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

To: Les H who wrote (13922)	5/14/1999 2:09:00 PM
From: Les H	Respond to of 99985

Bonds Plunge on CPI and Industrial Production bonds-online.com Bond prices are down sharply this morning as CPI and industrial production posted much stronger gains than expected increases. Thirty-year bonds are down 1 3/4 points, yield 5.89%. Two-year notes are down 8/32, yield 5.25%. CPI for April rose .7%, while the core rate (ex food and energy) rose .4%. This was the largest increase in CPI since 10/90 and the largest increase in the core rate since 1/95. The troubling part of the data is that the increase in prices was broad based. Energy rose 6.1%, food rose .1%, housing rose .4%, medical care rose .4%, transportation rose 2.4% and tobacco rose 3.6%. The probability the Fed will change its policy directive from neutral to one of tightening has greatly increased. Industrial production for April rose .6%, capacity utilization rose to 80.6. Expectations were for a rise of .3% and 80.1. Industrial production for March was revised from .1% to .5%. The increase in industrial production was broad based. Manufacturing output rose .6%, utility output rose .7% and mining output rose .1%. The one area of the economy, manufacturing, that was weak, is now showing good gains. These are very strong numbers and will likely cause the Fed much concern. Bonds extended their losses on the data. Business inventories for March rose .5%. Expectations were for an increase of .2%. Retail inventories rose 1.7% and wholesale inventories rose .3%. There was little reaction to the data as all attention is being paid to CPI and industrial production. The University of Michigan consumer confidence index for Mat rose to 106.4. Expectations were for a marginal increase to 104.8. We can certainly tell by the strength in the economy that the consumer remains very upbeat. I would not expect confidence to change until we see stocks enter a prolonged decline or until the level of unemployment starts to rise. Bonds held their losses on the data. The key event of next week will be the FOMC meeting on Tuesday. Monetary policy is expected to remain unchanged, but there is a strong possibility the policy directive may be changed from neutral to a bias to tighten. Have a great weekend.