Prepared by

The Nikko Securities Co. International, Inc.

Saw See: The bond market has been locked in a trading range. The stock market–at least the DJIA industrials–has been–capped. A week ago we saw inflation; this week we didn't see much at all. And so it goes. The new constant in the market equation is the commentary by Fed officials that embraces old-time economic principles above those of the New Paradigm. This revival was kicked off by Fed Chairman Greenspan and a chorus of Fed voices has joined him, Susan Phillips most recently, arguing that weak European growth would not continue to help contain commodity prices as it has in the past.

The PPI reminded up that inflation is not dead. The PPI is an index of domestically produced goods. It omits services and imported goods. But domestically, all things are not simply buoyant. Non-durable goods industries are still generally shedding jobs. Durable goods industries have some positive job growth. Still, this mixed sector, the one faced most squarely with intense competition from abroad, was able to muster some frightening inflation figures. The services sector, more dependent on an ever-tightening labor supply, less benefited by productivity gains, and not strapped by foreign competition, did not produce the price pressure last month that the market was looking for. Even so, after a brief relief rally the bond market came off its top and eventually gave up all the day's gains before the close of cash market trading. Optimism lost.

Relations between the U.S. and Japan began to heat up with the Federal Maritime Commissions's vote to detain Japanese ships in U.S. ports and its order to Coast Guard to deter others from docking. This episode is not over as the U.S. is still trying to open up Japanese ports. The U.S. also is trying to limit Japan's dependence on export-led growth–even in the face of yen weakness. These issues often come to a head over the trade reports, and we get a trade report this week. Bad trade news would threaten dollar strength and could spill over with adverse impacts on the bond market.

Well, one can hardly write a market letter this week without mention of what happened 10 years ago in the U.S. equity market. It created, arguably, the best buying opportunity of the decade. Other markets shuddered, the Japanese market roared ahead asserting the last phase of its dominance. Today it is turnabout as the Japanese market is weak and lackluster while the U.S. market knows no bad news. But like in 1987, we have international conflict at hand. Only this time it's not James Baker of the U.S. in one corner, wearing the red, white and blue trunks versus Gerhard Stoltenberg of West Germany in the other, wearing the black, red and yellow. It's a U.S./Japan squabble over port entry. Like 10 years ago there is some high profile M&A activity, this time involving MCI and various suitors. Unlike last time the dollar has been rising strongly, not falling. Unlike last time we have productivity miracles instead of a “hollowing out” of the “rusts belt.” Right now inflation is the tamest since the mid-1960s, not questionably as it was a decade ago. There is no reason to fear a crash, but like the Japanese market 10 years ago, this one knows no bad news, and that's not good either. Japan once was like that.

A very light economic calendar is in place for next week. Look for Tuesday's report on September International Trade Deficit to narrow to $10 billion. The Treasury will announce details of the monthly 2-year and 5-year note auctions on Wednesday.

Robert A. Brusca, Chief Economist

The Nikko Securities Co. International, Inc.

One World Financial Center, Tower A

200 Liberty Street, New York, New York

Financial Commentary

THE ALLENDALE ADVISORY REPORT | STRATEGY FOCUS | WEEKLY OUTLOOK
ECONOMIC PERSPECTIVE | FED STEER PRICES GOING NOWHERE FAST
U.S. ECONOMIC AND INTEREST-RATE OUTLOOK
STICKING WITH THE U.S. TREASURY MARKET | THE TODD MARKET TIMER
CASH AND BONDS-- THE RODNEY DANGERFIELDS OF FINANCIAL ASSETS?
MYERS ON FUTURES | THE COPPER JOURNAL | COMMODITY FUTURES FORECAST WEEKLY REPORT
INTEREST RATE WATCH | NIKKO MARKET COMMENTS

Consensus National Futures and Financial On Line Index

Copyright 1997, by Consensus Inc.  All American and Pan American rights Reserved. editor@consensus-inc.com

Hosted by:
One Crossroads Place
610 West Maple Ave, Suite WWW
Independence, MO 64050
(816) 252-4080
sysop@kcmo.com

wmeubank@ocp.kcmo.com