TALK FROM TRENCHES: JUNE PPI TAME BUT FEAR JULY; EURO BASHING
12:38 EDT 07/14
By Isobel Kennedy
NEW YORK (MktNews) - U.S. Treasuries tried to do better following the release of market friendly PPI and retail sales figures Wednesday morning. But the market faltered as sellers took advantage of the uptick.
European and Asian central banks were said to be sellers of two-year notes as was a very prominent hedge fund. The leveraged account was believed to be selling two-year notes and 30-year bond contracts vs. buying S&P stock futures in an asset allocation trade. Sources speculate the fund sold about $2 billion in cash twos and 8,000 to 10,000 bond contracts.
While most players viewed the PPI and retail sales numbers as market friendly, sources say there were not enough shorts to help an uptick. They also think the market is just plain tired.
Some are already jumping past the bullish June PPI to the July PPI. They expect the recent rise in oil to filter into the next set of data. In addition, there is still concern about tomorrow's CPI and Friday's industrial production figures.
One economist highlighted the rises in June core intermediate and crude PPI in today's data. He says these price pressures are only two to three steps back from the retail level. "The last time core intermediate accelerated as much was in 1994," he says, "when the Fed embarked on a 300 BP tightening cycle".
On retail sales, another economist says this is the bottom line: "2Q core sales rose by around 8% annualized, a clear slowing from the frantic 1Q pace, but still too fast for the Fed. Consumer demand growth is still easily outstripping productivity growth."
But one economist sees a silver lining in the 1999 growth. She says about 1% of growth is attributable to Y2K due to stockpiling and last-ditch computer hardware and software fixes. So in the year 2000, U.S. GDP should slow of its own accord.
Back to oil, there has been little let up in price pressures. The American Petroleum Institute said oil stocks fell for the fourth week in a row, adding to the concerns about tight supply. The U.S. Energy Information Agency says while Kuwait is the only Opec member pumping oil at below its quota, if production cuts for the other members hold, the price of oil should not fall over the rest of 1999.
Over in Euroland, the European Central Bank said in its monthly report released Tuesday the value of the euro could benefit from expectations of stronger Euroland growth coupled with price stability. But they used very cautious language, sources say, and did not repeat previous statements that the currency had room to appreciate. Analysts say the problem with the euro really rests with what is happening in the U.S. -- A very pro-growth Fed and that translates into a consistently strong U.S. economy. But Europe continues to lag the U.S. performance even though a recovery is underway. This is what is keeping the euro under pressure, they say.
Of course, "bad mouthing" the euro is not helping either! German "Wise Man" Peffekoven tells Market News that he sees continued euro weakness and says European structural reforms are necessary before a rebound in the euro can be expected. The wise man sees little chance that the euro's continuing slide in international currency markets will come to a quick end. Horst Siebert, economic advisor to the German government, pressured the euro-dollar by saying it could fall to 90 U.S. cents!
Other international situations on the radar screen: Will China devalue the yuan? Their decision not to follow devaluations in the rest of Asia during the global crisis leaves them less competitive. China's first half 1999 trade surplus fell almost 65%. Watch growing tensions between Taiwan and China as the former starts balking again about the "One China" policy.
Lastly, adding to today's weakness in U.S. Treasuries were sellers unwinding safe haven plays. Much earlier Wednesday, there were reports that the IMF might offer Argentina additional aid on top of the $2.8 billion contingency credit line that is already in place. A $1.7 billion of the existing line can be tapped now, an IMF source says. --contributors: Joe Plocek, Robert Ramos, Kim Rellahan
US DATA PREVIEW: US JUNE CPI EXPECTED MILD, BUT WATCH FOR JULY
15:47 EDT 07/14 --Median June CPI Estimate Is +0.1% Overall, +0.2% Core
By Joseph Plocek
WASHINGTON (MktNews) - The U.S. June Consumer Price Index is expected to post a moderate reading but analysts say that higher oil prices could boost inflation in July.
The median estimate in a Market News International poll of economists is for a 0.1% gain in overall CPI and a 0.2% gain in the core component excluding energy and food.
Moreover, the data risk for June CPI is favorable. Analysts in the Market News International poll have overestimated the overall CPI in five of the last seven June monthly readings, by an average of 0.1 point. The report is to be issued at 8:30 a.m. EDT Thursday.
The main factors behind the expectation for a moderate June CPI are lower gasoline prices and a large seasonal adjustment hurdle for the month. Indeed, Wednesday the June Producer Price Index posted an under-expectations 0.1% drop overall and a 0.2% drop in its core component, reflecting the same factors and taking some of the sting away from inflation expectations.
One had to go back to core intermediate and core crude PPI to find any signs of price pressures in Wednesday's company-related inflation data. Core crude PPI and core intermediate PPI were each up 0.5% in June, and a Bureau of Labor Statistics economist said the rise in each was broadening. Some private analysts said these pressures are two to three steps back from the retail level, and opinion was mixed on how to interpret the pressures. Certainly they are not expected to be felt for a number of months, if at all.
"The core (CPI) rate is expected to rise 0.2% in June, up from 0.1% in May. Our estimate assumes declines in motor vehicle prices, computer prices, and hotel rates," said Jim Glassman at Chase Securities.
One trouble spot could be airfares, which are being raised for the summer travel season, and may add as much as 0.1 point to the core CPI. Economist Joseph Abate of Lehman Brothers said, "Strong travel demand has put upward pressure on all travel-related expenses."
Other analysts agree the June CPI data will be moderate. "A strong dollar, robust productivity gains, and still tame wage rates will continue to keep the inflation threat in abeyance," said Avery Shenfeld of CIBC Oppenheimer.
But the good inflation news will not last, Shenfeld said, as OPEC attempts to cut production and maintain higher oil prices. "June's tepid CPI likely won't last right through the summer, with energy prices threatening up to a 0.2% addition to July CPI on their own," Shenfeld added. |
