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OPTIMA RESEARCH INVESTMENT, INC.
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Tuesday 7/7/98 -- Americas Comment -- The US markets today
will focus on (1) any overnight events in the Asian and Russian
financial markets, (2) today's US weekly retailer sales surveys,
(3) the US Treasury market which settled mildly stronger yesterday
in dull trade, lifted by the gains in the dlr/yen, (4) the dollar
which settled mildly stronger yesterday, boosted by muddled remarks
by Japanese officials concerning the possibility of permanent
income tax cuts, (5) the stock market which settled moderately
higher, as the S&P 500 posted a new all-time high, and (6) the CRB
index which closed moderately lower yesterday on weak energy
prices.
US NAPM's June non-manufacturing index slips -- The June NAPM
non-manufacturing index fell by -2.5 points to 61.5%. That marked
a new 4-month low in the series and left it just below May's
historic peak of 64.0%. The decline in the index suggests that
non-manufacturing activity continued to grow in June, albeit at a
slightly slower pace than in May.
The decline in the headline index was tied to softness in the
prices (-2.0 points to 46.0%), new orders (-4.5 points to 59.0%),
backlog of orders (-3.0 points to 50.0%), and inventory change
(-0.5 points to 49.5%) sub-indexes. Offsetting those declines were
gains in the new export orders (+6.5 points to 55.0%), imports
(+2.0 points to 56.0%), employment (+0.5 points to 54.5%), supplier
deliveries (+3.0 points to 53.5%), and inventory sentiment (+5.5
points to 69.0%) sub-indexes.
Once again, the vast majority of the sub-indexes held above
the key 50% mark, with only the prices and inventory change indexes
coming in below the 50% level. The strength in the vast majority
of the sub-indexes illustrates the strength in the non-
manufacturing sectors of the economy which account for about 80% of
overall US economic activity.
Of note in today's report was the favorable inflation news.
The prices index fell by -2.0 points to 46.0% which points to
falling service-sector costs. Although the supplier deliveries
index climbed by +3.0 points to 53.5%, that index still held far
below last Aug's peak of 71.5% (which was posted with the UPS
strike). Also of note is the sharp +6.5 point rebound in the new
export orders index to 55.0%. That sub-index has only dipped below
the key 50% mark in 2 of the last 12 months, suggesting that the
non-manufacturing sectors of the economy have been largely immune
to the impact of the Asian crisis and the strong dollar. That is
critical since these sectors of the economy account for the bulk of
US economic activity.
US June auto are stronger than expected -- With all three of
the major US automakers having now released their June sales data,
those reports point to an annual sales rate of 14.4 to 14.6 million
units. That is much stronger than early expectations for a 13.6
million unit pace and even stronger than the revised expectations
for a 14.1 million unit pace. Moreover, the 14.6 million unit rate
was mildly stronger than May's 14.2 million unit annual pace. The
strength seen in June auto sales to date suggests that the June
retail sales report will be on the strong side once again.
However, looking farther ahead, the 14.4-14.6 million unit pace
will not be sustained this month due to the impact of the GM
strikes which is draining inventories at dealerships.
US May housing completions edge lower -- May housing
completions fell by -3.0% to an annual rate of 1.455 million units.
April housing completions were revised sharply weaker to +0.9% (to
1.500 million units) from the earlier report of +2.8% (to 1.530
million units). The -3.0% drop in May completions marked the first
decline in the series in 4 months. Still, completions stood +4.6%
higher than a year-earlier. At the end of May an adjusted 915,000
units were under construction. That marked a +0.4% (mo-mo) and
+12.0% (yr-yr) increase.
As usual, today's May housing completions report had no impact
on the financial markets. Housing completions are expected to
remain firm in the coming months given the strength in starts and
the continued tightness in the new home sales market.
US Interest Rates -- US credit market settles mildly stronger
in dull post-holiday trade -- Sep T-bonds yesterday pushed higher
in Asian and early European trading and then drifted sideways
through the entire US trading day to finally settle mildly
stronger. Futures closes: USU98 +0-09 at 124-05; TYU98 +0-05 at
114-06; FVU98 +0-035 at 109-310; TUU98 +0-012 at 104-100; TBU98
+.005 at 94.970; EDZ98 +.015 at 94.310. Cash closes (3PM NY): cash
30-yr +0-13 at 107-30; cash 30-yr yield -.026 at 5.573; cash 10-yr
+0-05 at 101-25; cash 10-yr yield -.021 at 5.390; cash 5-yr +0-03
at 99-29; cash 5-yr yield -.022 at 5.397; cash 2-yr +0-010 at
99-300; cash 2-yr yield -.017 at 5.400; 3-mo T-bill -.24 at 49.25.
Sep T-bonds yesterday held below last Thursday's 2-1/2 week
high of 124-10 where they held just 4 ticks below the contract high
of 124-14 (6/16/98). The cash 30-year bond yield yesterday closed
at 5.573% and posted a new all-time low of 5.570%. On that 5.570%
low, the yield fell by a total of 52.3 bp from the 3-month high of
6.093% (4/29/98). Dec Euros yesterday held below last Thursday's
2-1/2 week high of 94.335 where, in turn, it held below last
Tuesday's 2-1/2 month high of 94.370.
Bullish factors yesterday included (1) the strength in the
dollar/yen in response to the muddled Japanese comments concerning
permanent income tax cuts, (2) some carry-over buying tied to last
Thursday's June unemployment report which pointed to some cooling
in the US labor market, (3) continued hopes for a sharp slowdown in
US economic activity, (4) renewed mortgage-backed demand as the
long-bond yield fell to new all-time lows, (5) the underlying
flight-to-quality bid due to Russian, Japanese and Asian financial
instability, and some short-covering and technical buying. Bearish
factors included (1) the strength in June auto sales which
underscored the continued strength in domestic demand, and (2)
lingering concerns about BOJ FX intervention.
Fed may conduct a supplemental system repo -- The Fed today
may conduct a supplemental system repo operation if upward pressure
on the fund rate persists. Although the Fed has yesterday's fixed
$5.363 billion 4-day system repo operation in place until Friday,
that operation probably falls a bit short of addressing the Fed's
$6-$9 billion per day add need. That add need stems mostly from
rising currency in circulation associated with the holiday weekend
and the summer seasonal add requirement. Yesterday's fixed 4-day
system repo was conducted with the funds rate trading at 5-9/16%,
a bit above the 5-1/2% target.
US Stock Market -- The US stock market yesterday trended
higher for most of the day to finally settle with broad gains.
Settlements: Dow Industrials +66.51 at 9091.77, DJU98 +87 at 9190,
Dow Utilities +1.56 at 295.40, OEX +4.44 at 563.82, S&P 500 +10.89
at 1157.31, SPU98 +11.40 at 1169.40, NASDAQ Composite +15.47 at
1909.47, and the Russell 2000 +1.66 at 459.97. The S&P 500 (cash
& futures), the OEX and the Dow Utilities closed at all-time highs
yesterday.
Stock market breadth yesterday was bullish with advancing
issues (1,722) leading declining issues (1,271) by a 4 to 3 margin.
Yesterday's volume was below average at 513 million shares with
declining volume accounting for 34% of the total. The percentage
of NYSE stocks above their 200-day averages was unchanged at a
1-month high of 50% after touching a 3-1/2 year low of 42% last
Monday. The number of shares posting new 52-week highs (346)
exceeded the number posting new 52-week lows (220) as it has for
the past week after lagging for the past 1-1/2 months.
The S&P 500 led yesterday's advance with a .95% gain while
NASDAQ rose .82%, the Dow .74% and the Russell 2000 .36%. For the
year-to-date, the NASDAQ is in first place with a 21.6% gain which
is followed by the S&P 500 at +19.26% and the Dow at +14.97%. The
Russell 2000 continues to lag with a 5.25% year-to-date gain.
Bullish factors yesterday included (1) technical factors as
the S&P 500 and the OEX rose to new all-time highs, (2) a broad-
based rally in the drug, retail, communication-equipment, banking
and automobile sectors, (3) surging prices for Internet related
stocks, (4) the drop in 30-year bond yields to an all-time low of
5.570% which should eventually filter into lower corporate
borrowing expenses, and (5) a 1% gain in General Electric, the
largest US company by market capitalization.
Bearish factors for the stock market include (1) weakness in
the oil related stocks yesterday as August crude oil futures closed
down 4.28%, (2) a sell-off in the computer system and semiconductor
shares yesterday, (3) Japanese Prime Minister Hashimoto's denial
that he advocated a permanent tax cut, a step financial markets see
as essential to pull Japan out of its recession, (4) weak market
breadth with the broader Russell 2000 index remaining well below
its all-time high and with the S&P 500 rising on the strength of
only the largest-cap stocks, and (5) the growing realization that
operating earnings for the S&P 500 have virtually no chance of
showing a double digit gain in 1998 and will instead log their
slowest growth rate since 1991.
Internet related shares dominated yesterday's most active
list. Netscape (-5.6%) traded 21.77 million shares and fell back
late in the session after gaining 64% in the previous two days.
Yahoo (+15.2%) posted a new 52-week high of 200 on volume of 13.55
million shares. Egghead.com (+64.58%) changed hands 12.3 million
times after it reported that revenue at its web site that sells
computer and related items rose 95% in Q2. Egghead.com shares have
risen 288% in the past year. Lycos soared 26% on volume of 9.48
million shares after it announced a 2 for 1 stock split to take
affect in August. Lycos is up 697% in the last year.
Evidence of excessive speculation in the stock market is
visible in the Internet stocks. Investors have driven up the
prices of these companies on hopes that they will be acquired by
larger media companies and on a search for the next "big thing".
At present levels, Internet bookseller Amazon.com (up 1,116%
yr-yr), despite not earning any money, has a higher stock market
capitalization than Barnes & Noble and the Borders Group who are
earning money.
Of the S&P 500's 89 sub-groups 65 rose yesterday while 24
fell. Market breadth was bullish as 322 of the S&P 500 stocks
closed lower while 156 fell. The drug sub-index was yesterday's
best performer as Merck (+1.6%), Schering-Plough (+3.75%) and
Pfizer (+2.33%) rose. The group has the second highest weighting
in the S&P 500 (5.16%) after the oil companies and is enjoying a
29.2% return for the year-to-date, about 10 percentage points above
the S&P 500's return. The shares are not without overvaluation
concerns, however, with the sector trading at a 12-month trailing
P/E ratio of 54.65 (81% above its 3-1/2 year average of 30.2) and
at a price-to-book ratio of 13.72, well above the overall S&P 500's
near record reading of 6.09.
Of the 30 Dow stocks, 23 rose yesterday while only 7 fell.
McDonalds (+2-1/2) was the Dow's biggest gainer and rose to a new
all-time high of 73-3/4. General Motors rose 2 as the US auto
industry saw sales rise to an 11-year high. IBM fell 1-1/2 as
investors continued to worry about the portion of the company's
profits which are derived from Asia.
The cash S&P 500 posted a new all-time high of 1157.32
yesterday where it continued to break out above its 3-month
sideways trading range that existed between 1133 and 1075. On
yesterday's high, the index extended its 3-week upmove to a total
of 7.69%. On yesterday's all-time high of 563.84, the OEX also
continued to leap above the top of its 3-month trading range
defined as 548.
The Dow Industrials index continues to trend lower in a
2-month pattern of lower major highs and low major lows after
posting an all-time high of 9311.98 on May 4. On its recent (Jun
16) 3-1/2 month low of 8569.88, the index was down 742.10 points
(7.97%) from that high. Only a close above 9105 will break the
downward pattern. The NASDAQ composite index rose to a 2-1/2 month
high of 1914.46 last Wednesday where it held just 6.64 points below
its all-time high of 1921.10 (April 22). On last Wednesday's high,
the index was up 11.62% from the Jun 15th 4-month low of 1715.19.
Commodities -- CRB closes lower as energy sector leads losses
-- The CRB index yesterday closed down -.98 points at 213.52 as it
continued to consolidate just below last Tuesday's 5-week high of
216.75. The major lows on the downside are the recent 5-year low
of 208.54 (6/15/98), the 12-year low of 198.17 (Aug 1992), and the
20-2/3 year low of 196.16 (July 1986). The CRB index is down -.24%
on a month-on-month basis and down -9.36% on a year-on-year basis.
Closes: Energy: CLQ98 -.62 at 13.88; HUQ98 -.0065 at .4800;
HOQ98 -.0168 at .3770; NGQ98 -.074 at 2.365. Precious Metals:
GCQ98 -.7 at 294.3; SIU98 +.8 at 534.0; PLV98 +4.7 at 372.3.
Grains: S X98 -7-6 at 594-2; SMZ98 -3.60 at 156.60; BOZ98 -.09 at
26.04; C Z98 -4-4 at 243-6; W Z98 +3-0 at 298-2. Livestock: LCQ98
unch at 64.30; FCQ98 +.55 at 72.72; LHQ98 +.75 at 55.07; PBQ98
-3.00 at 57.62. Softs: SBV98 -.04 at 8.54; KCU98 +1.40 at 110.75;
CCU98 +4. at 1630.; JOU98 +.45 at 109.10. Industrials: CTZ98 -.58
at 76.35; HGU98 -.70 at 72.15; LBN98 -8.20 at 287.70.
August natural gas was the CRB's biggest loser yesterday as
the contract fell -.074 to close at 2.365. On last Wednesday's
high at 2.520, the contract rose .575 cents (29.6%) from the June
10th 1-1/4 year low at 1.945. Natural gas has risen sharply going
into the peak air-conditioning demand season.
August crude oil fell -62 cents yesterday to close at $13.88.
On June 15th, crude oil futures touched a 12-year low of $11.40 on
the weekly-nearest chart (Jul 98 contract). Recent production cuts
are not expected to reduce supplies, which are 7% higher than last
year, before the August contract expires. Oil producers began to
notify customers last Thursday of output reductions related to the
recent OPEC production cuts. OPEC production cuts for the year now
total 3.2 mln barrels per day, or 4.3% of global demand.
Grain markets fell sharply yesterday led by a decline of -7-6
to 594-2 in Nov soybeans and a decline of -4-4 to 243-6 in Dec
corn. Weather forecasts for soybeans and corn are near ideal as
they call for above average temperatures as well as rain over 80%
of the midwest. Seventy-five percent of the corn crop is expected
to pollinate by July 21st with current weather conditions improving
the likelihood of high yields.
August gold yesterday closed down -.7 at $294.3 as it remained
below the psychologically important $300 level. The South African
rand posted an all-time low yesterday and producers from that
country are expected to resume forward sales of gold, which is
priced in dollars, if the rand currency situation remains negative.
Aug gold posted a 5-1/2 month low of $285.6 on June 16th where it
extended its 2-1/2 month downmove to a total of $32.6 (10.25%).
The next major line of support is $283.9, the 18-2/3 year
weekly-nearest low. On that low, August gold was down $60 (17.45%)
from its 1-year high of $343.9 (9/30/97).
Canada -- The Canadian dollar yesterday closed .45 cents
weaker at C$1.4733/US$, but held above the all-time low of
C$1.4763/US$ (6/16/98). The Canadian dollar has been pressured by
the resurgent Asian crisis and the subsequent collapse in commodity
prices.
The Sep Canadian bond yesterday settled unchanged at 125.64
but held below the contract high of 126.03 (6/15/98). On the
126.03 high, the Sep bond had climbed by a total of 1.13 points
from the 4-1/2 week low of 124.90 (6/5/98). The Canadian 10-year
cash yield yesterday settled -1.8 bp at 5.279% as it held above the
2-1/2 month low of 5.252% (6/15/98), where it was 6.2 bp above the
all-time low of 5.190% which was established on Apr 3. The Sep
3-month bankers acceptance yesterday closed -4 bp at 94.87, holding
below last Friday's 2-1/2 month high of 94.93. On last Friday's
high, the contract rebounded by a total of 38 bp from the 6-month
low of 94.55 (6/11/98), but held 21 bp below the 5-1/2 month high
of 95.14 (4/3).
The Toronto-300 stock index yesterday closed +50.79 points at
7434.50, moving farther above the 3-month low of 7094.60 (6/15/98).
On that 3-month low, the index was down by 743.10 points (9.5%)
from the all-time high of 7837.70 (3/23/98).
Forex -- Dollar settles mildly stronger, lifted by
backtracking among Japanese officials concerning tax cuts -- The
dollar yesterday opened moderately stronger in Asian and early
European trading before tailing off through mid-day in the US. The
dollar then rebounded upward late in the session and finally
settled mildly stronger. Dollar closes (3PM NY): cash dollar index
+.29 at 101.75; dlr/yen +.82 at 140.20; dlr/mark -.0055 at 1.8128;
dlr/Swiss -.0056 at 1.5240; stlg/dlr -.0122 at 1.6358; USD/CAD
+.0045 at 1.4733. Mark closes: mark/yen +.69 at 77.33; stlg/DM
-.0292 at 2.9661; mark/FRF -.0012 at 3.3506; mark/lira -.16 at
984.50; mark/Swiss -.0005 at .8406. Futures closes: DXU98 +.25 at
101.55; JYU98 -.0060 at .7204; DMU98 +.0009 at .5539; SFU98 +.0014
at .6606; BPU98 -.0172 at 1.6296; CDU98 -.0039 at .6795; ADU98
-.0035 at .6165.
The dlr/yen yesterday closed +.82 yen, as it consolidates in
the upper third of the range established by the recent sell-off
from the 7-3/4 year high of 146.73 yen (6/17/98) to the 2-month low
of 133.73 yen (6/19/98). The major highs on the upside are the
psychological 150 yen level and the 11-1/2 year high of 160.30
(4/90). The dlr/mark yesterday closed -.55 pfennigs at 1.8128 DM,
mildly below last Thursday's 2-1/2 month high of 1.8254 DM. On
last Thursday's, the dlr/DM rebounded by 7.15 pfennigs from the
5-month low of 1.7539 DM. The major highs on the upside are the
9-1/2 month high of 1.8561 DM (4/2/98) and the 8-1/2 year high of
1.8913 DM (8/97).
Bullish factors for the dollar included (1) disappointment
that Prime Minister Hashimoto denied he ever made a comment in
support of a permanent tax cut, (2) disappointment with the
Japanese government's plan for a large-scale bank bailout which
fell far short of establishing a Japanese version of the RTC to
clean up the bad loan mess, (3) the weaker than expected UK May
industrial production report which weighed on sterling as it dented
some speculation about a BOE tightening this week, and (4) the
continued market uncertainty in Russia which pressured the mark.
Bearish factors for the dollar included (1) some continued
selling pressure tied to last Thursday's US June unemployment
report which pointed to some cooling of the US labor market, and
(2) some continued long liquidation pressures, especially against
the mark, after last Thursday's sharp dollar rally.
The dollar/yen pushed higher yesterday after Prime Minister
Hashimoto on Sunday denied that he referred to a "permanent tax
cut" last Friday. The dollar/yen sold off by 1.95 yen last Friday
on a muddled report which suggested that Mr. Hashimoto may have
said that he supported a permanent tax cut. Nevertheless, the LDP
and the government are actively considering a permanent tax cut.
Speculation has emerged that a 2-4 trillion yen permanent tax cut
starting in fiscal 1999-2000 (which starts April 1999) will be
announced, possibly before Mr. Hashimoto's trip to Washington later
this month. Mr. Hashimoto will meet President Clinton on July 22nd
and is expected to unveil a solid fiscal stimulus package before
that meeting.
The FX market is closely watching the Russian situation.
Russian T-bill yields rose 12 percentage points yesterday to 89-90%
on ongoing devaluation fears and talk that the central bank may
raise the refinancing rate from the current 80% level. Market
uncertainty surrounding Russia is likely to grow ahead of
tomorrow's scheduled auction of 10 bln rubles in T-bills. Last
week only 2.4 billion rubles in bills were sold out of 16.0 billion
offered.
European Comment -- The European markets today will focus on
(1) today's release of the German Jun unemployment report and the
May industrial production report, as well as the monthly ECB
meeting in Frankfurt, (2) anticipation of tomorrow's and Thursday's
UK MPC meeting and the Bundesbank and Bank of France meetings on
Thursday, (3) the European credit markets which closed moderately
stronger yesterday, and (4) the European stock markets which closed
mixed yesterday.
Germany -- The Kohl government over the weekend announced that
today's June unemployment report would show a -120,000 worker
decline in unemployment. It was not clear whether that leak
covered adjusted or unadjusted data. Moreover, the government said
that it expects unemployment to fall below the 4.0 million worker
mark by the fall. A government spokesperson said that the weekend
leak came in response to a newspaper article last Friday that put
June unemployment at down -120,000 workers. However, the
government leak was probably aimed at boosting the flagging Kohl
reelection effort.
In a separate leak yesterday, it was reported that Finance
Minister Waigel's 1999 budget proposal will call for a +0.4%
increase in spending to 465.3 billion DM. Net borrowing next year
will come in a touch lower at 56.2 billion DM, versus 1998's 56.4
billion DM. The 1999 budget proposal is expected to be presented
to the cabinet tomorrow and made public on Thursday.
German May manufacturing orders volume fell -0.3% (mo-mo)
which was weaker than market expectations for roughly an unchanged
report. The weakness came from foreign orders which fell -0.7%,
whereas domestic orders were flat. April manufacturing order
volume was revised downward to +0.7% from +0.9%. The 2-month
average for April/May was -0.5% versus the previous 2-month period.
On a year-on-year basis, May orders were up +8.7%.
The German credit market closed higher yesterday. Bullish
factors included German May manufacturing order volume which fell
-0.3% m/m and was weaker than market expectations for roughly an
unchanged report. The Bundesbank's Haferkamp said that the EU
Parliament's demand for a dialogue with the ECB over economic and
monetary policy should be carefully scrutinized. The German
economy does not require a rate change. The German credit market
is focussed on today's Jun unemployment report and the Jun
pan-German CPI, and on Thursday's Bundesbank Council meeting.
The 10-year Bund yield yesterday closed -2.2 bp at 4.706% and
posted an all-time low yield of 4.695%. Liffe Sep Bunds yesterday
closed up +.20 at a contract high settlement of 108.93 and posted
a contract high of 108.97. The Liffe Sep Euromark yesterday closed
up +.015 at 96.375 and posted a contract high of 96.385.
The Dax index yesterday closed down 35 points (-.58%) at 5918
after posting a new all-time high of 5986. The Dax is up +39.27%
for the year to date in mark terms and +38.19% in US dollar terms.
Weaker than expected May manufacturing order volume, led by a
decline in foreign orders, raised concerns that profits will slow
due to the Asian crisis.
France -- The BOF yesterday conducted a neutral repo
operation, leaving its interest rates unchanged. The key
intervention rate stands at 3.30% and the 5 to 10-day repo rate
stands at 4.60%.
The French franc yesterday closed .12 centimes stronger at
3.3506 francs/DM. The franc has been trading sideways in a narrow
range for the past 6-months, below the all-time high of 3.3297
FF/DM (2/16). On that all-time high, the franc was 2.42 centimes
above the franc's ERM parity rate of 3.3539 FF/DM.
The French credit market closed higher yesterday. Bullish
factors included ongoing concerns about the Japanese economy as the
Japanese government continues to debate its course of action. The
Bank of France left the intervention rate unchanged at the week's
first money market operation. The French credit market is focussed
on tomorrow's Jun INSEE household confidence survey and Thursday's
final Q1 GDP (prelim +0.6% q/q) and BOF Monetary Policy Council
meeting.
The 10-year Notional yield yesterday closed down -2.9 bp at
4.777% and posted an all-time low yield of 4.773%. The Sep
Notional bond yesterday closed +.21 at 105.00 and posted a contract
high of 105.05. The Sep Pibor yesterday closed +.015 at 96.370 and
posted a new contract high of 96.380.
The CAC40 stock index yesterday closed up 7 points at an all-
time high settlement of 4311. The CAC40 is up 43.76% for the
year-to-date in franc terms and up 41.72% in US dollar terms. The
CAC40 rose to an all-time high yesterday after Valeo, a large car-
parts manufacturer, reported better than expected first half sales.
UK -- The UK May industrial production report of -1.2% (mo-mo)
and +0.8% (yr-yr) was weaker than market expectations of -0.6%
(mo-mo). Warm weather depressed utility output and the overall
industrial production figure. However, the May manufacturing
production report of -0.4% (mo-mo) and unch (yr-yr) was also weaker
than market expectations of -0.2% (mo-mo). On a smoother 3-month
basis, March-May industrial production edged +0.8% higher from Dec-
Feb and climbed by +1.0% (yr-yr). However, March-May manufacturing
output climbed by only +0.1% from the previous 3 months was
unchanged from a year-earlier.
Yesterday's industrial production report confirmed ideas that
the UK manufacturing sector is seeing ongoing weakness related to
the sagging strength in sterling and to last year's interest rate
hikes. Yesterday's report might make MPC members a bit less
hawkish considering the weak state of the UK manufacturing sector.
However, MPC members are focussed on other policy concerns such as
strong employee earnings, firm domestic demand, and the inflation
picture.
Sterling yesterday settled -2.92 at 2.9661 DM, falling farther
below last Thursday's 2-1/2 month high of 3.0271 DM. On last
Thursday's high, sterling rebounded by a total of 16.54 pfennigs
from the May 22nd 7-1/2 month low of 2.8617 DM but remained 8.29
pfennigs below the 8-3/4 year high of 3.1100 DM (4/3/98). Last
Friday's and yesterday's sell-off was attributed to some long
liquidation pressures as well as the weak May industrial production
report which cast some doubts on speculation for another tightening
at this week's MPC meeting.
The UK credit market closed higher yesterday. Bullish factors
included May industrial production of -1.2% m/m and +0.8% y/y which
was weaker than market expectations of -0.6% m/m and May
manufacturing production of -0.4% m/m and unch y/y which was also
weaker than market expectations of -0.2% m/m. The UK credit market
is focussed on tomorrow's and Thursday's BOE Monetary Policy
Committee meeting.
The 10-year gilt yield yesterday closed -4.9 bp at 5.795% and
held below its 1-1/2 month high yield of 5.931% that was posted on
June 19th. Sep gilts yesterday closed up +.31 points at 109.11
where they remained within their 2-week trading range. Sep short
sterling yesterday closed up +.020 at 92.110 where it held above
the Jun 19th 5-1/2 year low of 92.020.
The FTSE stock index yesterday closed up 1.9 points at a 3-1/2
week high settlement of 5990.3 as it moved to the top of its 2-1/2
month long trading range between approximately 6065 and 5650. The
FTSE is up 16.64% for the year-to-date in sterling terms and up
16.35% in US dollar terms. Despite the fall in May industrial
production, the stock market is continuing to worry that the BOE's
Monetary Policy Committee could move to raise rates when they meet
this week.
Asian Comment -- Japan -- BOJ chief Hayami yesterday told the
quarterly BOJ Branch Managers meeting that Japan's economic
condition is worsening due to concern about the health of the
financial system, weak labor and income conditions, and poor
sentiment as seen in the recent tankan survey. However, he said
that the government's "Total Plan" for creating bridge banks and
the government's recent 16 trillion yen stimulus package should
ease the current negative cycle.
Most of the individual branch managers agreed that there are
few, if any, signs of recovery in their regional economies. Most
regions remained plagued by weak manufacturing, high inventories,
and a weak labor market.
June imported vehicle sales fell by -25.5% (yr-yr). Through
the first 6 months of the year, imported vehicle sales fell by
-28.7% (yr-yr). Weakness in imported vehicle sales stems from
softness in domestic demand in the Japanese economy, as well as
from weakness in the yen. Weak imported vehicle sales has yet to
become a political hot potato, especially in US/Japanese relations.
However, the longer the Japanese economy remains in recession, US
exasperation with Japan will grow, possibly triggering trade action
in the auto sector.
The Nikkei index yesterday closed down 161 points at 16,350
(-.97%), consolidating mildly below last Thursday's 3-month high of
16,743. The stock market yesterday ran into some long liquidation
pressures and disappointment about PM Hashimoto's denial that he
said he supports a permanent tax cut. On last Thursday's high, the
Nikkei index recovered sharply by 14.6% (2,218 points) from the
recent 5-month low of 14,615 (6/16/98). Nikkei is up 7.15% for the
year-to-date in yen terms and is down .31% in US dollar terms.
Tokyo Sep JGBs yesterday closed +.34 points at 132.84,
consolidating mildly above last Wednesday's 1-1/2 month low of
131.96. JGBs were supported by PM Hashimoto's denial of
thepermanent tax cut report and by the mildly lower stock market.
In London, Sep JGBs settled at 132.77, down -.07 points from the
Tokyo close. The benchmark No. 182 10-year JGB closed -3.5 bp at
1.305%, well above the recent all-time record low closing yield of
1.130% (6/2/98). The Dec Euroyen yesterday closed -1.5 bp at
99.285, retaining most of last week's recovery rally. Asian Stock
Market Closes: Hong Kong Hang Seng -1.80%, Australia All-Ordinaries
+.39%, Singapore Straights Times Industrials +.43%, South Korea
Composite Index +.57%, Thailand Stock Exch -1.00%, Taiwan weighted
index +.24%, Philippines composite index -.26%, Malaysia composite
index -.92% (7/3/98), China SE Shanghai A -1.50%, Indonesia Jakarta
composite index +.89% (7/3/98).
OPTIMA FINANCIAL NEWS SCHEDULE^ Tuesday 7/7/98
A. Today's News (local & GMT release times shown)
Tue US 0900 ET 1300 BTM/Schroder weekly retail sales, last -0.4%
w/w.
1200 ET 1600 Chicago Fed President Moskow speaks on
community investment.
1440 ET 1840 Redbook retailer sales survey for week ended
July 4th, 1st 4 weeks -0.7%.
CAN 0830 ET 1230 May building permits expected -0.5% m/m.
GER 0955 CET 0755 June unemployment report, May -60,000
(seasonally-adjusted).
N/A May industrial production expected +0.3%
m/m, April -0.6% m/m.
EUR N/A Monthly ECB meeting in Frankfurt.
JPN 1500 JT 0600 June city bank lending, May +1.8% y/y.
B. Future News
Sometime this week:
GER N/A June pan-German CPI, May +0.3% m/m &
+1/3% y/y.
N/A May retail sales, April real sales -2% y/y
(unadjusted).
Wed US 1000 ET 1400 May wholesale trade: April inventories -0.6%;
April sales +0.1%; April inv-to-sales ratio
-0.01 point to 1.29 mos.
1200 ET 1600 Deputy Treasury Secretary Summers and
BOF Governor Trichet participate in a satellite
link-up on financial markets.
1300 ET 1700 Treasury auction of $8.0 bln in re-opened
30-year indexed bonds (mature in April 2028).
1500 ET 1900 May consumer credit expected +$4.5 bln,
April +$5.5 bln.
1830 ET 2230 ABC/Money Magazine weekly consumer
confidence, last -2 points to 23.
UK N/A 2-day BOE MPC meeting begins.
GER N/A Finance Minister Waigel presents the 1999
budget proposal to the cabinet.
FRA 0845 CET 0645 INSEE releases its June household
confidence survey.
EUR 1100 CET 0900 ECB President Duisenberg holds press
briefing following Tuesday's ECB meeting.
JPN N/A LDP expected to release its latest plan for
dealing with the bad loans problem.
N/A June wholesale prices expected -0.4% m/m,
May -1.7% y/y; June domestic WPI, May
-2.3% y/y.
Thu US 0830 ET 1230 Initial unemployment claims for the week
ended July 4th, last +24,000 to 390,000.
1630 ET 2030 Money supply report for week ended June
30th; June money supply; 1st-week
reserves.
UK 1200 UK 1100 2-day BOE MPC meeting ends,
announcement expected at noon UK.
GER N/A Regular bi-weekly Bundesbank meeting, press
conference to follow.
N/A Finance Minister Waigel presents 1999
federal budget.
FRA 0845 CET 0645 Final Q1 GDP expected unrevised from the
preliminary report of +0.6% q/q & +3.4% y/y.
N/A BOF Monetary Policy Council meeting.
RUS N/A Prime Minister Kiriyenko to unveil government
financial plan.
Fri US 0830 ET 1230 June PPI expected unch, May +0.2%; June
core PPI expected +0.1%, May +0.2%.
1430 ET 1830 Treasury announces the details of next
Thursday's 52-week bill auction.
CAN N/A June unemployment expected unch at 8.4%.
FRA 0845 CET 0645 April current account balance expected FFR
17.5 bln surplus, March FFR 13.3 bln surplus.
0850 CET 0650 Preliminary June CPI expected unch m/m &
+1.0% y/y, May +0.1% m/m & +1.0% y/y.
JPN N/A June bank lending, May -2.2% y/y.
Sun JPN N/A Japanese Upper House elections: 126 of 252
seats contested, LDP now holds 118 seats.
Week of July 13-17:
Mon US 1000 ET 1400 Q1 retailers' profits, Q4 after-tax profits
averaged 2.9% of sales.
1300 ET 1700 Weekly Treasury auction of 3 & 6-month bills.
Tue US 0830 ET 1230 June retail sales, May +0.9%; excluding
autos, May +0.4%.
0830 ET 1230 June CPI, May +0.3%; June core CPI, May
+0.2%.
0900 ET 1300 BTM/Schroder weekly retail sales.
0900 ET 1300 Atlanta Fed releases its June economic
survey, May -1.6 points to 18.6.
1000 ET 1400 June real earnings, May +0.6%.
1440 ET 1840 Redbook retailer sales survey for week ended
July 11th.
Wed US 0830 ET 1230 May business inventories, April +0.2%; May
business sales, April -0.1%, May inv-to-sales
ratio, April +0.01 point to 1.38 mos.
1000 ET 1400 June import prices, May -0.1%; June export
prices, May +0.1%.
1830 ET 2230 ABC/Money Magazine weekly consumer
confidence.
UK N/A BOE publishes minutes from June MPC
meeting.
Thu US 0830 ET 1230 Initial unemployment claims for week ended
July 11th.
0915 ET 1315 June industrial production, May +0.5%; June
capacity utilization rate, May +0.1 point to
82.2%.
1000 ET 1400 July Philadelphia Fed manufacturing survey,
June +10.7 points to 28.2.
1300 ET 1700 Treasury auction of 52-week bills.
1630 ET 2030 Money supply report for week ended July 6th;
June money supply; 2nd-week reserves.
JPN N/A BOJ Policy Board meeting.
Fri US 0830 ET 1230 May goods & services trade deficit, April
-$14.5 bln.
Future News:
July 22: Japanese Prime Minister Hashimoto meets President Clinton in
Washington.
Sep 27: German general election.
Upcoming Central Bank meetings:
FOMC: Aug 18, Sep 29, Nov 17, Dec 22.
Last G7 monetary policy changes:
US Federal funds target raised +25 bp to 5.5% on 3/25/97; discount
rate cut -25 bp to 5.0% on 1/31/96.
CAN Overnight rate target band +50 bp to 4.5-5.0% on 1/30/98.
UK Base rate +25 bp to 7.50% on 6/4/98.
GER Discount rate -50 bp to 2.50% and Lombard rate -50 bp to 4.50%
on 4/18/96 (effective 4/19/96).
2-wk repo rate +30 bp to 3.3% on 10/9/97 for 10/15/97 wkly repo;
after 13-1/2 months at fixed-rate 3.0%.
FRA Intervention rate +20 bp to 3.30% on 10/9/97; 5-10 day repo rate
-15 bp to 4.60% on 12/17/96.
ITA Discount rate -75 bp to 5.50% on 12/23/97; Lombard rate -75 bp
to 7.0% on 12/23/97.
JPN Discount rate -50 bp to .50%, unsecured overnight call loan rate
-40 bp to .45-.50% from .85-.90% on 9/8/95.
Times: US Eastern Time ET=GMT-5; British Time UK=GMT; Continental
European Time CET=GMT+1; Japan Time JT=GMT+9.
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