TALK FROM TRENCHES: BAD NEWS IS BAD NEWS; MORE DATA, AUCTIONS
09:50 EDT 07/30
By Isobel Kennedy
NEW YORK (MktNews) - "U, G, L, Y ... UGLY." If the bond market had cheerleaders, that would have been their call yesterday after the 1.1% ECI sucker-punched the unexpecting bond market. No mitigating factors -- "pure bad news for a market already buffeted by the Fed, record corporate issuance and a weakening dollar," as one of our more clever readers summed up Thursday's price action.
U.S. Treasury prices are under pressure again Friday. The market largely ignored a 0.7% rise in June personal income and a 0.3% gain in personal consumption. It was considered of zero importance since Thursday's GDP report incorporated the data and showed real consumption +4.0% in Q2. "Stay tuned for more important data at 10:00 EDT," one source said. Chicago Purchasing Manager's index and new home sales will be released at that time.
Looking ahead, the market will focus on Monday's NAPM report and next Friday's much dreaded July Employment report. Wedged in between will be the August refunding announcement of fives, tens and bonds. If retail does not show some interest at these levels, "further price concessions may be necessary to digest that supply," one salesperson said.
Corporate supply eased up a bit this week due to widening spreads but there is more on the horizon. Sun Microsystems is expected to sell $1.5 billion in three, five, seven and ten-year tranches today. Price talk of the deal has improved since the credit was upgraded by Moody's yesterday to Baa1 from Baa2. Standard and Poors rates the issue to BBB+.
Next week, Wal-Mart is expected to price a jumbo issue of $5 billion in twos, fives and tens. But keep in mind, the issuer has a total shelf of $10 billion and it has become commonplace for these big issuers to offer larger and larger deals whenever they get the chance, market players say.
Near term, most players look for the Treasury market to trade sideways or slightly lower through the August refunding. Retail accounts are said to be targeting 5.70% on the two-year and 6.15% on the bond as re-entry levels. Currently twos hover around 5.65% and bonds around 6.10%.
Once the mid-August refunding is out of the way, the market is expected to go back to sleep until Labor Day when the Street returns from vacation. At that time, some players are calling for a big rally. Others are looking for a "real correction." They think higher rates are clearly in the cards and that the two-year note must back up to 6.00% in the face of additional Fed tightenings.
The dollar continues under pressure and is affecting people's appetite for dollar assets. Friday, the euro-dollar stabilized around $1.07 and traders said the ongoing weakness may encourage more and more to get out of dollar assets.
Here is another negative to watch for. Sources say they have begun to focus on commodity prices as the record heat and drought conditions continue to affect many parts of the U.S. "The drought will affect corn and soybean prices. That affects cattle feed prices and that eventually impacts cattle and hog prices," one observer said.
Amid all the gloom and doom is there any bright light on the horizon? Sources say the market should get an element of support from month-end index buying later on today. However, extensions are said to be less than average this go around and buying will likely be limited. Oh well, have a good weekend. |
