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

To: Les H who wrote (26382)	9/20/1999 6:11:00 PM
From: Les H	Read Replies (1) \| Respond to of 99985

TALK FROM TRENCHES: WAITING FOR BOJ; WHAT WILL JAPAN OFFER? By Isobel Kennedy NEW YORK (MktNews) - U.S. Treasuries are lower across the curve but turnover is extremely light. Believe it or not, the only thing anyone is talking about is Tuesday's Bank of Japan monetary policy meeting. Given recent dollar weakness and yen strength, there's lots of chatter that Japan will ease monetary policy as part of an agreement to get the U.S.A. to intervene with them to defend the dollar. Sources are discussing what Japan might offer in return for getting the U.S. involved in intervention. With Japan's official discount rate at a meager 0.5%, how much more ease can be instituted? Some analysts suggest the BOJ might consider adding to the already staggering money market surplus through unsterilized foreign exchange intervention or targeting lower longer-term rates by buying specific maturities along the curve in order to hold down all financing costs, not just short-term rates. Both possibilities accomplish the same thing -- monetary ease. But Japan's officials are reportedly scared of too much stimulus because it could spark inflation. Who are they kidding, anyway? An economy in the doldrums needs stimulus and inflation. Weren't they talking about setting inflation targets, in hopes of creating an inflation psychology, a few months ago? And even if the red flags about inflation were raised, it's possible the Japanese consumer won't fall for a new Tokyo Tease. The real issue here is the old "pushing on a string" question from Economics 101: policy officials must ask how individuals might respond to the stimulus. After all, it's buying that ultimately boosts an economy -- especially so in the U.S. and Japan, where consumption accounts for about 60% of GDP. So far, it appears that the response is unfathomable by Western standards -- more savings! Maybe that is why Japanese stocks are rising. Stock gains, by the way, are not counted in the definition of savings! Tuesday's U.S. Trade figures are gaining lots of market focus especially due to the implication for $U.S. denominated assets. The June trade balance (not seasonally adjusted) with Japan was -$6.3b and could widen to close to -$7b in July. In both 1997 and 1998, the trade gap with Japan widened by $1b in July. Bi-lateral trade estimates are made by only a handful of firms, however. For 2Q, the U.S. current account balance was -3.6% of GDP, close to prior records held by Denmark -5.3% in 1986; U.K. -4.6% in 1989; Canada -4.2% in 1981; and the U.S. again at -3.5% in 1987. The usual policy remedy for this gap is sub-par growth for an extended period. If we could only slow our growth and export that to Japan! The trade figures, sources say, may be a "lose-lose" situation for U.S. Treasuries. If the trade gap widens, the dollar would surely get hit and weigh on the market. If the gap narrows, GDP estimates would be revised up and the prospects for stronger growth would imply higher interest rates. Fixed income market traders are still keeping their eyes on oil. J.P. Morgan Securities forecasts that it could reach $30 barrel if the U.S. winter weather is severe. And their analysts say that OPEC shows no sign of raising their production ceiling at the Sept 22 meeting. An article in Monday's Wall Street Journal (Europe) says OPEC will not change quotas because they are like "deer frozen in the headlights of an oncoming oil truck", suggesting they lack any automatic quota triggering mechanisms to react to changes in oil demand. With winter in the Northern Hemisphere quickly approaching and global recovery underway, this could further pressure oil. On the other hand, the article infers that OPEC wants the price of oil to stay close to $20 a barrel because anything higher would encourage competition from oil fields with higher production costs. Back to the Treasury market. Monday's light volume has been attributed to the Jewish holiday of Yom Kippur. And hopefully, players will return well rested for the results of the BOJ meeting. Also expect lots of rhetoric on the global front as the International Monetary Fund and World Bank meetings kick off Tuesday in Washington, D.C. And players who are in the trenches Monday should be grateful they could talk about the BOJ and not the U.S. Fed for just one day. It will all be back to normal tomorrow. Fed speakers on tap for this week are McDonough, Ferguson, Stern, Poole, Kelley, and Parry. --Robert Ramos 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. ANALYSIS: THREE REASONS US TRADE DEFICIT LIKELY TO REMAIN WIDE By Joseph Plocek WASHINGTON (MktNews) - The U.S. trade deficit is expected to have improved slightly in July, from a record $24.6 billion deficit in June, though the yearly total remains on track to a new high and available data go against the expectation for improvement. The median estimate in a Market News International poll of economists is for a $23.8 billion July monthly deficit,with the range from -$21.5 billion to -$25.5 billion. A narrowing in the trade deficit is expected to help steady the U.S. dollar and to show that the burden of global growth is shifting slightly away from the United States. However, the risk is clearly for a wider deficit than expected. In four of the last five July readings, and in three of the last four calendar months this year analysts have underestimated the trade deficit by an average of $1.7 billion. This puts the odds of a big underestimate at 75% to 80%. Expected higher exports may not materialize. Movement should not come from big ticket items. For example, Boeing Co. reported foreign deliveries were just 13 aircraft in July, versus 25 in June and 23 in August. Imports should remain strong on the back of good demand and rising oil prices. July's sharp rise in oil prices could add as much as $1.0 billion to the monthly import bill alone, some economists say. Ports are reporting record summer volume, and customs duties were $1.725 billion in July, up from $1.599 billion in June. Special attention will be paid to the bilateral deficit with Japan, where non-seasonally adjusted flows are reported. The NSA trade balance with Japan was -$6.3 billion in June and could widen to -$6.8 or -$7 billion in July. In both 1997 and 1998, the trade gap with Japan widened by $1 billion in July. Bilateral trade estimates are made by only a handful of firms, so this fact should be taken with caution.