To: John Pitera who wrote (2467 ) 6/28/2000 12:55:00 AM From: John Pitera Read Replies (2) | Respond to
Macro highlights...Mexican Peso weakening even with Rate Hike in Mexico, hey everyone is just going to keep raising rates for every it seems lately. Not a good day for the Mexican peso, which weakened by more than 1.2%, closing at its highest (peso weaker) against the dollar since February of 1999. Of interest, peso weakness came in the face of a central bank tightening, as the Bank of Mexico hiked its monetary short (the amount of money it withholds from the money market to effectively push up interest rates) to 230 mln pesos from 200 mln pesos...more we would still prefer to play from the short side. Set stops over 98-03 or, in the event that breaks, over 98-13 for a return to and test of the 97-08/07 area leading to the 96-26 area. Gains past 98-13 abort this negative view.--------The tug of war between the BOJ and ministry of finance looks set to continue. Last night finance minister Miyazawa said he had not asked the bank to intervene as yet but noted that the yen had strengthened towards previous levels of intervention. In the event the BOJ does raise rates soon, as they continue to hint, there is little doubt that a further period of yen strengthening towards 100.00 will follow. That said, with deflation lingering just below the surface, the combination of a sharply weaker yen and higher rates would no doubt bring about more conspicuous deflationary forces at a later date and that would in turn lead to an eventual yen weakening----------5.25% 10 currently at 26.2 from 25.4 on the close Monday. Meanwhile, the German federal government has announced that it will top up its 5.25% 10 by euro 10 bln at next week's auction. Given a paucity of front end supply near term along with the expectation that rates are on hold until September the 2002 the short end should remain relatively well anchored down. By contrast, the back end is likely to remain at risk of supply and inflation concerns. The curve is thus at risk of steepening. A closing spread above +38 would be needed to end the major series of falling tops since the mid Jan highs of +130 signalling a correction of that major flattening move.--------the yen has been somewhat hampered by rumors of an imminent downgrade to Japan?s sovereign credit rating. Such rumors have become a bit more specific, with Moody?s Investors Service reported to be near the completion of a move that began in February when it placed the country?s Aa1 rating on review for possible downgrade. Moody?s is concerned about the impact of continued fiscal stimulus packages, which have pushed the government?s debt burden to roughly 130% of GDP. Such speculation drew a harsh response from FinMin Miyazawa, whose LDP party is largely responsible for the pork-barrel spending policies. Of course, the BoJ may not be helping matters with its inclination for an end to the zero-rate policy . Getting back to reality however, a decision to downgrade Japan is likely to come under intense scrutiny when considering it is the world?s biggest creditor nation, with about Y1,300 tln in private savings .-------- longer than 2025 have considerable supply ($140 bln) but relatively low coupon rates which the Treasury has chosen to exclude to date. The size is expected to hold to the $2 bln of the last three reverse auctions to leave a cumulative $15 bln total. Over the rest of the calendar year the sizes will either decline or the twice a month buyback frequency decline if the Treasury holds to its $30 bln estimate. -------as the front of the curve has respected the likelihood of a resumption of the tightening cycle in August. However, accounts looking for more signs of a slowing in the economy may want to consider a steepening play in this spread. Another 25 bp rate hike is largely priced in, while even when assuming a more aggressive 50 bp rate hike, the spread only looks about 5 or 6 bp too steep. In other words, flattening risks are somewhat limited, while the spread may also get a near-term boost from unwinds related to Wednesday?s 2-year note auction. Seasonal patterns also show that the 2s tend to outperform the belly through the month of July.-----Consumer confidence fell to 138.8 in June after jumping to tie the record high of 144.7 in May (revised from 144.4). The decline is a bit larger than the market expected and came from sizeable declines in both components. The current conditions index which fell from a record 183.6 to 180.2. The more heavily weighted expectations component fell to 111.2 from 118.7. The decline suggests some moderation in spending but remember, May was an all time high.------- 1.6172 high of the corrective move to 1.5901 as players take note of prospective inflation and interest rate risks . This morning?s UK release of the institute of chartered surveyors report showing a reduced balance reporting higher house prices in the three months to May made a contrast with the 4 bps hike to 4.29% seen in this morning?s ECB repo. However, in the bigger picture it remains far from clear whether UK interest rates have peaked and this would be consistent with the impression that Sterling?s modest decline against the euro is little more than a pullback ...-------EU president Prodi who recently warned the government to be prepared to counteract potential inflationary pressures with tighter fiscal policy. Bundesbank members have been more forthright suggesting Greece will not be able to maintain long term price stability --------watches that measure closely given its accuracy over recent years as the Fed has become more "transparent" in its policy direction. Greenspan typically provides the market with some guidance as to what to expect . That was behind the expectation for 50 bp at the last meeting which proved correct. No comment from the Fed Chairman as the economy softened and the market began slicing down the odds of a follow-up tightening suggests on-hold policy. There is far more rationale as well. ---------
