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

To: pater tenebrarum who wrote (23531)	8/20/1999 6:35:00 PM
From: Les H	Read Replies (2) \| Respond to of 99985

TALK FROM THE TRENCHES: FOMC EVERYWHERE; LATAM TROUBLE By Isobel Kennedy NEW YORK (MktNews) - U.S. Treasuries are better bid across the board Friday but they remain locked in a very narrow range and volume is very dismal. But one veteran says "that is about all you can expect on a summer Friday with an FOMC meeting next week." While economists keep up the debate over Fed hike/no hike, bias change/no bias change and discount rate change/no discount rate change market players expect the market to hold in a tight range until the FOMC. And most look for the positive tone to continue. There are calls for a relief rally even if the Fed hikes rates 25 bps. And there are calls for a major rally beginning after Labor Day. Of course not everyone is bullish. One noted bear says economic recovery in Japan is bullish for commodity prices and bearish for bonds. He says August figures show a still-strong U.S. economy. He also sees the weak dollar and higher oil prices as potentially inflationary. But back to the Fed. Another related event next week that might spark some interest is the Thursday release of the FOMC minutes from June 29-30 meeting when the Fed raised rates. Even though the results of the vote are known, the Street may get some insight into how they arrived at their decision. Don't look for much "Fedspeak" for guidance next week. Fed officials will be in a "blackout" period due to the FOMC meeting. And when the Jackson Hole Kansas City Fed conference takes place August 26-28, reporters will be in attendance but they'll be hard pressed to get interviews with officials until a week after the FOMC meeting. Uncle Al, of course, will be there. The Q2 GDP revision is also due out next week. There has been lots of talk about the weak dollar subtracting from U.S. growth. But keep in mind the effects from this will not show up until September or October, so we'll have to wait for the Q3 and Q4 GDP numbers. Luckily, traders will not have to bid the two-year auction until after the results of the FOMC meeting results are out. Sources say traders have had a bit of trouble setting up shorts for this one. There has evidently been a real buyer out there who appears just as soon as market players think the shark is gone and it is safe to go back into the market. This same buyer is said to have been buying across the curve ever since Aug 13. And even though it has been a low volume period, the account has been steadily picking up paper in small quantities. The Fed conducted another coupon pass today this time covering a wide area of 2005 out to 2021. Will they be buying more coupons outright ahead of the Labor Day holiday? So far in August, they have purchased $3.2 billion outright vs. a total of $3.6 billion in August 1998. So the buying has been a little light thus far, analysts say. Traders are also watching Latin America now as Ecuador decides what to do about a $94 million Brady bond coupon payment due at the end of August. They evidently have the money to pay the coupon but may try and play a few games with the IMF by threatening default. If they don't make the payment, it would be a first for a Brady bond. By the way, without going into all the bells and whistles associated with this type of debt, the principal is secured with U.S. Treasuries but not the coupon, sources say. Speaking of emerging markets, one trade association says Q2 volume in those markets was up 19% to a total of $1.16 trillion in the first half. But that is less than half the $2.62 trillion traded in the first half of 1998. Japanese government bonds did better Friday on the belief that the stronger yen will drag on Japan's economy and lessen any chance of rate rises. And one strategist is looking for more gains in the Nikkei as it nears a cross of its 5- and 30-day moving averages. He notes these signals are watched by "black box" traders that buy (or sell) in bulk when price momentum appears to be turning. A rally in the Nikkei is assumed good for yen and bad for the dollar. Regarding the recent yen strength, senior LDP official Ohara reportedly said the yen's rise to Y110 would be a problem and a level at which the BOJ should intervene without sterilizing the action by issuing government bonds. More Tokyo Tease? Yesterday, a Kyodo News report cited a Ministry of Finance official as saying the BOJ will take no action on dollar-yen until after the Federal Open Market Committee meeting next Tuesday, and that if the Fed did raise its interest rates more than the expected 25 basis points, it could be a good opportunity to intervene. However, reports later quoted Vice Finance Minister for International Affairs Haruhiko Kuroda as saying U.S. interest-rate policy "has nothing to do with our foreign exchange policy." News that the world's largest banking group will be created with the alliance of Dai-Ichi Kangyo Bank, Fuji Bank and the Industrial Bank of Japan next autumn has people wondering if the net result will be just one, very big weak bank. Total assets would be $1.2 trillion versus Deutsche Bank at $868 billion and UBS Group at $687 billion. By the way, Fitch affirmed the ratings on all three banks this morning. Suzanne Cosgrove and Joe Plocek 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.