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Strategies & Market Trends : MDA - Market Direction Analysis -- Ignore unavailable to you. Want to Upgrade?

To: Les H who wrote (22130)	8/6/1999 12:08:00 PM
From: Les H	Respond to of 99985

TALK FROM TRENCHES: WHY STABILITY AFTER EMPLOYMENT SELL-OFF? By Robert Ramos & Joseph Plocek NEW YORK (MktNews) - The strong July U.S. employment report "assures" a Fed tightening, sources say, but by how much and when continue to be debated. But the key question is why bond prices aren't lower? Sources say technicals -- swap and credit spread widening -- prevent the market from getting too hard hit. Yesterday, traders learned the hard way just how strong this technical bid can be. Professionals were seen setting shorts following the bearish 2Q productivity report but could get no satisfaction and were forced to cover going into the close. Traders worry that today could be a mirror image. Although the Street is looking to set more shorts to prepare for the $37 billion Treasury refunding, sources say, aggressive selling may not materialize today. Traders already are holding core short positions and yesterday's panic buying due to widening swap and credit spreads has players spooked and "respecting" that technical bid. More conviction about a Fed tightening on Aug 24 would likely pressure corporate earnings, widening out spreads and leading to additional preference for Treasuries. In contrast to a usual quiet Friday afternoon, confidence to sell may grow as the day unfolds -- if spreads stabilize, "watch out below," sources say. Off-the-run issues continue to trade cheaper vs currents, but bids are scarce, sources say. Retail does admit, however, that paper holds some value relative to currents, but generally say they have no interest in putting on new trades amid the dislocation. Even when they do buy, retail managers -- now having more conviction of a near-term Fed tightening and expecting the refunding to produce a selling concession -- will likely stick to the high liquidity of on-the-runs. Sources say a possible "turn" in the U.S. interest rate cycle is said to be the key cause in the re-widening of swap spreads. Analysts say higher rates are prompting a shift in investor preference towards receiving floating rate cash flow and paying fixed, which has led to the wider spreads. Fed funds futures traders seem to have no doubts about the Fed. As a result of hefty selling in the Aug and Sep Fed funds futures by hedge and investment funds, the Sep contract is now pricing in an 86% chance of a 25 BPs tightening at the August FOMC meeting, pit sources report. Yesterday, the odds were only 62%! Traders say an off-meeting move by the Fed is not priced into the market, as the Aug contract implies rates closer to the current 5% funds rate target. U.S. equities and the dollar are also reacting mostly negatively to possible upcoming Fed tightening. One economist explains the move in the US$ by citing "market banter that Fed tightening ... wouldn't be good for U.S. asset prices." He also warns the strong July employment data point to a strong series of economic reports ahead. But he says next week's inflation data should be benign, suggesting the market could get a breather during the distribution period for the coupons. Some fear +50 BPs could come before the August 24 FOMC meeting. If so, this would be the first such move apart from an FOMC meeting in four years. From Washington, the Fed had no comment on reports that sitting Federal Reserve Governor Roger Ferguson will be nominated as Fed Vice Chairman. His "portfolio" of community lending and Y2K concerns should "expire" next year (banker Carol Parry, nominated to the Board yesterday, should take over community banking). Ferguson is one of the more dovish governors. Ferguson has been in office since November 1997 and his term as a Fed governor expires in January 2000. Talk about the White House giving itself maximum flexibility and limiting the effectiveness of its appointees! 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.

To: Les H who wrote (22130)	8/6/1999 12:10:00 PM
From: Les H	Read Replies (2) \| Respond to of 99985

TRADERS: FED FUND FUTURES PRICE IN 87% ODDS OF AUG FED HIKE By Alyce Andres CHICAGO (MktNews) - Selling of Aug and Sep federal funds futures was heavy early Friday, with hedge funds among the most active reported sellers after the release of much stronger-than expected July U.S. payroll data. Following the morning sell-off in the Aug and Sep contracts, fed funds traders at the Chicago Board of Trade said the Sep contract is now pricing in an 87% chance of a 25-basis-point tightening at the August 24 meeting of the Federal Open Market Committee. "This payroll (report) was the kiss of death," said Wayne Citron, a local federal funds trader. July non-farm payrolls were reported rising by 310,000, well above economists' estimates. In addition, average hourly earnings, view as an inflation benchmark, were up .5%, also higher than forecast. Many traders had predicted a July payroll above 200,000 would mean an "imminent tightening," at the August 24 meeting, added Lawrence Malato, also a local pit trader. A third local market-maker said he believes the Fed is going into a tightening cycle similar to that of 1994. He pointed out back-month Eurodollar contracts also have witnessed heavy selling pressure, which is indicative of a either a Fed tightening cycle, or a severe downward correction in the U.S. equity markets. The Nov fed funds contract traded down to 94.62 after the jobs data, which prices in a 50/50 probability of another 25 basis-point tightening at the October 5 FOMC meeting, Malato added. On Thursday, amid a sharp rally in Treasury prices on worries over widening credit spreads, the Sep contract had priced in only a 62% probability of a 25-basis-point hike in rates at the August meeting. Traders say an off-meeting move by the Fed is not assumed by current fed funds prices. The Aug contract is last trading at 94.945 and should settle near 94.93 if the Fed raises rates in August, they said.