Looks like consensus estimate for CPI tomorrow has been upped again to 0.5. Thursday, it was 0.3. Friday, it was 0.4. The limbo barss are 6 feet off the ground.
TALK FROM TRENCHES: US STOCKS, CPI WILL TELL IT ALL
By Isobel Kennedy
NEW YORK (MktNews) - U.S. Treasuries are mixed Monday. The short end is a bit higher than Friday's levels
because of stock market jitters. The long end, on the other hand, is a bit weaker due to inflation fears.
And that says it all, sources say. The bond market has two things on its mind: the performance of the equity markets
and Tuesday's consumer price report.
Stocks have been traipsing back and forth in minor positive/negative territory all morning. But some of the
superstitious chatter out there only accentuates the negative. For example, tomorrow is the 55th day since DJIA hit its
all-time high of 11,326 on August 25, 1999. Sources say, the 1929 crash in the Dow occurred on the 55th day after it
set a record that year. They also note the stock market crash of 1987 came 55 days after it set a new record.
On the positive side, Goldman Sachs Chief Investment Strategist Abbey Joseph Cohen said the S&P 500 is 5%
undervalued especially in the current interest rate environment, according to a newswire report. "Long and
medium-term interest rates have already risen to reflect possible increases in short-term rates by the Fed," she added.
Along those same lines, IMF's Director Stanley Fischer said Monday a continued decline in U.S. stock prices could
help the Federal Reserve defer some of the policy tightening it otherwise might have had to implement.
While these comments from the big guys are probably intellectually sound, more than talk is needed to heal the
wounds suffered by the little guys in the trenches. Large stocks lost about 4.6% in Sept and the loss for the first two
weeks of Oct is 3.1%. If you started out Sept with $50,000 in a 401k plan, you would now have only $46,150. And
that is a lot of "cashish-ola" even if it's only on paper.
Interestingly, one bond strategist says stocks reacted more negatively to Mr. Greenspan's stock warnings this time
(after having mostly ignored them in the past) because it is more receptive to negative news now. The list of chinks in
the armor of the once impenetrable "Goldilocks Just Right Economy" are growing: falling dollar, rising commodity
prices, rising health-care costs, an upturn in the global economy. These factors are helping to restore pricing power --
another thing that did not exist before.
It looks like some service providers are finally passing on higher fuel costs to their customers. The Hampton Jitney,
which provides bus service to the Hamptons from NYC, is raising its fares 9% from $22 to $24. This is their first
increase in 2.5 years. The company that provides taxi service from the railroad to the Fire Island ferries is also raising
its fare 50% from $2 to $3.
It has been reported that 14 U.S. shippers are raising shipping costs by 10-15% imports and exports to and from
Asia. The U.S. gets most of its imports from Asia.
Market players are on pins and needles waiting for CPI. As we all know, last Friday's producer price index was up
1.1% overall and up 0.8% in the core. Prior to that, this inflation index was up 1% or more only four times since 1990
and all four times occurred in 1990. Now people are wondering what affect the PPI will have on the CPI. After looking
at the following chart, there are lots of nervous nellies out there, sources say.
DATE PPI CORE DATE CPI CORE 10/90....+1.00....+.20 10/90....+.70....+.30 09/90....+1.30....+.50
09/90....+.70....+.40 08/90....+1.10....+.30 08/90....+.80....+.50 01/90....+1.90....+.20 01/90....+.90....+.50
In the event of a strong CPI report, market strategists say the equity market's reaction will dictate the performance
of the Treasury market. Unlike Friday's PPI/stock influence, treasuries will only benefit from a flight-to-safety bid if the
DJIA trades off at least 300 points. Stock losses inside this mark would cause Treasuries to deteriorate further. They
may even take out Friday's post-PPI high yields.
But one senior market strategist contends that the levels reached after Friday's appalling PPI will be significant
supports. "In the face of disaster, the market turned around due to tumbling stocks and held", he said. The high yields
set on Friday were 5.93% on 2s, 6.126% on 5s, 6.20% on 10s and 6.366% on 30s.
But others question how long the market can maintain this safe-haven bid. By the same token, some credit market
players are wondering if the Fed will "dare" to raise rates with equity prices under such pressure.
Going forward, various shops say the probability of a Fed hike on Nov 16 are increasing but the odds are still
slightly below 50%. Variables that are key to establishing a "Fed call" for the next meeting include tomorrow's CPI
report, next Thursday's employment cost index, and the hourly earnings component in the Oct Employment report due
out Nov 5. Until then, "a staggering stock market and inflation fears will play tug-of-war with Treasuries" one market
veteran said.
On another topic, corporate spreads have widened out a bit since early last week. But they are still attractive,
comparatively speaking, sources say. For example, the global Associates Corp 2008 issue is currently +116. That
issue sold at +145 around the time of the Asian/Russian debacle in the fall of 1998. But at the beginning of 1998, a
similar issue would have traded at +65, sources say.
Mortgage-backed security strategists says U.S. mortgages may be fairly valued right now, but still recommend being
overweighted in this sector. The current coupon spread of +147 over UST 10Y is still much wider than the +89-116
range that prevailed for 2 years prior to the August 1998 Russia crisis.
Update on U.S. Budget: Thursday, Oct 21 is the day the temporary budget authority ends. There will have to be
another continuing budget resolution to keep the government open unless all budget bills pass prior to the expiration.
The budget scorecard so far is as follows: of 13 spending bills, five passed, two were vetoed, three are awaiting
Presidential signature. Three others, plus one revised vetoed bill, are awaiting a congressional conference to reconcile
differences between House and Senate versions.
Could there be another government shutdown? --Rob Ramos, Joe Plocek, Kim Rellahan contributed.
NOTE: Talk From the Trenches is a daily compendium of chatter from Treasury trading rooms offered as a gauge
of the mood in the financial markets. It is not hard, verified news.
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