TALK FROM THE TRENCHES: MKT GRASPS AT STRAWS
By Isobel Kennedy
New York <Mkt News> U.S. Treasuries are barely holding on to modest gains on the day compared to Wednesday 3:00PM levels. However, participants seem to be grasping at straws of any positive nature, while fearing that the market could loose its footing at any moment, sources say.
Early gains in the front end came from stock prices that plunged on warnings from IBM that its Q4 sales could slow because most companies had already front-loaded their business into earlier quarters because of Y2K bug fears.
The front end got a further boost when the European Central Bank did not raise rates Thursday morning. Some of those gains later evaporated because of the sharp prices paid component in the Philadelphia Fed Index.
The longer end of the curve got its much anticpated boost mid- to late-morning due to the pricing of a $5 billion Ford Motor Credit 10Y global deal. The strength was due to rate-lock and swap-related buying, sources say.
But in reality, the market is just marking time until it gets some direction from next week's economic releases. Lower home sales, a slippage in consumer confidence, and maybe a -1% print for durable goods orders could give the market support early in the week, sources say. But Thursday's 3Q GDP estimates at 4.5% to 5%, and the employment cost index estimates at about +0.9%, are seen as market negatives.
As far as today's Philly Fed index is concerned, attention was obviously focused on the prices paid component which rose to 22.5 from 11.8, and the prices received component that rose to 3.7 from -1.6. These statistics are from the current conditions index. But some sources said take a look at the heads-up contained in the 6-month outlook survey. Those numbers look even worse, with prices paid at 43.7 vs 23.0 and prices received at 12.0 vs 3.7. Looking at these numbers, some Treasury players continue to express disappointment that the Fed did not just go ahead and raise rates at this month's FOMC meeting. First of all, it would have dispelled fears that the Fed was behind the curve, one player said. But another said the reason was deeper than that. By not raising rates, Greenspan dealt a final blow to a Treasury market that was "already on the ropes." Kicking a market that was already down (and for over one year now!) was clearly the implication.
On the other hand, some say this week's tame consumer price index saved face for the Fed and dilutes any criticism that they might be behind the curve.
Fed funds futures traders say November Fed fund futures are pricing in approximately a 64% probability of a 25 basis point tightening at the Nov. 16 FOMC. This is up from the 50% area earlier in the week. Back month contracts are all up sharply today. Traders say the April contract is pricing in two 25 basis point tightenings by the end of Q1 2000.
Interestingly, Fed Board economists, in paper titled "What's Happened to the Phillips Curve?" (the curve that maintains lower unemployment is correlated with higher inflation) suggest the recently shaky relationship can be restored by using Capacity Utilization or profit margins. Maybe the Street should watch those variables!
The ECB did not raise rates today. While some expect them to wait until next year to do so, a growing number expect a hike this year given recent strong economic data and hawkish comments by a number of ECB council members. The central bank meets again on November 4.
By the way, the Bank of England meets at that same time too. Tomorrow, the U.K.'s Q3 GDP growth will be reported. The Market News survey indicates a strong +0.8%, or annual +3.2%. Analysts say this is way above the trend line accepted growth of +2.25%. The growth rate could be the fastest rate in two years. A big number could heighten fears of a rate rise next month, sources say.
Thursday, Fannie Mae announced a calendar of benchmark offerings for the year 2000. It includes 5 each of 5 years (Feb, May, July, Sep, Dec) and 10 years (Jan, Apr, June, Aug, Nov); two each of 7 years (Mar and Oct) and 30 years (May and Nov); and four issues of 2 years or 3 year (Jan, April, Aug, Oct). Fannie will try to set amounts at $6-8 billion for notes and $4-6 billion for bonds, sometimes using Dutch auction re-opening.
Overnight there were reports of a Japanese Trust bank selling off-the-run bonds and moving the proceeds into Fannie Mae 5Y paper. Keep in mind, Japanese based accounts are required to mark to market pure vanilla Treasury holdings but not agency paper. No wonder they like agency paper!
There were different opinions about the condition of last night's Japanese 10Y auction but the market moved rapidly downward following the release of the auction results. Analysts say the downward pressure came from hedge-selling related to the weak demand and foreign selling of futures contracts. Players say it's related to the ongoing supply/demand imbalance. Some major institutional investors seem to be holding off on JGB purchases amid expectations of an economic recovery. Concern that the upcoming supplementary budget will provide a further boost to the recovery is also a lingering problem.
Comments by former minister of international trade and industry, Kaoru Yosano, about the next stimulus package did not help bond yields, either. He reportedly said that the next stimulus package will be between 12 trillion to 14 trillion yen, slightly higher than previous estimates of between 11 trillion and 13 trillion-yen.
China's Premier, Zhu Rongji, on Wednesday ruled out the possibility that China would devalue its currency, according to Kyodo News. In a meeting with a Japanese business delegation Zhu reportedly said that recent yen strength made it "less necessary" for China to devalue. Those comments echo similar comments made yesterday by China's central bank head Xie Ping. --Kim Rellahan 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.
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