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

To: Les H who wrote (23910)	8/26/1999 2:35:00 PM
From: Les H	Read Replies (1) \| Respond to of 99985

SLOWDOWN OR OVERHEATING??ASK THE CONSUMER Bonds are weaker as the headline GDP number masked underlying strength in the economy. Thirty-year bonds are down 13/32, yield 5.88%. Ten-year notes are down 11/32, yield 5.75%. Two-year notes are down 4/32, yield 5.57%. Second quarter GDP was revised to 1.8% from an originally reported 2.3%. The factors pushing it lower were a larger trade deficit and a decline in inventories. The trade deficit widened by $14 billion and subtracted .6% from the number, due to strong imports. Inventories subtracted more than $7 billion from GDP. The consumer remains a dominant factor. Consumer spending rose 4.6% vs. an originally reported 4.0%. Domestic final sales rose 4.3% vs. 3.9%. The price deflator was revised lower to 1.5%. Preliminary third quarter GDP projections stand at 3.8%. Bonds traded lower as the data depicts a continuing strong domestic economy. Initial jobless claims fell 5,000 to 283,000. Expectations were for a small rise. The labor market remains tight. Nothing new here. Bad news for emerging market debt. Ecuador will miss its interest payment on Monday. This will be the first default on a Brady bond issue. Ecuador has said they are working on rescheduling their Brady bond debt for new uncollateralized securities. Friday will bring data on personal income and the revision to the University of Michigan?s consumer confidence index. Have a great day. bondsonline.com

To: Les H who wrote (23910)	8/26/1999 2:36:00 PM
From: Les H	Respond to of 99985

TALK FROM THE TRENCHES: IT NEVER RALLIES ON A RAINY DAY 13:35 EDT 08/26 By Isobel Kennedy NEW YORK (MktNews) - Would the U.S. Treasury market have extended this week's gains had it not been for a torrential rain storm in New York City? After all, they say the market never rallies on a rainy day. U.S. Treasuries fell lower across the curve Thursday as a raft of profit-taking came from many of those players who were able to make it to work. Many others gave up waiting for subways and commuter trains or are still sitting in traffic on clogged highways. Despite the downpour, it is natural for the market to consolidate after this week's impressive gains, sources say. The market was technically overbought and due for a pullback. In addition, many the shorts that give the market a base were flushed out yesterday. Much of today's selling came from speculative accounts that are antsy to book profits after this week's run-up. Market rumor had it that a big hedge fund was dumping some twos. But others say that some of the aggressive selling in cash twos was caused by unwinds of failed steepeners. Wednesday, a few large players were seen counter trading the market by selling 5s and buying 2s. But a few factors are still in the market's favor. Should the market fall further, retail accounts that missed the boat are likely to look for a chance to get in. Next week's month-end index fund buying is likely to be supportive as well. Since there was a refunding of 5s, 10s and bonds in August, the extensions are expected to be longer than the average monthly increase, sources say. Safe-haven alert is also a market plus. News that Ecuador will miss this Monday's $96 million coupon payment and try to restructure $6 billion in Brady debt is unsettling, players say. The size of a possible default is not the issue, they say, it is just not a good precedent to set. Ecuador would be the only country to miss a payment on Brady debt. And some very loose and unsubstantiated talk that a major hedge fund was in trouble with frozen assets is also a concern. Of course, rumors of trouble at this same fund have been ongoing for several months now and nothing concrete ever shows up. But maybe as they say, where there's smoke, there's fire. Going forward, the ongoing weak dollar is another worry for players in the U.S. asset markets. In fact, concerns about the strength of the Japanese yen even prompted rumors that there would be an emergency G-7 or G-3 meeting. Since this seems unlikely, players were probably just confusing this with a Manila Framework meeting that is scheduled for this weekend in Singapore. This group was set up during the Asian crisis. Officials from Japan, Asia and possibly the U.S. will attend and you know the yen will be a key topic. In terms of other clouds on the horizon, the upcoming Jackson Hole meeting is key. The meeting starts today but we will not hear from Big Al until tomorrow around 10:00 EDT. Of course, tape bombs could appear in many different forms after that. But after the meeting, Fedspeak will likely come only from the underlings because the chairman will be on vacation in the Western USA. Looking ahead to next week, some sources say they will exercise caution ahead of the employment report on Sep 3. Any strength in the report will likely spark renewed talk of another tightening before year end. Some strategists speculate such a report could send the long bond yield skyrocketing back to 6.25%, the August high yield. U.S. Treasury players are also looking for some decent rate-lock selling to emerge soon. Despite today's downtick, rates are still attractive enough for corporations to lock in current rates as they plan to flood the market with new issues prior to the onset Y2K problems in fourth quarter. Over in Japan, it never just rains it pours. Moody's said yesterday that many regional banks will be hurt by large credit losses arising from their class II loans. And there were reports that three regional banks plan to ask the government to pump a total of Y200 billion into their depleted capital bases. This morning, Japan said it will issue 30Y bonds for the first time in history on Sep 2. It's another step towards becoming the largest borrower in the world, a title the USA is glad to finally give up. But after this week's poor 10Y sale and another 6Y auction on Aug 31, can Japanese investors absorb it all? And there is more bad new. Yesterday, the post office savings system said there might be a Y31 billion outflow of deposits over the next three years. And even though the Ministry of Finance denied there would be selling of JGBs because of this, the most market players are not so sure. And don't forget Tuesday's dose of bad news that the major Japanese holders of JGBs will not be lending securities over year end because they fear Y2K computer glitches. Back in New York City, the rain has finally stopped but many of the trains are still not running. But more importantly, what became of that senior foreign exchange trader who was sitting at his desk in his sweater and underwear while he waited for his shirt and pants to dry? --Rob Ramos and 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.