F.GEMS: MICROS to GO!...

[Francois+Goelo]

***¶***Weekly Economic Indicators & Second Guessing Grenspan....

WEEKLY UPDATE FOR: May 19, 2001 by Bob Bose...

Prior Week in Review:

Financial Market Highlights:
============================

                        05/18/01     05/11/01     %Change 
  
 S&P 500                 1,291.96     1,245.67      +3.72% 
 Dow Jones              11,301.74    10,821.31      +4.44% 
 NASD Comp               2,198.88     2,107.43      +4.34% 
 Russell 2000              506.28       487.36      +3.88% 
 SOX Index                 657.43       616.78      +6.59% 
 Value Line                412.44       396.97      +3.90% 
 MS Growth                 567.60       557.11      +1.88% 
 MS Cyclical               578.27       546.20      +5.87% 
 T - Bill                    3.51%        3.68%     -17 BP 
 Long Bond                   5.75%        5.88%     -13 BP 
 Gold - Oz-Near Month     $287.80      $269.50     +$18.30 
 Silver - Oz-Near Month     $4.58        $4.35       +$.23

Economic News:
==============

FOMC Cuts Rates One Half Point And Maintains Bias To Ease
Accompanying Press Release And Minutes Note Wealth Effect
Our View Unchanged - Second Half Recovery, But Risks Increase

*March Business Inventories fell -.3% - Sales also fell -.3%

*Industrial Production for April off -.3% - March revised
Sharply downward - Capacity Utilization eased to 78.5%

*FOMC cuts rates by one half point - Maintains Bias
Toward further ease - See Below

*April Housing Starts rose +1.5% - Permits fell -2.5%

*April Consumer Price Index rose +.3% - Core Rate -
Excluding Food & Energy - rose +.2%

*Jobless Claims fell -8,000 to 380,000 - Four Week
Moving Average drops -2,250 to 401,250

*Leading Indicators in April rose +.1%

*Philadelphia FRB May Business Activity Index was -8.8
Basically unchanged from April's -7.2

*March Trade Deficit rose by +$4.3 bil to $31.2 bil
Exports softened, imports surged


Obviously by now everyone knows that the Federal Open
Market Committee (FOMC) lowered both the Federal Funds
Rate and the Discount Rate, to 4.0% and 3.5% respectively.
And they maintained their bias to lower rates further if
need be. We expected the former, but thought, perhaps
hoped is a better word, that they would remove their bias
toward further rate reductions. Our concern is simply that
an almost 40% reduction in short term rates, in so short a
period of time, could end up being too stimulative, as the
economy reaccelerates during the second half.

Clearly this is not a concern for the FOMC. The press
release last week noted the " ... effects of earlier
reductions in equity wealth on consumption ... continues
to weigh on the economy." The same theme is repeated
numerous times in the minutes from the March FOMC meeting.
So, it appears quite clear that the FOMC wants higher stock
prices to avoid what in their opinion is the negative
"wealth effect" from declining stock prices.

In addition, and as we had expected, they did ignore the
negative report on first quarter productivity - or more
accurately lack of it. What we didn't expect was that
they would specifically comment upon it by noting that
"Although measured productivity growth stalled in the
first quarter, the impressive underlying rate of increase
that developed in recent years appears to be largely intact,
supporting longer-term prospects." We hope they are right.

In our view, then, the FOMC is making a big bet. Simply
put, they are employing a very aggressive easing policy to
try to jump start an economic reacceleration that will
significantly improve productivity growth - sufficiently
so to ward off any significant inflationary pressures.
They are hopeful that softening labor markets and below
trend GDP growth will moderate inflationary pressures.

Our concern is that inflationary pressure, albeit modest
at the moment, is building - that's not a forecast that's
a fact. If these pressures do not abate before the
stimulative impact of the FOMC's policy "kicks in", then
inflationary pressures will get worse, and easily exceed
consensus expectations. A clear negative for financial assets.

The presumed response from the FOMC would likely be a
tightening, and there is some indication that they are now
more willing to use more frequent changes in policy to try
to meet their overall objective of non-inflationary growth
in line with their revised view of the economy's potential.

For instance, the minutes of the March meeting note discussion
of the need for a three quarter point cut, rather than the
half point reduction that was adopted. Presumably they were
still trying to bury the Greenspan put then as we noted,
so they didn't want to "cave in" to the market. But "Most
members agreed, however, that in the context of their focus
on the economy, smaller, possible more frequent, policy
adjustments were appropriate to afford them the opportunity to
recalibrate policy in rapidly changing and highly uncertain
circumstances." Presumably this statement was meant to refer
to a slowing economy, but clearly it can be applied to
tightening moves as well if inflationary pressures increase.

However, there appears to be little doubt about the Fed's
desire to return to approximately 3% growth as soon as possible.
We think the bias should have been removed, and that the FOMC
should wait for more data to determine if further easing is
necessary. Clearly they disagree, and think they can
"recalibrate" if necessary.

Their choice of terms implies a precision in monetary policy
that I simply do not believe exists, and I think they are trying
to "fine tune" too much. So, in my view the risks have increased.
Not really over the near term, but any second half recovery
will need to be monitored very, very closely. Stay tuned !



Current Weekly Calendar of Economic Data:
=========================================


Thursday: Jobless Claims, New Home Sales

Friday: Q1 Preliminary GDP, Durable Goods, Existing Home Sales, Univ. of Michigan Consumer Sentiment