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OPTIMA RESEARCH INVESTMENT, INC.
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Wednesday 7/15/98 -- Americas Comment -- The US markets today
will focus on (1) any overnight events in the Asian and Russian
financial markets, (2) today's release of the US May business
inventories report, the June import/export prices report, and the
CBO's mid-year budget and economic review, (3) the US Treasury
market which settled mildly weaker yesterday as long liquidation
pressures and some unwinding of flight-to-quality positions weighed
on the market, (4) the dollar which settled little changed, but was
sharply lower against the yen yesterday as investors remain
optimistic that a new Japanese government will take aggressive
steps to restore the economy and banking system to health, (5) the
US stock market which settled sharply higher amid some earnings
optimism, and (6) the CRB index which closed mildly stronger
yesterday boosted by surging energy prices.
Today's release of the May business inventories report is
expected to show a +0.2% gain in stocks. That would be unchanged
from April's +0.2% advance. May wholesale inventories climbed by
+0.6%, while factory inventories climbed by +0.1%. Both wholesale
and factory inventories account for about 70% of overall business
inventories, with the remainder made up of retail inventories.
Yesterday's sharp upward revision in May retail sales (see below)
suggests that growth in retail inventories was probably softer than
previously expected. Therefore, overall business inventories are
expected to show a small +0.2% gain. As usual, the markets will
keep a close watch on the behavior of the stocks-to-sales ratio
which climbed by -0.01 point in April to 1.38 months. That is
mildly above the all-time low of 1.36 months which was first
established in Feb 1997 and then matched in both March and July.
The relatively low ratio suggests that there it not much of an
inventory overhang (if any) in the economy and that the current
period of working off inventories should be short-lived.
US June retail sales edge higher -- June retail sales climbed
by +0.1%, moderately weaker than expectations for a +0.4% increase.
May sales, however, were revised moderately stronger to +1.2% from
the earlier report of +0.9%. The +0.1% increase in June retail
sales marked the smallest gain in the series in 3 months. On a
year-on-year basis, sales climbed by +6.2%, down from May's +7.1%
(yr-yr) jump.
Excluding autos, June retail sales climbed by +0.1% as well.
That was a bit softer than expectations for a +0.2% increase.
However, May non-auto retail sales were revised sharply stronger to
+0.9% from the earlier report of +0.4%. On a year-on-year basis,
June non-auto retail sales slowed to +5.1% from May's +5.7% (yr-yr)
advance.
June durable goods sales were unchanged following May's +1.8%
leap. June auto dealer sales edged +0.1% higher, marking the
smallest increase in 5 months. Still, that added a bit to May's
impressive +2.4% surge. Excluding autos, June durable goods sales
fell by -0.2%, reversing a bit of May's +0.9% increase. June
building material sales fell by -0.2% (the first drop in 7 months)
and furniture sales fell by -0.3%. Furniture sales have now fallen
in 3 of the last 4 months.
June non-durable goods sales edged +0.2% higher after climbing
by +0.9% in May. Strength in non-durable goods sales stemmed from
a +0.6% leap in restaurant sales, a +0.4% increase in drug store
sales, and a +0.2% gain in general merchandise sales. Partly
offsetting those gains were a -0.4% drop in apparel sales, a -0.3%
decline in department store sales, a -0.1% drop in gas station
sales and a small +0.1% increase in food store sales.
On the surface yesterday's June retail sales report certainly
appears to be soft with both the headline and non-auto gains of
only +0.1%. However, that weakness was more than offset by the
strong upward revisions to May sales. Those revisions will likely
lead to upward revisions in forecasts for Q2 consumer spending.
Moreover, yesterday's data excludes spending on services which is
critical since spending on services accounts for nearly 60% of all
consumer spending.
Looking toward the Q2 GDP report, the personal spending
component (which accounts for about two-thirds of GDP) is expected
to post a +4.5% to +4.8% increase. That is up from forecasts for
about +4.0-4.5% going into yesterday's report. Unfortunately, much
of the strength seen in personal spending will likely be sapped by
weakness in net exports, inventory accumulation, and industrial
production, thereby leaving overall GDP growth near the +2% mark.
However, the Fed and the markets will keep a close eye on the final
sales to domestic purchasers component of GDP which will exclude
the impact of the Asian crisis (net exports) and the anticipated
slowdown in inventory growth, thereby revealing unsustainably
strong domestic demand in the US economy. That will likely lead
the Fed to keep its tightening bias for the time being.
Lastly, as always, yesterday's June retail sales report is
subject to revision. The most likely revision may be to auto
dealer sales as the +0.1% increase contrasts sharply with the
record per-unit auto sales reported by the manufacturers.
Moreover, looking ahead, consumer spending should rebound in the
coming months as the underlying fundamentals for the consumer
remain quite strong: the tight labor market with accelerating wage
pressures, the historically low level of interest rates which feeds
the housing sector, the high-flying stock market which boosts the
wealth-effect, and strong consumer confidence.
US June CPI edges higher as price pressures remain subdued --
The June CPI climbed by +0.1%, a bit softer than expectations for
a +0.2% increase. That was down from May's +0.3% increase and
marked the smallest gain in 3 months. On a year-on-year basis, the
June CPI climbed by +1.7%, unchanged from May's +1.7% (yr-yr) gain,
and mildly above the 11-1/2 year low of +1.4% (yr-yr) seen in the
Feb-April period.
The headline index was held down by a -0.7% slide in energy
prices. Gasoline prices last month fell by -0.9% and natural gas
prices plunged by -1.8%. Food prices, however, edged +0.1% higher
in June.
Excluding food and energy prices, the June core CPI climbed by
+0.1% as well. That was down from May's +0.2% advance, and a bit
more favorable than expectations for a +0.2% increase. On a year-
on-year basis, the June core index climbed by +2.2%, unchanged from
May's +2.2% gain, and a bit above March's 32-year low of +2.1%
(yr-yr).
The core CPI was held in check by a surprise -0.6% drop in
tobacco prices, a -2.0% decline in air fares, a -0.3% drop in new
car prices, and a small +0.1% increase in housing costs. Partly
offsetting those were a +0.4% increase in medical care costs
(prescription drug prices edged +0.1% higher), and a +0.2% increase
in apparel prices.
In June, goods prices fell by -0.1% (mo-mo) and climbed by
+0.2% (yr-yr). While that marked back-to-back year-on-year
increases, the long-term downtrend in year-on-year goods prices
remains intact. Services prices (which account for 57% of consumer
prices) climbed by +0.1% (mo-mo) and by +2.7% (yr-yr). That was
down a bit from May's +2.8% (yr-yr) gain which was the sharpest
year-on-year gain in services costs in at least 6 months. However,
the downward to sideways trend in year-on-year services prices also
remains intact.
All in all, yesterday's June CPI report was a bit more
favorable than expected and points to steady price pressures in the
US economy. Moreover, the ongoing favorable disinflationary trends
in the overall index, the core index, the goods index, and the
services index should help reinforce the fact that inflationary
pressures have yet to surface. In fact, through the first half of
the year, the headline CPI climbed at an annual rate of +1.4%,
mildly more favorable than the +1.7% increase seen in all of 1997.
Looking ahead, the outlook for the behavior of consumer prices
remains favorable. The strength in the dollar should continue to
hold down prices of imported goods. In addition, the recent tumble
in energy and other commodity prices should hold down price
pressures in the goods component which accounts for 43% of the
overall index. Services costs, on the other hand, may continue to
be troublesome, especially if medical care costs continue to
accelerate. This needs to be watched closely as rising medical
care costs can spill over to the benefits component of the
Employment Cost Index. In fact, the core index (which is even more
heavily weighted toward services than the headline index) climbed
at an annual rate of +2.5% in the Jan-June period. That was up
from the +2.2% growth in the 1997 core CPI.
Most importantly, however, the markets will need to keep a
close eye on productivity growth. If productivity growth slows
markedly, the acceleration in wages could spill over into a pick-up
in general price pressures as firms struggle to meet their unit
labor costs. This is the Fed's biggest concern going forward.
Retailer sales are mixed in early July -- The Redbook
yesterday reported that through the first week of July its index of
retailer sales climbed by +0.8% from June. On a year-on-year
basis, sales climbed by +8.0%. The Redbook reported that most
retailers began the month "slightly ahead of plan."
In contrast, BTM/Schroders yesterday reported that in the week
ended last Saturday its index of same-store retail chain sales fell
by -1.0% from the previous week. On a year-on-year basis, sales
climbed by +7.3%, down from the +9.3% (yr-yr) gain seen a week
earlier. Despite the sharp decline in sales in the latest week,
Schroders reported that sales were "on-plan." Through all of July,
sales are expected to post a +5% (yr-yr) increase.
The mixed results in yesterday's surveys may be tied to the
fact that July is an odd month for retailers. By July, most
seasonal purchases have been made, while it is too early for fall
and back-to-school shopping to begin in earnest.
US June real earnings edge lower -- June real earnings edged
-0.3% lower. That reversed some of May's +0.5% increase which was
revised downward from the previous report of +0.6%. The -0.3%
decline in June real earnings stemmed from a +0.1% gain in hourly
earnings, a -0.3% decline in the average workweek, and a +0.1%
increase in the CPI for urban workers. On a year-on-year basis,
June real earnings climbed by +1.8%.
While the real earnings report is routinely overlooked by the
financial markets, yesterday's small decline in June earnings could
point to some softness in the key wages and salaries component of
the more important personal income report which will be released on
Aug 3rd.
US June Atlanta Fed index edges higher -- The Atlanta Fed's
June business activity index edged +0.2 points higher to 17.6. The
May index was revised mildly softer to 17.4 from the earlier report
of 18.6. The production index fell by -9.8 points to 14.7, while
the employment index fell by -10.8 points to 1.2. There was
favorable news on the inflation front in yesterday's report as the
prices paid for raw materials index fell by 11.2 points to -12.0,
while the prices received for finished goods index fell by 5.1
points to -4.3.
Yesterday's Atlanta Fed index will likely be overlooked by the
financial markets as "old news". Of all the regional Fed surveys,
the one with the most sway over the markets remains the
Philadelphia's Fed's manufacturing activity index due to its timely
nature. Their June index will be released on Thursday and it will
help form expectations for the June NAPM report which will be
released on July 1st.
Richmond Fed surveys are mixed -- The Richmond Fed yesterday
reported that its June manufacturing survey showed little change in
activity, apart from a slight further slowdown in shipments and new
orders. The drop in shipments in May and June was the first back-
to-back decline in more than 1-1/2 years. On the inflation front,
raw materials prices were little changed, while prices for finished
goods accelerated slightly.
June retail and service-sector activity slowed in the Richmond
district. Price pressures were mixed as non-retail price pressures
accelerated, while retail price pressures moderated.
Just as with the Atlanta Fed index, yesterday's June Richmond
Fed survey was completely overlooked by the financial markets as
"old news".
US Interest Rates -- US credit market settles mildly weaker,
as capital flight continues -- Sep T-bonds yesterday moved sideways
in European trading, spiked higher after the release of the CPI and
retail sales reports, and then tailed off through most of the
remainder of the day to finally settle mildly weaker. Futures
closes: USU98 -0-13 at 122-14; TYU98 -0-06 at 113-20; FVU98 -0-025
at 109-225; TUU98 -0-007 at 104-070; TBU98 -.010 at 94.960; EDZ98
-.015 at 94.280. Cash closes (3PM NY): cash 30-yr -0-17 at 105-25;
cash 30-yr yield +.036 at 5.716; cash 10-yr -0-05 at 101-02; cash
10-yr yield +.020 at 5.484; cash 5-yr -0-03 at 99-20; cash 5-yr
yield +.022 at 5.463; cash 2-yr -0-015 at 99-275; cash 2-yr yield
+.026 at 5.442; 3-mo T-bill +.060 at 5.000.
Sep T-bonds yesterday fell to a 3-1/2 week low of 122-07 as
they consolidated just below the contract high of 124-14 (6/16/98).
The cash 30-year bond yield yesterday climbed to a 3-1/2 week high
of 5.733% and closed at 5.716% where it held well above last
Monday's 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 the 3-1/2 week high of
94.335 (7/2/98) where, in turn, it held below the 2-1/2 month high
of 94.370 (6/30/98).
Bearish factors included (1) the weakness in the dollar/yen,
amid renewed hope that a new Japanese government will take
aggressive measures to reform the banking industry and boost the
economy, (2) the unwinding of some flight-to-quality positions in
Treasuries amid optimism surrounding the situation in Japan (and,
by extension in Asia) and in Russia, (3) long liquidation
pressures, (4) the underlying strength in US retail sales as seen
by the sharp upward revision to the May data, and (5) the jump in
energy prices. Bullish factors yesterday included (1) the very
favorable US June CPI report which reinforced the fact that price
pressure remain at bay in the US economy, and (2) the headline
softness in the June retail sales report which fanned widespread
expectations for a slowdown in US GDP to the 2% area from Q1's
+5.4%.
Fed may conduct a supplemental system repo -- The Fed today
may conduct a supplemental system repo operation if upward pressure
on the funds rate continues. However, the Fed has both last
Friday's fixed $4.450 billion 6-day system repo operation and
Monday's fixed $2.025 billion 3-day system repo in place through
today's end of the 2-week maintenance period. Those operations
should address the bulk of the Fed's remaining add need. The Fed
yesterday remained out of the open market with the funds rate
trading at 5-7/16%, a bit below the 5-1/2% target.
US Stock Market -- The US stock market yesterday traded higher
for most of the session and then turned slightly lower late in the
day to finally settle with strong gains. Settlements were: Dow
Industrials +149.33 at 9245.54, DJU98 +160 at 9308, Dow Utilities
+.95 at 290.99, OEX +6.27 at 576.24, S&P 500 +12.39 at 1177.58,
SPU98 +12.10 at 1185.80, NASDAQ Composite +2.88 at 1968.41, and the
Russell 2000 +.68 at 459.43. The S&P 500 (cash and futures), the
NASDAQ and the OEX all closed at all-time highs yesterday.
Stock market breadth was bullish yesterday with advancing
issues (1,753) leading declining issues (1,185) by a 3 to 2 margin.
Yesterday's volume was heavy at 690 million shares and provided
volume confirmation for the upmove. Declining volume accounted for
32% of yesterday's total. The percentage of NYSE stocks above
their 200-day averages fell to 50% where it was down a bit from
last Friday's 1-1/2 month high of 52%. That reading in turn was up
from June 22nd's 3-1/2 year low of 42%. The number of shares
posting new 52-week highs (355) exceeded the number posting new
52-week lows (287).
The Dow was the biggest winner yesterday with a 1.64% gain
while the S&P 500 added 1.06%. The NASDAQ and the Russell 2000
both rose .15%. For the year-to-date, the NASDAQ is in first place
with a 25.35% gain followed by the S&P 500 at +21.35% and the Dow
at +16.91%. The Russell 2000 continues to lag with a 5.13% year-
to-date gain.
Bullish factors included (1) the continued sharp rally in
European stock markets which surged again yesterday, Italy's MIB30
is up 50.34% for the year-to-date in lira terms, (2) the better
than expected June CPI report since inflation reduces stock market
returns on a real basis, (3) a 1.6% gain in General Electric, the
largest US company by stock market capitalization, (4) technical
factors as the S&P 500 posted a new all-time high, (5) the broad
advance by a wide variety of companies suggesting that breadth may
be widening, (6) strength in the technology sector as the NASDAQ
continued to surge higher to post a new all-time high, and (7)
indications that mutual fund inflows for the year-to-date are
running about 20% ahead of last year's pace as investors continue
to believe in the stock market.
Bearish factors for the stock market included (1) the 2-day
rise in the benchmark 30-year bond yield as prices retreated from
last Monday's all-time high, (2) valuation concerns with the S&P
500 trading at a record 6.18 times book value, twice the level seen
at the start of 1995, and (3) indications that bullish sentiment is
at an extreme as the call/put ratio on the OEX nears an 8-month
high and as investors' drive Internet stocks to absurd levels.
Near the top of yesterday's most active list was Cendant
(-16.8%) which changed hands 60.30 million times. An audit found
that accounting irregularities, first disclosed in April, will
cause 1997 earnings to be revised downward and will also dent 1998
profits. The shares have fallen 62% in the last 3-1/2 months.
Compaq (+2.68%) rose on volume of 37.16 million shares as investors
squared up ahead of today's Q2 earnings report. The company is
expected to report that it broke even in the quarter compared to
earnings of $.17 per share in the year-ago quarter. The shares
were also boosted by a Wall Street Journal article which said that
Compaq's sub-$1000 computer had become the most profitable consumer
PC.
Of the S&P 500's 89 sub-groups, 68 rose yesterday while 22
fell. Market breadth was bullish as 357 of the S&P 500 stocks
closed higher while 124 fell. The diversified health-care sub-index
was yesterday's best performer on a capitalization weighted basis
as Bristol-Myers Squibb (+3.04%) and Johnson & Johnson (+3.48%)
rallied. Bristol-Myers posted a new all-time high while Johnson &
Johnson matched Q2 earnings expectations.
Of the 30 Dow stocks, 24 rose yesterday while 6 fell. JP
Morgan (+7-9/16) was the Dow's best performer after it reported Q2
earnings that beat estimates by 6 cents. Alcoa (+3-1/4) surged
after announcing a cost-cutting plan with the ambitious goal of
slashing costs by 2001.
The cash S&P 500 posted an all-time high of 1179.76 yesterday
where it continued to climb above the top of its 3-month sideways
trading range that existed between 1133 and 1075. The Russell 2000
posted a 1-1/2 month high of 460.44 last Thursday where it was up
6.18% from its 5-1/2 month low of 433.66 (June 15). The small-cap
index, however, remains well below its all-time high of 492.28
which was posted on April 22. The Dow Industrials index posted a
1-1/2 month high of 9256.61 yesterday where it extended its 1-month
upmove to a total of 8.01%. The Dow, however, remains below its
all-time high of 9311.98 (May 4). The NASDAQ composite index rose
to a new all-time high of 1978.17 yesterday where it was up 15.33%
from the Jun 15th 4-1/2 month low of 1715.19.
Better than expected earnings are boosting stock indexes --
While it is still too early in the Q2 reporting season to draw
final conclusions about the quarter, the earnings reports seen so
far have been above expectations. Of the 56 companies in the S&P
500 that have reported profits thus far, 57% have reported earnings
that have beaten expectations while 18% have fallen short, leaving
a net positive surprise balance of 39%. At this point last
quarter, there was a net positive surprise balance of only 9%.
The positive surprise balance seen so far this quarter is due
to the significant downgrading of Q2 earning estimates over the
last two months. Earnings estimates for the S&P 500 in the second
quarter dropped from 13% (annualized) at the end of 1997 to 3.6%
several weeks ago and now down to recent estimates of just above
1%. This downward revision has been excessive and is allowing
mediocre earnings reports to easily beat estimates. This is what
happened in Q1 when earnings expectations were cut to 0.5% before
the flood of releases. Earnings ended up growing 3.8% in the first
quarter. A similar thing appears to be happening now. The
companies that have reported so far are showing earnings growth of
approximately 6%, well above what was expected several weeks ago.
Still, the pace of earnings growth has been declining since peaking
in October 1995 and it will be a stretch to see double digit
earnings growth for all of 1998.
Investors today will have a chance to react to the Q2 earnings
report of Intel which was released after yesterday's close. Q2
earnings fell 28% (yr-yr) and were below consensus expectations.
The technology sector may also come under pressure from Intel's
comments that it expected Q3 sales to be only slightly higher than
Q2 sales. Intel's shares have risen 22% over the past month as
investors bet that the worst is behind the company. The company
did say, however, that second half revenue would be above first
half revenue and that gross margins would rise several percentage
points in Q3.
Among the companies expected to report Q2 earnings today and
their consensus expectations according to First call are: Apple
Computer ($.33), Compaq ($.00), Ford ($1.81), Freddie Mac ($.56),
General Dynamics ($.70) and Kroger ($.47). Tomorrow, Gillette
($.33), Coca-Cola ($.47), Office Depot ($.27), McGraw-Hill ($.72),
Microsoft ($.48), SBC Communications ($.50), Sun Microsystems
($.71), and Tellabs ($.42) are expected to report.
Commodities -- CRB closes slightly higher as energy soars,
grains tumble -- The CRB index yesterday closed up +.64 points at
210.00 as it continued to retreat from the Jun 30th 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 -.10%
on a month-on-month basis and down -10.43% on a year-on-year basis.
Closes: Energy: CLQ98 +.64 at 14.55; HUQ98 +.0128 at .4800;
HOQ98 +.0119 at .3885; NGQ98 +.017 at 2.266. Precious Metals:
GCQ98 +1.6 at 294.0; SIU98 -.8 at 532.5; PLV98 +5.2 at 382.9.
Grains: S X98 -15-4 at 581-0; SMZ98 -4.90 at 151.40; BOZ98 -.38 at
25.51; C Z98 -6-6 at 236-6; W Z98 -3-2 at 286-4. Livestock: LCQ98
+.67 at 62.47; FCQ98 +.28 at 70.55; LHQ98 +.23 at 50.70; PBQ98
-1.20 at 52.47. Softs: SBV98 -.09 at 8.67; KCU98 +.80 at 107.20;
CCU98 +4. at 1583.; JOU98 +4.00 at 105.15. Industrials: CTZ98 -.77
at 72.35; HGU98 +.65 at 74.95; LBN98 +1.90 at 269.50.
Aug crude oil was the CRB's biggest winner yesterday as the
contract rose +64 cents to close at $14.55. On Jun 15th, crude oil
futures touched a 12-year low of $11.40 on the weekly-nearest chart
(Jul 98 contract). Speculation mounted yesterday that the American
Petroleum Institute report on crude oil and gasoline stockpiles
would begin to show the effect of recent OPEC production cuts.
OPEC production cuts for the year officially total 3.2 mln barrels
per day, or 4.3% of global demand.
Dec corn was the CRB's biggest loser yesterday as the contract
fell -6-6 to close at 236-6. On yesterday's contract low at 236-2,
the contract has fallen 36-2 cents (13.30%) from the Jun 23rd
2-month high of 272-4. The USDA reported after the close on Monday
that 68% of the corn crop is in good to excellent condition
compared to 66% one week ago. The USDA reported corn silking at
24% compared to the 5-year average of 12% at this time. Weekend
rains broke the dry spell in the Mississippi Delta that threatened
crops in that region. The National Weather Service forecast for
next week called for above average rains and temperatures which are
favorable.
August gold yesterday closed up +1.6 at $294.0 as it remained
below the psychologically important $300 level. Gold has recently
tracked movements in the currency markets with a stronger yen
boosting prices. Asian gold demand is vulnerable to weakening in
the Japanese yen with the metal already expensive in local currency
terms. Aug gold posted a 5-3/4 month low of $285.6 on Jun 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 .09 cents
stronger at C$1.4791/US$, as it rebounded after falling to another
new all-time low of C$1.4815. The Canadian dollar has been
pressured by the resurgent Asian crisis and the subsequent collapse
in commodity prices.
The Sep Canadian bond yesterday settled -.20 points at 125.37
as it moved farther below last Wednesday's contract high of 126.18
(6/15/98). The Canadian 10-year cash yield yesterday settled -1.9
bp at 5.277% as it rebounded above last Wednesday's 3-month low of
5.228%. On that low, it was 4.3 bp above the all-time low of
5.190% which was established on Apr 3. The Sep 3-month bankers
acceptance yesterday closed +1 bp at 94.88, holding mildly below
the 2-1/2 month high of 94.93 (7/3/98).
The Toronto-300 stock index yesterday closed +38.20 points at
7387.10 holding 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 little changed, but dlr/yen plunges on
optimism surrounding Japan -- The dollar yesterday edged upward in
European and early US trading before moving lower after the release
of the retail sales and CPI reports. The greenback then rebounded
again through most of the remainder of the session to finally
settle little changed. Dollar closes (3PM NY): cash dollar index
-.02 at 101.48; dlr/yen -1.41 at 140.01; dlr/mark +.0018 at 1.8033;
dlr/Swiss +.0015 at 1.5208; stlg/dlr -.0060 at 1.6330; USD/CAD
-.0009 at 1.4791. Mark closes: mark/yen -.86 at 77.63; stlg/DM
-.0079 at 2.9455; mark/FRF +.0005 at 3.3532; mark/lira +.60 at
985.17; mark/Swiss unch at .8432. Futures closes: DXU98 -.06 at
101.32; JYU98 +.0069 at .7205; DMU98 -.0007 at .5564; SFU98 -.0009
at .6613; BPU98 -.0056 at 1.6286; CDU98 +.0003 at .6768; ADU98
+.0080 at .6242.
The dlr/yen yesterday closed -1.41 yen, as it consolidated in
the middle 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 dlr/mark yesterday closed +.18 pfennigs
at 1.8033 DM, as it rebounded after falling to a new 2-1/2 week low
of 1.7950 DM. On yesterday's low, the dlr/DM sold off by a total
of 3.75 pfennigs from last Thursday's 3-month high of 1.8325 DM.
Bearish factors for the dollar included (1) hopes that
Japanese action on the economy would grow more aggressive with the
installation of a new government, (2) long liquidation pressures,
and (3) persistent worries about a sharp slowdown in US economic
activity in the second half of the year. Bullish factors for the
dollar included (1) underlying concerns that the political
uncertainty in Japan may further delay the push for a permanent tax
cut and a wholesale clean-up of the banking system, (2) worries
about Duma opposition to the Russian government's pact with the
IMF, (3) expectations for only a token BBK tightening ahead of EMU,
and (4) the underlying strength in US domestic demand as seen in
yesterday's sharp upward revision to May retail sales.
The dlr/mark was underpinned yesterday by growing opposition
in the Duma to Monday's agreement between the Yeltsin government
and the IMF for $22.6 billion in assistance. While the government
believes that the conditions attached to the pact (concerning
taxation and spending) can be implemented by Presidential decree,
the Duma believes that the $22.6 billion package exceeds the 1998
budget limit on overseas borrowing. Therefore, the Communist-
dominated Duma is insisting that the package be brought before them
for approval. President Yeltsin is resisting, but even if the Duma
rejects the IMF's aid, Mr. Yeltsin can still accept it and enact
the conditions for the aid through a Presidential decree.
Therefore, the ongoing squabble boils down to the Duma trying to
protect its turf.
European Comment -- The European markets today will focus on
(1) today's release of the UK June unemployment report, April
average earnings data, and the publication of the minutes from the
June 4th MPC meeting, (2) the European credit markets which closed
mixed yesterday, and (3) the European stock markets which closed
stronger yesterday.
Germany -- The Bundesbank yesterday called for tenders on
today's regular 2-week repo operation. A total of 67.0 billion DM
in repos expire today. Expectations all for a 1-2 billion DM
reserve injection aimed at addressing some tightness in the money
market.
The German credit market closed slightly higher yesterday.
The HWWA economic institute forecast that German interest rates
will not change until the ECB takes control of monetary policy in
January. The German credit market is focussed on Jun wholesale
prices (May -0.4% m/m, -2.1% y/y), Jun M3 money supply (May +4.4%
y/y), and the Jun Ifo business climate index.
The 10-year Bund yield yesterday closed -0.7 bp at 4.698%
after posting an all-time low yield of 4.651% last Friday. Liffe
Sep Bunds yesterday closed unchanged at 108.65 after posting a
contract high of 109.15 on Monday. The Liffe Sep Euromark
yesterday closed up +.010 at 96.390 after posting a contract high
of 96.410 last Friday.
The Dax index yesterday closed up 76 points at an all-time
high settlement of 6095 (+1.26%) after posting an all-time high of
6096. The Dax is up +44.43% for the year to date in mark terms and
+43.13% in US dollar terms. Yesterday's rally was led by the
banking shares (Dresdner Bank, Commerzbank, and Deutsche Bank)
which rose on relief that Russia received a package from the IMF.
France -- The French financial markets were closed again
yesterday for the Bastille Day holiday, but will re-open today.
The French franc yesterday closed .05 centimes weaker at
3.3532 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.
As a review of recent activity, the French credit market
closed higher last Friday. The French credit market is focussed on
this week's release of the May industrial production and May
manufacturing production reports.
The 10-year Notional yield last Friday closed down -3.2 bp at
4.771% and posted an all-time low yield of 4.758%. The Sep
Notional bond last Friday closed up +.19 at 105.09 and posted a
contract high of 105.21. The Sep Pibor last Friday closed +.005 at
96.380 and posted a contract high at 96.400.
The CAC40 stock index was closed yesterday for the Bastille
Day holiday. As a review of recent activity, the index last Friday
closed down 63 points at 4256 (-1.45%) as it retreated below last
Thursday's all-time high of 4363. The CAC40 is up 41.93% for the
year-to-date in franc terms and up 40.63% in US dollar terms.
French stocks may play catch-up today after the gains seen in the
European stock markets yesterday. In addition, French investors
this week will be watching tomorrow's earnings announcement from
STMicroelectronics NV, Europe's second largest semiconductor maker.
UK -- The UK's key measurement of inflation showed an
unexpected decline but remained above the government's 2.5% target
on a year-on-year basis. The June RPIX fell -0.1% (mo-mo) and rose
+2.8% (yr-yr). That was mildly more favorable than expectations
for a +0.1% (mo-mo) gain and a +3.1% (yr-yr) advance. In May, the
RPIX climbed by +3.2% (yr-yr), the strongest gain in 1-1/2 years.
The headline June RPI fell by -0.1% (mo-mo) and rose by +3.7%
(yr-yr) were it was also more favorable than expectations for +0.1%
(mo-mo) and +3.9% (yr-yr). Moreover, the +3.7% increase in the
headline RPI was down from May's +4.2% (yr-yr) gain which was the
sharpest in 6 years.
The decline in retail prices was led by a drop in seasonal
food prices (-3.2% mo-mo) and the Office for National Statistics
said that prices are likely to decline again in July. A surge in
seasonal food prices was partially behind May's 1-1/2 year high
reading in the RPIX.
The gilt market was buoyed by the favorable retail prices
report which dampened fears of another rate hike. The BOE has
raised interest rates six times in the last 1-1/4 years in an
effort to get inflation down to the 2.5% target. However, the
markets are keying on today's release of the June unemployment
report and in particular the April average earnings report.
Further strength in wage pressures could negate any hopes for a
steady BOE policy stance that were raised by yesterday's RPI
report.
Chancellor Brown yesterday announced his comprehensive
spending review which raised even more concern about the
government's commitment to meeting strict spending limits aimed at
producing a balanced budget over the course of the business cycle.
Mr. Brown pledged sharp increases in spending on education and
health care, and called on departments to produce efficiency plans
in order to qualify for any increase in spending. He said that the
growth in spending on health and education will be financed by
spending cuts elsewhere in the budget as well as by expectations
for smaller interest payments on government debt.
However, the markets are likely to raise a cautionary flag
over Mr. Brown's budget numbers. The +2.75% per year increase in
real public spending over the next 3 years points to an
expansionary fiscal policy at a time when the BOE is trying to
brake economic growth. That has already boosted expectations for
another tightening, perhaps as early as the August MPC meeting.
Worse still, there is little leeway in Mr. Brown's spending program
if economic growth slows to a pace less than the government's
forecast for +1.75% growth in the current fiscal year, +2% growth
in FY 1999-2000, and +2.25% growth in FY 2000-2001. The markets
will now keep an eye on Mr. Brown's testimony today before the
Treasury Select Committee where he will be grilled on the Labour
government's plans to accelerate public spending.
Sterling yesterday settled -.79 pfennigs at 2.9455 DM, as it
held below the 2-1/2 month high of 3.0271 DM (7/2/98). On the
3.0271 DM 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).
The UK credit market closed higher yesterday. The Jun RPIX
fell -0.1% m/m and rose +2.8% y/y. That was below expectations for
a +0.1% m/m gain and a +3.1% y/y advance. In May, the RPIX
advanced at a +3.2% rate, the strongest gain in 1-1/2 years. The
headline Jun RPI fell -0.1% m/m and rose +3.7% were it was also
below expectations for +0.1% m/m and +3.9% y/y. The UK credit
market is focussed on today's Jun unemployment report (expected
-2,500, expected Apr average earnings +5.2% y/y).
The 10-year gilt yield yesterday closed -2.5 bp at 5.800% and
held below the Jun 19th 1-3/4 month high yield of 5.931%. Sep
gilts yesterday closed up +.10 points at 108.95 where they remained
within the 3-week trading range. Sep short sterling yesterday
closed up +.050 at 92.250 where it rebounded from the Jun 19th
5-1/2 year low of 92.020.
The FTSE index closed higher by 142.0 points at a 3-month high
settlement of 6100.2 (+2.38%) as it broke out above its 3-month
trading range. The FTSE is now holding just below its all-time
high of 6150.5 (April 14). The FTSE is up 18.78% for the
year-to-date in sterling terms and up 18.1% in US dollar terms.
Yesterday's favorable June inflation report sparked a rally as
investors bet that interest rates in the UK have peaked. The
strong opening on Wall Street also supported shares in the UK.
Asian Comment -- Japan -- The was little news to report
yesterday regarding the formation of a new government. The
political maneuvering has been relegated to the "smoke-filled
rooms" and probably won't see any light of day until tomorrow at
the earliest. That is when LDP members of both the lower and upper
houses of parliament are expected to gather for the first meeting
ahead of next week's likely vote on a new party leader.
The Nikkei index yesterday closed up 129 points at 16,489
(+.79%) as it extended Monday's rally. Japanese stocks were
supported by a call for a six trillion yen tax cut from the head of
Japan's tax reform panel, Hiroshi Kato. On July 2nd's 3-1/2 month
high of 16,743, the Nikkei index recovered sharply by 14.6% (2,218
points) from the recent 6-month low of 14,615 (6/16/98). Nikkei is
up 8.06% for the year-to-date in yen terms and is up .96% in US
dollar terms.
Tokyo Sep JGBs yesterdayclosed -.38 points at 131.60 after
posting a 9-week low of 131.59. On yesterday's low, the contract
extended its 1-1/2 month downmove from the June 5th contract high
to a total of 2.84 points. JGB's are coming under pressure as
investors worry that Mr. Hashimoto's successor as Prime Minister
will hasten stimulus measures. In London, Sep JGBs settled at
131.71, up +.11 points from the Tokyo close. The benchmark No. 182
10-year JGB closed +3.5 bp at 1.445%, well above the recent
all-time record low closing yield of 1.130% (6/2/98). The Dec
Euroyen yesterday settled down -1.0 bp at 99.215 but isholding
above Monday's 2-week low of 99.170.
Asian Stock Market Closes: Hong Kong Hang Seng +.98%,
Australia All-Ordinaries +1.31%, Singapore Straights Times
Industrials -1.02%, South Korea Composite Index +1.78%, Thailand
Stock Exch -.39%, Taiwan weighted index -.34%, Philippines
composite index +.51%, Malaysia composite index -.23%, China SE
Shanghai A -1.60%, Indonesia Jakarta composite index +.91%.
OPTIMA FINANCIAL NEWS SCHEDULE^ Wednesday 7/15/98
A. Today's News (local & GMT release times shown)
Wed US 0830 ET 1230 May business inventories expected +0.2%,
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%.
1330 ET 1730 St. Louis Fed President Poole speaks on the
US economic outlook.
N/A CBO releases its mid-year budget &
economic update.
1830 ET 2230 ABC/Money Magazine weekly consumer
confidence, last -1 to 22.
N/A Earnings: Apple Computer ($.33), Compaq
($.00), Ford ($1.81), Freddie Mac ($.56),
General Dynamics ($.70) & Kroger ($.47).
CAN 0830 ET 1230 May manufacturing survey: new orders
expected +0.5% m/m, April -0.3% m/m.
0830 ET 1230 May new vehicle sales expected +1.0% m/m,
April +5.9% m/m.
UK 0930 UK 0830 BOE publishes minutes from June MPC
meeting.
0930 UK 0830 June unemployment expected -2,500, May
+1,700; April average earnings expected
+5.2% y/y, March +5.2% y/y; March-May unit
wage costs expected +6.2% y/y, Feb-April
+6.4% y/y.
1615 UK 1515 Chancellor Brown testifies before the
Treasury Select Committee regarding
Tuesday's public spending announcement.
EUR N/A ECB President Duisenberg appears before
EU Parliamentary Committee in Strausbourg.
JPN 1330 JT 0430 Revised May industrial production, April -2.0%
m/m.
N/A Finance Minister Matsunaga holds press
conference.
B. Future News
Sometime this week:
GER N/A May retail sales, April real sales -2% y/y
(unadjusted) & -4.7% y/y (adjusted).
N/A June wholesale prices, May -0.4% m/m &
-2.1% y/y.
N/A June M3 money supply, May +4.4%.
N/A June Ifo business climate index, May unch.
N/A May trade balance expected 12.0 bln DM
surplus, April 11.4 bln DM surplus; May
current account balance expected flat, April
2.4 bln DM surplus.
JPN N/A May current account surplus expected 1.3 tln
yen.
Thu US 0830 ET 1230 Initial unemployment claims for week ended
July 11th expected -22,000 to 370,000, last
-1,000 to 392,000.
0915 ET 1315 June industrial production expected -0.4%,
May +0.5%; June capacity utilization rate
expected -0.6 points to 81.6%, May +0.1 point
to 82.2%.
1000 ET 1400 July Philadelphia Fed manufacturing survey,
June +10.7 points to 28.2.
1000 ET 1400 Fed Governor Meyer testifies before the
House Banking Committee regarding
consumer credit.
1300 ET 1700 Treasury auction of $10.0 bln in 52-week bills
(pay down $3.525 bln).
1345 ET 1745 Chicago Fed President Moskow speaks on
the 7th District & the FOMC.
1630 ET 2030 Money supply report for week ended July 6th
expected: M1 +$3.0 bln, M2 -$5.0 bln, & M3
-$6.0 bln;
June money supply expected: M1 -$4.5 bln,
M2 +$16.1 bln & M3 +$23.9 bln; 2nd-week
reserves.
N/A Earnings: Gillette ($.33), Coca-Cola ($.47),
Office Depot ($.27), McGraw-Hill ($.72),
Microsoft ($.48), SBC Communications ($.50),
Sun Microsystems ($.71), & Tellabs ($.42).
CAN 0700 ET 1100 June CPI expected +0.2% m/m & +1.1% y/y,
May +0.4% m/m & +1.1% y/y; June core CPI
expected +1.3% y/y, May +1.4% y/y.
UK 0930 UK 0830 June public-sector finances (PSNCR expected
4.0 bln sterling, May 2.539 bln sterling).
1100 UK 1000 British Chambers of Commerce release their
quarterly survey.
GER 1800 CET 1600 BBK member Krupp speaks in Munich.
JPN 0850 JT June M2 plus CDs money supply expected
+3.5% y/y, May +3.8% y/y.
N/A BOJ Policy Board meeting.
N/A Tax Commission expected to begin
discussions on permanent income tax cuts.
Fri US 0830 ET 1230 May goods & services trade deficit expected
-$14.3 bln, April -$14.5 bln.
1000 ET 1400 University of Michigan releases its early July
consumer sentiment index, June -0.9 points to
105.6.
1030 ET 1430 Fed Governor Gramlich testifies before the
Senate Banking Committee regarding
mortgage reform.
N/A Earnings: Tyco International ($.51), Case
($1.60), DSC Communications (-$.12), &
Healthsouth ($.28).
CAN 0830 ET 1230 May merchandise trade surplus expected
C$900 mln, April C$1.2 bln.
0830 ET 1230 June LEI.
JPN N/A EPA releases its July monthly report.
Week of July 20-24:
Sometime this week:
GER N/A June PPI, May unch m/m & +0.1% y/y.
Mon US 1300 ET 1700 National Association of Home Builders
releases its July single-family home sales
index, June +3 points to 71.
1300 ET 1700 Weekly Treasury auction of 3 & 6-month bills.
CAN 0830 ET 1230 May wholesale trade.
Tue US 0830 ET 1230 June housing starts, May -0.7% to an annual
rate of 1.530 mln units.
June building permits, May +1.7% to 1.543
mln units.
0830 ET 1230 June experimental CPI, May +1.5% y/y; June
core experimental CPI, May +2.0% y/y.
0900 ET 1300 BTM/Schroder weekly retail sales, last -1.0%
w/w.
1000 ET 1400 Fed Chairman Greenspan delivers his semi-
annual Humphrey-Hawkins testimony before
the Senate Banking Committee.
1440 ET 1840 Redbook retailer sales survey for week ended
July 18th, 1st-week +0.8%.
CAN 0830 ET 1230 May retail sales.
JPN N/A BOJ releases its monthly report.
N/A BOJ Governor Hayami holds press
conference.
Wed US 1000 ET 1400 Fed Chairman Greenspan delivers his semi-
annual Humphrey-Hawkins testimony before
the House Banking subcommittee.
1400 ET 1800 June Treasury statement, June 1997 $54.635
bln surplus.
1430 ET 1830 Treasury announces the details of next
week's 2-year note auction.
1830 ET 2230 ABC/Money Magazine weekly consumer
confidence.
GER 1800 CET 1600 ECB member Issing speaks in Frankfurt.
JPN N/A BOJ releases minutes from the June 12th
Policy Board meeting.
Thu US 0830 ET 1230 Initial unemployment claims for week ended
July 18th.
1630 ET 2030 Money supply report for week ended July
13th; 1st-week reserves.
GER N/A Regular bi-weekly BBK Council meeting, last
before summer recess (next mtg Aug 20th).
Fri US N/A No US economic reports scheduled at this
time.
Week of July 27-31:
Mon US 1000 ET 1400 June existing home sales, May +1.0% to an
annual rate of 4.82 mln units.
1300 ET 1700 Weekly Treasury auction of 3 & 6-month bills.
Tue US 0900 ET 1300 BTM/Schroder weekly retail sales.
1000 ET 1400 Conference Board releases its July consumer
confidence index, June +1.4 points to 137.6.
1440 ET 1840 Redbook retailer sales survey for week ended
July 25th.
JPN N/A BOJ Policy Board meeting.
Wed US 0830 ET 1230 Advance June durable goods orders, May
-2.4%.
1300 ET 1700 Treasury auction of 2-year notes.
1830 ET 2230 ABC/Money Magazine weekly consumer
confidence.
CAN 0830 ET 1230 June industrial product price index.
June raw materials product price index.
JPN N/A Preliminary June industrial production, May
-2.0% m/m & -11.2% y/y.
N/A June large retailers sales, May -0.9% y/y.
Thu US 0830 ET 1230 Initial unemployment claims for week ended
July 25th.
0830 ET 1230 July APICS Business Outlook Index, June
+3.6 points to 51.0.
0830 ET 1230 Q2 Employment Cost Index, Q1 +0.7% q/q &
+3.3% y/y.
1000 ET 1400 June new single-family home sales, May
+0.3% to an annual rate of 890,000 units.
1630 ET 2030 Money supply report for week ended July
20th; 2nd-week reserves.
Fri US 0830 ET 1230 Preliminary Q2 GDP, Q1 +5.4% with chain
price index +1.2%.
1000 ET 1400 July Chicago-area Purchasing Managers
index, June -3.4 points to 52.9%.
CAN 0830 ET 1230 May GDP expected +0.2%, April unch.
JPN N/A July Tokyo CPI, June -0.1% m/m & +0.4%
y/y.
N/A June pan-Japan CPI, May unch m/m & +0.5%
y/y.
N/A June unemployment rate, May +0.01 point to
4.14%.
N/A June labor supply/demand ratio, May -0.02
points to 0.53.
Week of Aug 3-7:
Mon US 0830 ET 1230 June personal income, May +0.5%; June
personal consumption, May +0.6%.
1000 ET 1400 July NAPM index, June -1.8 points to 49.6%.
1000 ET 1400 June construction spending, May -1.5%.
N/A Most US automakers release July sales
reports, June 14.4 mln unit pace.
Tue US 0900 ET 1300 BTM/Schroder weekly retail sales.
1000 ET 1400 June LEI, May unch.
1440 ET 1840 Redbook retailer sales survey for week ended
Aug 1st.
N/A GM expected to release its July vehicle sales
report.
CAN 0830 ET 1230 July building permits.
Wed US 1000 ET 1400 June housing completions, May -3.0% to an
annual rate of 1.455 mln units.
1400 ET 1800 Fed releases Tan Book ahead of Aug 18th
FOMC meeting.
1430 ET 1830 Treasury announces details of Aug refunding
operation (5-year, 10-year, & 30-year
maturities).
N/A Ford releases July vehicle sales.
1830 ET 2230 ABC/Money Magazine weekly consumer
confidence.
CAN N/A 3-day Premiers' conference in Saskatoon
begins.
UK N/A 2-day BOE MPC meeting begins.
Thu US N/A July same-store retail chain sales reports.
0830 ET 1230 Initial unemployment claims for week ended
Aug 1st.
1000 ET 1400 June factory orders, May -1.6%.
1630 ET 2030 Money supply report for week ended July
27th; 1st-week reserves.
CAN N/A 3-day Premiers' conference in Saskatoon
continues.
UK N/A 2-day BOE MPC meeting concludes,
announcement expected at noon UK.
Fri US 0830 ET 1230 July unemployment report: July non-farm
payrolls, June +205,000;
July manufacturing payrolls, June -29,000;
July average workweek, June -0.1 hour to
34.6 hours;
July average hourly earnings, June +0.1%
m/m & +4.1% y/y to $12.74;
July civilian unemployment rate, June +0.2
points to 4.5%.
1000 ET 1400 June wholesale trade: May inventories
+0.6%; May sales -0.3%; May inv-to-sales
ratio +0.01 point to 1.30 mos.
1000 ET 1400 July leading inflation index, June 102.9.
1500 ET 1900 June consumer credit.
CAN N/A 2-day Premiers' conference in Saskatoon
ends.
0700 ET 1100 July unemployment report.
Future News:
Aug 12: BOE releases its Quarterly Inflation Report.
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-4; British Time UK=GMT; Continental
European Time CET=GMT+2; Japan Time JT=GMT+9.
COPYRIGHT, 1982-1998, OPTIMA INVESTMENT RESEARCH, INC (312-427-3616)~
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