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

To: donald sew who wrote (12532)	4/30/1999 2:08:00 PM
From: Les H	Respond to of 99985

Bank of Montreal report: US Growth Still Hot at 4.5% in Q1 The US economy continued in high gear, expanding an annualized 4.5% in the first quarter following a 6.0% rise in Q4. This was stronger than the 3.3% pace that we and the market had been expecting. Prices also surprised on the upside, with the GDP deflator rising 1.4% in Q1 up from a 0.8% gain in Q4. Consequently, fixed-income markets deteriorated, with 10-year bond yields rising 5 basis points. The US economy's performance was only surprising because the recent indicators had suggested that the pace of inventory accumulation had slowed. However, rather than subtracting significantly from growth, it added a small 0.1 percentage points to growth. Given stimulative monetary conditions, a booming stock market, and sky high consumer confidence it is not surprising that the consumer continued to drive the economy forward. Consumption expanded at a 6.7% annualized pace in Q1, up from an already fast 5.0% rate in Q4. Housing investment jumped 15.6% in Q1, up from 10.0% in Q4. As well, business investment expanded 9.9% in Q1 down from a 13.2% pace in Q4. Given this pace of demand growth, a slightly faster rate of inventory accumulation seems unlikely to cause a problem going forward. The modest slowing in growth was the result of the strong US dollar and weak external demand, which exerted an expected drag on the economy through net exports. Exports fell 7.7% in Q1, while imports surged 11.7%. Together this subtracted 2.9 percentage points from Q1 growth. We expect net exports to continue to temper the strong pace of GDP growth in coming quarters. With wage inflation trending lower and price inflation under 2%, we expect the Fed to remain on the sidelines for the time being. However, we still believe that tight labour markets will eventually lead to higher inflation. In our view, these pressures will begin to materialize in coming quarters, which should prompt the Fed to start raising interest rates late this year.