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The Week Ahead ...
The Week Ahead

Tuesday 21 January-Fed Chairman Greenspan Testifies to Senate Budget Committee Hearing on US Economy. This should generate plenty of market interest, especially given the recent upturn in US economic activity and Wall Street's rise to a series of new all-time highs. The latest estimates suggest that real GDP increased by 3% in the fourth quarter of 1996, compared to Fed's forecast of 2%. Will Greenspan hint that this might trigger a rise in interest rates? And what will he say about the 'excessive exuberance of financial markets with the Dow Jones pushing towards 7000?

01:30pm-Wednesday 22 January-Housing Starts (Dec).

Housing starts jumped 9.2% in November, following declines in the previous two months. Housing sector activity has picked up following a steep fall in mortgage rates, and the consensus expects December's figure to be unchanged at 1.45 million.

07:00pm Thursday 23 January-Federal Budget (Dec). The budget is usually in surplus in December and a figure around $10bn is expected. This would be double the surplus in December 1995, reflecting continued strong receipts. It would bring the cumulative deficit for the first three months of the financial year down to $67bn, compared to $56bn in the same period of fiscal 1996.

The Week Just Past

Retail sales grew 0.6% m-on-m in December, 4.5% y-on-y. This is the latest in a run of strong data suggesting that growth in the final quarter of 1996 was more buoyant than many economists had anticipated. In the three months to the year end the value of retail sales grew at an annualised rate of 4.8%.

Consumer prices advanced 0.3% m-on-m in December, up 3.3% y-on-y. Underlying inflation, excluding food and energy grew only 0.1% m-on-m, up 2.6% y-on-y, a little below expectations. The key question for the bond market should be whether higher food and energy prices will feed through to general inflation. However, with core US inflation now at a 31-year low, the bond market responded very calmly to this latest set of price data.

The trade deficit in November was $8.4bn. This was wider that October's revised deficit of $8bn, but lower than most economists had been expecting. There was a modest rise in both exports and imports. The politically sensitive trade deficit with Japan narrowed to $4.3bn - the lowest since 1991.

Industrial output in December rose by 0.8% following a revised 0.8% rise in November. This took the annual rate of gain to 5.1%. Capacity use rose to 83.8%.


The key issue for financial markets in the United States this year is whether or not the economy will begin to show signs of overheating. There is plenty of evidence that the economy is operating pretty close to full capacity. Unemployment has fallen to 5.3% and has been below 5.5% for almost a whole year now; there are already signs that this is having an impact on wages, with a steady move up in average hourly earnings this year. And capacity utilisation rates are also rising, as this week's data illustrated.

If the economy continues to grow at the pace of 1996Q4 (ie an annual rate of 3%), capacity pressures will build and the Federal Reserve will have to act, as it did in 1994, to prevent an increase in inflation.

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