all I like my macro bets on little to no rate hikes Mish