This is a monthly overview of key developments in the U.S. and Latin America. This section is updated approximately the 15th day of the month.

You are also invited to access our regular weekly commentaries on another website: financialweb.com. Go to the section "Commentary" and search for "Lasaga on Latin America."

StratInfo - Strategic Information Analysis Inc. Miami, Florida, U.S.A.

June 2000

U.S. Economy:

The announcement that the CPI increased 0.1 percent in May was good news. The April rate was also 0.1 percent. However, we do not think this is the end of the inflationary spiral. After falling 14 percent in April, crude oil prices were up 11.8 percent in May. This confirms our view that we are not likely to get any relief on energy prices until after the summer. With a still hot economy, we think there is further room for price increases during the second half of this years.

Since we consider the "core" inflation index a misleading indicator, we monitor the twelve month moving average CPI index. This rate had risen to 2.7 percent in May, up from 2.2 last December, and we expect it will end this year at about 3.4 percent. The problem with the "core" inflation index is that it excludes food and energy, and we have a problem with the notion that food and energy are not relevant in the consumer basket.

Recent indicators point to some moderation in growth during this second quarter. Nevertheless, the economy is still expanding at an unsustainable rate, that will inevitably lead to higher inflationary pressures. The decline in retail sales of 0.3 percent in May following April’s decline of 0.6 percent does show that consumers are becoming mildly reluctant to buying interest rate-sensitive durable goods. After all, the significant increase in the Fed Funds rate during the past year was bound to have an impact on demand. At the same time, the unemployment rate edged up to 4.1 percent in May, from 3.9 percent in the previous month. Despite the rise, it still looks like a pretty tight labor market. Note the very modest productivity growth rate of 2.4 percent during the first quarter.

Higher inflation during the second half of the year will lead to further increases in the Fed Funds rate, although we think the FOMC will likely pass on a rate increase this month. The December Fed Funds futures are trading at 6.82 percent, down from 7.1 percent about a month ago. We think another 75 basis point increase by year-end is possible. At the same time, the yield curve is beginning to steepen, in part due to higher inflation expectations. The 3 month - 20 year spread increased from 0.36 percentage points in April to 0.56 in May.

Latin American Economies

President de la Rua caused an uproar with his latest adjustment package and now faces a round of strikes and street demonstrations against his austerity policies. The latest measures will do little to bring about a significant reduction in the fiscal budget deficit, but they will surely contribute to greater social unrest.

Low income earners are getting increasingly vocal against the government’s dollarization plan in Ecuador.

Hipolito Mejia won the presidency in Dominican Republic with about 50 percent of the votes. A second round was averted when his main opponents - Danilo Medina and Joaquin Balaguer - conceded defeat. A smooth transfer of power is expected for the first time in many years.

President Alberto Fujimori was reelected in Peru on the second round balloting. The opposition candidate, Alejandro Toledo, withdrew from the race in protest for lack of guarantees for a free election. No economic sanctions are expected from the U.S., Europe and the other Latin American countries.

Elections Update:

Mexico - Mid-year 2000. PAN candidate Vicente Fox has a good chance of defeating PRI’s Francisco Labastida. Opinion surveys are putting Fox ahead of Labastida.

Venezuela - Presidential and congressional elections were postponed, due to technical problems in the voting process. No new date has been set yet for the new elections.

StratInfo - Strategic Information Analysis Inc. Miami, Florida, U.S.A.