Inflation: Creeping.
NIKKO MARKET COMMENTS
Prepared by
The Nikko Securities Co. International, Inc.
One Pill Makes You Larger;
One Pill Makes you Small
The Federal Reserve must feel a bit like it too has gone through the looking glass. It is faced with a stubbornly strong economy, busting at the seams, with an unemployment rate at a 24-year low–taking us back to those thrilling days of 1973. This memory is best forgotten. At the same time we have regional financial disturbances in the Pacific Rim that are a bit more like Latin America's problems in the early '80s (than like Mexico's recent hiccup). These are best forgotten, too. But, of course, these things cannot be forgotten. The lessons learned must be applied. The mistakes of the past should be avoided. So what should the Fed do? (A): Tighten to obviate the inflation from the strong economy given more clearly rising inflation pressures. (B): Not tighten, or even ease, to accommodate stock market pressures to stop the Asian flu that has been spreading. Which pill is it?
Ten Years After
Ten years after the global stock market tremors of 1987 we have learned something. We have learned that markets can take a licking but keep on ticking. We have learned that policy swerves for the sake of the international economy may not be a good idea. We learned this from Japan, a country that inflated its money stock, saw that boost its asset prices and bring debt problems of enormous magnitude. All this was just because it tried to cushion the impact on the economy from the rising yen. That move caused more problems than it was worth, but then hindsight is 20/20. The Fed does have some time to play with. And postponing the inevitable can be a good idea if one doesn't play things out too long. If inflation does not accelerate markedly, waiting a few months for financial difficulties to stabilize may be fruitful.
Growth: Yes! Acceleration: Perhaps?
Inflation: Creeping.
And The New Employment Report Shows!
Average hourly earnings are clearly creeping higher. The Fed's dilemma is (1); whether to hike rates now, (2); hope the spurt unwinds by itself as it did earlier this year, or (3); hope that productivity gains will keep these increases from infecting consumer prices. The Fed will bide its time. Some see a slowdown occurring “naturally” due to Asian problems. But, Janet Yellen of the CEA agrees with our estimate that those events set U.S. growth back by just 0.2 percent pts. It's not enough to rely on. The Fed can wait, but it will brake.
Outlook For The Next Week Ended November 14th
The FOMC meets Wednesday. No move expected. Thursday, productivity and unit labor costs for '97Q3, up 2.2% and 2.3%, respectively. On Friday producer prices for October will rise 0.3% overall and 0.2% in the core. Retail sales for October will be flat overall, and up 0.1%, excluding autos.
Robert A. Brusca, Chief Economist
The Nikko Securities Co., International, Inc.
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Financial Commentary | Consensus National Futures and Financial On Line Index
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