Bank of America Investment Management releases "U.S. Economic Projections" report for the week ending Dec. 17, 1999
13 December 1999
Bank of America Investment Management releases "U.S. Economic Projections" report for the week ending Dec. 17, 1999
Note to editor: The "U.S. Economic Projections" report that follows is written each week by Dr. Lynn Reaser, chief economist for the Bank of America Private Bank. "U.S. Economic Projections" is a publication of Bank of America Investment Management, which is based in St. Louis, Mo., and is a division of the Private Bank. With offices in 53 cities, Bank of America Investment Management is the largest organization of its type in the United States today in terms of assets under management and manages more that $120 billion on behalf of high-net-worth clients of the Private Bank.SAN FRANCISCO/ST. LOUIS, Mo.----Dec. 10, 1999-- "U.S. Economic Projections" report for the week ending Dec. 17, 1999.
Bank of America Investment Management
Good Tidings
Current Market Focus
Rising oil prices tried to dampen the market's holiday spirit this week, but good news elsewhere in the economy bolstered the performance of stocks and bonds. Markets had waited since last Friday for the Producer Price Index and were pleasantly surprised by its report. Despite a 1.4% surge in energy prices, overall producer prices increased just 0.2% in November. Energy accounts for only 12% of the total index, and other components were well behaved. Food prices barely budged, and the "core" index -- excluding food and energy -- was flat.
Stocks and bonds rallied with the release of the report, which suggested that inflation remains largely in check. Despite tight labor markets and rising commodity prices, ongoing gains in productivity, falling prices for technology products, and a general environment of pricing restraint continue to foster a generally low rate of inflation.
The Week Ahead
The coming week will feature the last major batch of indicators for 1999. Pay special attention to consumer prices and retail sales scheduled for release on Tuesday. Look forward to a relatively benign report on consumer prices, although energy prices will likely stir up trouble once again. Meanwhile, consumers showed greater interest in cars and light trucks last month, which should push up retail sales moderately after two months of stagnation.
Watch for Wednesday's industrial production report for a gauge of factory output. Expect to see a gain, albeit a much smaller one than that posted in the prior month. Thursday should also bring news that our foreign trade deficit is finally beginning to level out. Lastly, housing starts released on Friday may buckle only slightly under the pressure of higher interest rates, especially since weather was unusually mild in November.
Overall, look for next week's reports to contain some evidence that the underlying pace of economic growth may be moderating while inflation is staying in check.
The Stock Market
Technology stocks dominated the markets during most of the week, with the Nasdaq Composite racing to yet another high on Thursday. Friday's favorable reading on producer prices allowed some of the cheer to spread to other parts of the market. Lower interest rates proved especially constructive for the battered financial sector.
Economic numbers released during the coming week will be critical to maintaining the market's good mood. A jump in the Consumer Price Index would inflict significant damage. Any signs of strong economic activity might also revive interest-rate fears.
The Bond Market
The bond market remained somewhat grumpy all week until the release of the Producer Price Index on Friday. The yield on 30-year government bonds subsequently dropped to 6.17% Friday morning, the first time in three weeks that yields had fallen below 6.20%. While anxiety over a possible further tightening by the Federal Reserve has not been eradicated, the subdued performance of inflation has at least soothed the nerves of fixed-income traders.
Reports released during the coming week will either further calm the bond market or rekindle expectations of a hike in interest rates by the Federal Reserve early next year. In the meantime, Y2K concerns have yet to surface. New paper continues to be issued in the municipal, corporate bond and high-yield markets with good response. As of yet, no flight to U.S. Treasuries or cash has materialized.
Indicators to watch
Indicator Retail Sales - November
Release Date Tuesday, December 14, 8:30 a.m. EST
October 0.0%
Forecast 0.4% (0.3% to 0.5% range)
Comments Consumers finally warmed to the new millennium cars, as auto
purchases picked up in November. Excluding cars and trucks,
anticipate a moderate 0.4% increase as unseasonably mild
weather tempered sales until the weekend after Thanksgiving.
Indicator Consumer Price Index - November
Release Date Tuesday, December 14, 8:30 a.m. EST
October 0.2%
Forecast 0.2% (0.2% to 0.3% range)
Comments Look for consumer prices to show a rise similar to that
posted at the wholesale level. After a brief retreat in
the prior month, energy prices resumed their climb in
November. Expect to see pricing restraint in other
areas, however, with a 0.2% rise in the core Consumer
Price Index.
Indicator Business Inventories - October
Release Date Wednesday, December 15, 8:30 a.m. EST
September 0.5%
Forecast 0.3% (0.2% to 0.4% range)
Comments Manufacturers and wholesalers have already reported
relatively subdued increases in inventories of 0.3% for
October. Anticipate a similar advance at the retail
level. These numbers suggest that companies generally
have not scurried to build up inventories ahead of Y2K.
Indicator Industrial Production - November
Release Date Wednesday, December 15, 9:15 a.m. EST
October 0.6%
Forecast 0.2% (0.2% to 0.3% range)
Comments Expect a further gain in total industrial output but at
a much more subdued pace than that recorded in October.
Warm weather held down utility output, while auto output
also likely subsided last month. Look for capacity
utilization to stay at a relatively low 80.7% for
November.
Indicator Initial Claims for Unemployment Insurance - Week ended
12/11/99
Release Date Thursday, December 16, 8:30 a.m. EST
Prior Week 293,000
Forecast 285,000 (283,000 to 289,000 range)
Comments Look forward to continued good news on the employment
front, with jobless claims again falling below the
290,000 level.
Indicator International Trade Goods and Services - October
Release Date Thursday, December 16, 8:30 a.m. EST
September -$24.4 billion
Forecast -$24.4 billion (-$25.4 billion to -$23.4 billion range)
Comments Expect to see the trade deficit on goods and services
remain close to September's level, as a gain in exports
was probably offset by an equal increase in imports.
After steadily climbing for a number of months, the
deficit now shows signs of leveling off.
Indicator Housing Starts - November
Release Date Friday, December 17, 8:30 a.m. EST
October 1.63 million
Forecast 1.60 million (1.59 million to 1.63 million range)
Comments Builders are becoming somewhat more cautious in reaction
to the increase in interest rates. Anticipate, however,
only a modest easing in November's total as
better-than-normal weather allowed an above-average
number of construction projects to begin last month.
U.S. Economic Forecasts
Actual
1998 1999 2000
Real GDP (% chg.) 4.3 3.9 3.5
Consumer Price Index (% chg.) 1.6 2.2 2.5
S&P 500 Operating EPS (% chg.) -1.7 14.5 7.5
Federal Funds Rate (Dec. avg. %) 4.75 5.50 5.50
30-year Treasury Bond Yield
(Dec. avg. %) 5.06 6.10 5.90
The information and data provided in this analysis are derived from sources that we deem to be reliable and accurate. Any opinions expressed are strictly the opinion of Bank of America Investment Management and are subject to change without notice.