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

To: pater tenebrarum who wrote (13472)	5/10/1999 9:31:00 PM
From: Giordano Bruno	Read Replies (1) \| Respond to of 99985

The bottom line is that if the Fed's objective is to cool the red-hot economy without having to raise rates, bond yields probably have to move above 6%. So far this year, the long bond yield has averaged 5.43%, still below 1998's average of just under 5.6%. Yields would have to average about 6% through the balance of the year to bring the full-year 1999 level 25 basis points above last year's mean (which would be the minimum necessary to slow the economy). Recent trends suggest this may well be in train. No Friend in this Trend By Dr. Sherry Cooper, Chief Economist, Nesbitt Burns May 10th Edition ------------------------------------------------------------------------ The market's reaction to Friday's employment report was yet another indication of the underlying negative sentiment prevailing in the Treasury market. In addition to the recovery in the emerging economies and rising commodity prices, investor concerns were further aggravated by what were perceived to be hawkish comments by Federal Reserve Chairman Alan Greenspan on Thursday—rate hike fears are now clearly back on the table. By week's end, 30-year yields were trading above 5.8%, the highest since last June. Treasuries ignored what would have normally been positive developments such as the downtick in crude oil prices and the $10 per ounce slide in gold prices on news that the Bank of England will sell half of its bullion reserves. Although the Fed Chief 's comments were an even-handed assessment of the U.S. economy, the bond market chose to focus on the last third of the speech. It was here that Greenspan discussed what he sees as the excesses of the U.S. economy, particularly the extreme tightness in the labor market. For in stance, regarding the low unemployment rate, Greenspan suggested "We cannot judge with precision how far this level can de- cline without sparking upward pressures on wages and prices. Accelerating productivity may have appeared to break the link be-5.4 tween labor market conditions and wage gains in recent years, but it cannot have changed the law of supply and demand." In retrospect, April 16 th may be seen as a key turning point for the bond market, when investors stopped reacting positively to benign inflation data and began focussing on growth numbers. On that day, both the March retail sales and consumer price reports were released—the 30-year Treasury yield rose 5 basis points despite the third consecutive 0.1% rise in core CPI, as retail sales came in at +0.2% with a strong upward revision to February. The bond market's inability to push 30-year yields below the 5½% threshold in the wake of the inflation-friendly employment cost report on April 29 th was yet another indication of the shift in investor sentiment. This was echoed in the 14 basis point run-up after the Q1 GDP report showed extremely strong growth in tandem with a still-low price deflator. The bottom line is that if the Fed's objective is to cool the red-hot economy without having to raise rates, bond yields probably have to move above 6%. So far this year, the long bond yield has averaged 5.43%, still below 1998's average of just under 5.6%. Yields would have to average about 6% through the balance of the year to bring the full-year 1999 level 25 basis points above last year's mean (which would be the minimum necessary to slow the economy). Recent trends suggest this may well be in train. The market's bearish tone washed right over the April employment report, which contained plenty of positive news for bonds. The 234,000 increase in nonfarm payrolls was only slightly above the market consensus, whereas there was the very real risk of a blowout number folowing March's tiny 7,000 increase. The average monthly employment gain in the past year has now moderated to 223,000 from over 280,000 in 1997, although it will need to slow much further before the jobless rate stops falling. Factory payrolls continued to slide, and the 29,000 decline was in line with the average drop over the past year, casting at least some doubt on the strength of the turnaround in manufacturing. Goods-producing industries in general were soft in the month, as construction managed only a small gain after a sharp drop in March. The biggest positive surprise in the employment figures was the modest 0.2% increase in average hourly earnings. Year-over-year earnings slowed to 3.2% in April from 3.6% in the prior month and the cycle high of 4.4% a year ago. This tame result added weight to the view that wage pressures are actually easing even as the labor market tightens to an extent not seen in thirty years. The quit rate—which measures the share of the unem-ployed who left their job volun-tarily— rose to 13.9% in April, the highest rate in nine years. This suggests that workers are becoming sufficiently confident in the strength of employment conditions. Mr. Greenspan has often referred to this indicator as a gauge of potential wage pressures. However, both the latest readings on average hourly earnings and the first-quarter employment cost index suggest that wages haven't budged yet. Beyond the favorable news on the wage front, another big positive fundamental factor for the Treasury market still in place is Washington's fiscal position. The Congressional Budget Office reaffirmed its forecast for this year's budget surplus of $111 billion, and even noted that the projection may be revised upward. This represents over 1% of GDP and is nearly double last year 's surplus of $69 billion. However, the reduction in the supply of government bonds due to the rising surplus is being swamped by the swelling tide of corporate issuance. Treasurers are rushing to lock in rates that are still only a shade above the average level since the start of 1998. Also, there are growing concerns that the best of the fiscal news is past, as the costs of the Kosovo conflict mount and weapon systems are replenished. Of greater concern for the fixed-income market is the prospect that the U.S. economy will not cool before the Asian economies are fully back on track, putting sharp upward pressure on commodity markets. While oil prices have backed off from the $19/ barrel level, the rapid runup in April will jolt this week's consumer and producer price data. The PPI is expected to rise roughly 0.6%, lifting the year-over- year increase to just over 1%. While this is still quite subdued by past standards, it represents a big turnaround from the negative readings through much of 1998 that spawned a flurry of deflation chatter. Excluding food and energy, producer prices are rising closer to a 2% pace. A similar story is expected in this Friday's CPI report, where a 0.5% increase is anticipated, pushing the year-over- year trend to 2% for the first time since October 1997. While still moderate, bond yields were firmly above 6% the last time inflation was that high.

To: pater tenebrarum who wrote (13472)	5/10/1999 10:40:00 PM
From: wmwmw	Read Replies (1) \| Respond to of 99985

1. Low crude price and low price in other imports due to weakness in oversea were minor causes of past low inflation. See AG's speech. 2. Maybe for one percent increase in products there need 2 or 4 percent money printed for circulation? I don't know. I feel many times at some stage both sides of a debate can not convince the other and neither can themselves be convinced. I would rather keep silent at this time and welcome outsiders to offer their opinions.