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

To: pater tenebrarum who wrote (23138)	8/16/1999 5:25:00 PM
From: Les H	Read Replies (3) \| Respond to of 99985

TALK FROM THE TRENCHES: US TSY BOND UP AS MKT BRACES FOR CPI By Isobel Kennedy NEW YORK (MktNews) - After dog paddling much of Monday morning, U.S. Treasuries are moving higher led by the back end. The 2/30Y curve has flattened to +37 from +41 as some buying in the cash long bond emerges in very, very thin volume. Still, Friday's producer price index euphoria has faded and a Monday morning reality has set in as traders brace for Tuesday's dreaded July consumer price index. Overall the tone remains largely constructive but there are still some lingering bears out there, sources say. Because of the tame PPI report, many are changing their view about an August 24, FOMC rate increase. Those who thought a rate hike was a sure thing are now having second thoughts. Some analysts think the Fed could put off a move until the Oct 5 FOMC meeting. And others who saw the likelihood of 50 bps in rate hikes before year-end may now believe that just 25 bps may be enough whether it comes now or later. The market doubters out there, however, think that the Street is using the market friendly PPI to "talk the market up." Some sources say the dealer community needs good news to draw in retail in order to redistribute last week's refunding overhang. Some bearish sources are playing down the favorable PPI preferring to nervously eye recent gains in oil and copper prices. Of course it is understandable for the street to talk up their positions. They are still looking at hefty profits from last week's refunding and they would like to keep it that way. They have been long and right instead of long and wrong for the first time in a while. Interestingly, this is the first time in over a year that fives and bonds have posted profits following the refunding! A difference of opinion about the direction of the 2/30Y curve also exists. Some analysts suggest it should steepen ahead of Tuesday's CPI release. On the other hand some players, who remain mildly bullish, think the 2/30Y curve should flatten. They reason that Wednesday's two-year supply announcement and ongoing Fed jitters should keep pressure on the front end. What is the data risk for Tuesday's CPI? In the last four July releases, analysts were right on the money in both overall and core CPI. But in the prior three July numbers, analysts had over-estimated both core and overall CPI by an average of 0.1 point. Median estimates for tomorrow are +0.3% overall and +0.2% core. Over in the sister markets, DaimlerChrysler's $3.25 billion is the largest deal on the docket this week. It will contain a three-year floater and five and ten year fixed tranches and is expected to launch today. Agency and swap spreads have finally tightened in from last week's historic wides as real money accounts opt to buy this paper instead of U.S. Treasuries, sources say. But despite the improved market conditions, few jumbo agency deals are expected in the near term. Across the Atlantic, E-11 bond prices were lower Monday as the markets coast with a view similar to the USA...that is steady growth and low inflation. Analysts looking for a possible rate hike coming out of the U.S. expect real lagtime before any rate movement follows from the European Central Bank. European bond traders await the July German Ifo survey due Thursday. Analysts say that following the sharply improved June Ifo survey (business climate index up from 90.5 in May to 92.9 in June) players are braced for more news of economic recovery. Market News International's survey anticipates a release showing a 93.5 level. In the emerging market sector, the outlook for bonds is to the downside and volumes remain weak. Most of the news coming out of countries like Argentina and Ecuador is positive for the moment but the market is concerned about the effects of global interest rate reversal and the widening of U.S. dollar swap spreads. The yield on Brazil "C" bonds, for example, hovers around 16.93%, a level not seen since March 9, sources say. Japan's Economic Planning Agency chief Sakaiya said on Japanese television this weekend that "a sufficient amount of extra budget" is needed to sustain the weak economy. Sources say this statement obviously indicates there will be another surge in Japanese government debt. Regarding the outlook for oil prices, the Middle East Economic Survey said Monday morning that compliance with the production cuts pledged by 10 of Opec's 11 members rose to 92.8% in July from 88.6% in June. Weekend reports in the Chinese press said China would consider devaluing its currency if it developed a trade deficit. Adjusting the currency "may after all be an option if imports significantly exceed exports and push up a trade deficit." But the report also said the situation has no yet reached that point so talk of devaluation is currently roundless. Back in the USA, Saturday's Washington Post contained a portrait of Fed Governor and Vice Chair nominee Roger Ferguson. It says he talks fast and lives on a tight schedule and believes in price stability. He is also described as "a hyper-pragmatist, acutely prepared, and rarely prone to stubborn positions." Rob Ramos, Kim Rellahan, Jill Bebar contributed to this article. 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.