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OPTIMA RESEARCH INVESTMENT, INC.
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Thursday 7/16/98 -- Americas Comment -- The US markets today
will focus on (1) any overnight developments in the Asian and
Russian financial markets, (2) today's release of the US June
industrial production/capacity utilization report, the July
Philadelphia Fed manufacturing index, and the weekly initial
claims, money supply, and reserve reports, (3) the US Treasury
market which settled little changed as Sep T-bonds consolidated
above Tuesday's low, boosted by the strength in the dollar/yen, (4)
the dollar which settled a bit softer as the mark extended its
gains due to optimism about Russia, while the dlr/yen pushed higher
amid doubts about the abilities of a Prime Minister Obuchi, (5) the
US stock market which settled mildly softer as long liquidation
pressures emerged, and (6) the CRB index which closed little
changed yesterday.
Today's release of the June industrial production report is
expected to show a -0.4% decline. That would reverse most of May's
+0.5% increase. Expectations for a drop in June production center
on the impact of the two GM strikes which have all but shut down
North American production at the world's largest auto maker. Apart
from the auto industry, output will likely be undercut by the
effort among manufacturers to pare inventories, as well as by the
impact of the Asian crisis on the manufacturing sector of the
economy. On the capacity side of the coin, the capacity
utilization rate is expected to show a sharp -0.6 point decline to
81.6%. That would more than reverse May's +0.1 point increase and
leave the capacity rate at its lowest level in 4-1/2 years. Such
a decline would bolster expectations for continued steady price
pressures in the US economy as the low capacity rate suggests there
are no significant potentially inflationary bottlenecks in the
production process.
US May business inventories slip -- May business inventories
fell by -0.1%, moderately weaker than expectations for a +0.2%
increase. April business inventories were revised a bit softer to
+0.1% from the earlier report of +0.2%. The -0.1% decline in May
business inventories marked the first drop in the series in nearly
2 years. On a year-on-year basis, inventory growth slowed to +4.1%
from April's +4.6% (yr-yr) gain. That left year-on-year growth
moderately below March's 2-1/3 year peak of +4.9%.
As previously reported, May factory inventories climbed by
+0.1% and May wholesale inventories climbed by +0.6%. The only new
data in yesterday's report concerned retail inventories which fell
by -1.0%. That more than reversed April's +0.2% increase and
marked the sharpest drop in retail inventories in 2-1/2 years. The
decline in retail inventories was broad-based as durable goods
stocks fell by -1.5% and as non-durable goods inventories fell by
-0.4%. The drop in durable goods retail inventories was fueled
largely by a -1.9% plunge in auto inventories. However, non-auto
retail inventories still fell by -0.6%.
May business sales climbed by +0.1%. April business sales
were revised mildly weaker to -0.3% from the earlier report of
-0.1%.
The May inventories-to-sales ratio remained unchanged at 1.38
months where it stands mildly above the all-time low of 1.36 months
which was established in Feb 1997 and matched in March and July
1997. For retailers, the inventories-to-sales ratio fell by -0.03
points to 1.45 months. That marked a new 14-1/3 year low, thereby
pointing to very tight inventories at the retail level when
measured against demand.
Yesterday's May business inventories report should confirm
that the slowdown in inventory growth in April and May will sharply
brake Q2 GDP growth from the +5.4% pace seen in Q1. The -0.1%
decline in May business inventories was reinforced by the downward
revision to April inventories. Moreover, looking ahead to June,
inventories are likely to fall again as a result of the combination
of the GM strike and the strength in per-unit vehicle sales.
The focus of yesterday's inventory report also falls on the
retail component which posted a sharp -1.0% drop. The most
impressive aspect of that decline is that it was not fueled
entirely by falling auto inventories, as non-auto retail
inventories fell by only -0.6%. Moreover, the very tight retail
inventories-to-sales ratio (at a 14-1/3 year low of 1.45 months)
suggests that stocks at the retail level are very tight when
measured against demand. In fact, even the overall stocks-to-sales
ratio of 1.38 months points to tightness as that ratio stands only
0.02 points above the all-time low of 1.36 months.
The tightness in the inventories-to-sales ratio suggests that
the inventory overhang in the US economy is not very large.
Moreover, the continued strength in consumer demand suggests that
the effort among producers, wholesalers, and especially retailers
to pare inventory growth should not take much time. Therefore,
while inventories may make a hefty negative contribution to Q2
growth, the tightness of stocks when measured against demand could
trigger a sharp rebound in production and inventory accumulation in
the second half of the year. That is especially true in the auto
industry as GM will make aggressive moves to increase production
once it settles its 2 strikes in Flint, MI.
Import prices continue to fall -- June import prices,
excluding fuel, fell by -0.3%. That marked the 9th straight
decline in the series. May non-fuel import prices were revised a
bit higher to -0.2% from the earlier report of -0.3%. Overall June
import prices fell by -0.5%. That marked the sharpest decline in
3 months. May import prices were left unrevised at -0.1%. The
decline in overall June import prices was fueled largely by a -3.9%
plunge in imported petroleum prices. That marked the first drop in
imported oil prices in 3 months. Elsewhere, prices of imported
goods from Japan fell by -0.7% (mo-mo) and by -4.8% (yr-yr), and
imports from the Asian newly industrialized countries fell by -1.2%
(mo-mo). Imports from the NICs account for only about 10% of all
US imports. June export prices fell by -0.6%, more than reversing
May's +0.1% increase.
Yesterday's June import prices report provided some more good
news on the inflation front for the financial markets. The
strength in the dollar continues to feed through to falling import
prices which, in turn, are playing a crucial role in holding down
both producer and consumer prices in the US economy. That role is
both direct and indirect. The direct effect contributing to
favorable price pressures is obviously that the dollar price of
imported goods is falling. The indirect effect of falling import
prices is that it forces US producers to match the lower prices of
similar items manufactured overseas. The result is good news for
domestic US price levels.
CBO issues its revised forecasts -- The Congressional Budget
Office yesterday released its mid-year economic and budgetary
review in which it presented a brighter outlook for the economy,
but cautioned about a possible Fed tightening. The CBO revised its
forecast for 1998 GDP growth to +3.3% from Jan's forecast of +2.7%.
However, the CBO expects growth to slow to about +2% through the
remainder of 1998 and into 1999. Still, the CBO warned that the
Fed may tighten by year-end if inflationary pressures accelerate,
but it also said that it expects any rate hike to be "mild" and
"temporary." Concerning inflation, the CBO forecast the 1998 CPI
to climb by +1.7%, down from Jan's +2.2% forecast. However, the
CPI is expected to accelerate to +2.6% in 1999, pushed higher by
strong wage growth and sharper increases in medical care costs.
US Interest Rates -- US credit market settles little changed
-- Sep T-bonds yesterday drifted sideways through most of the day
and finally settled little changed. Futures closes: USU98 +0-02 at
122-16; TYU98 +0-02 at 113-22; FVU98 +0-010 at 109-235; TUU98
+0-005 at 104-075; TBU98 +.005 at 94.965; EDZ98 +.005 at 94.285.
Cash closes (3PM NY): cash 30-yr +0-06 at 105-31; cash 30-yr yield
-.013 at 5.703; cash 10-yr +0-02 at 101-04; cash 10-yr yield -.008
at 5.476; cash 5-yr +0-01 at 99-21; cash 5-yr yield -.007 at 5.456;
cash 2-yr +0-015 at 99-290; cash 2-yr yield -.026 at 5.416; 3-mo
T-bill -.001 at 4.999.
Sep T-bonds yesterday held above Tuesday's 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 held below
Tuesday's 3-1/2 week high of 5.733% and closed at 5.703% 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).
Bullish factors yesterday included (1) the strength in the
dlr/yen as the markets are disenchanted with the prospects of
Foreign Minister Obuchi taking over the top spot in Tokyo, (2) the
decline in May business inventories which may trigger another round
of downward revisions in forecasts for Q2 GDP growth, and (3)
short-covering. Bearish factors included (1) 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,
(2) this week's upward push in share prices which may also be
drawing capital out of the Treasury market, and (3) some supply
pressures as investors eye the Aug refunding operation which will
include 30-year bonds for the first time in 6 months.
Fed may conduct a term system repo -- The Fed may conduct a
4-day system repo operation in order to get a jump start on
addressing its add need in the new 2-week maintenance period that
begins today. The Fed faces a modest $4-$8 billion per day add
need in the new 2-week period. That add need is fueled largely by
high levels of currency in circulation as the summer vacation
season remains in high gear. Moreover, the Fed will need to
replace a total of $11.917 billion in system repos as last Friday's
fixed $4.450 billion 6-day, Monday's fixed $2.025 billion 3-day,
and yesterday's $5.442 billion overnight system repos all expire
today. The Fed yesterday conducted the overnight system repo with
the funds rate trading at 5-11/16%, mildly above the 5-1/2% target.
The upward pressure on the funds rate yesterday was tied to banks
scrambling to meet their reserve requirements.
US Stock Market -- The US stock market yesterday moved
sideways for most of the session before a late sell-off left the
major indexes mixed. Settlements were: Dow Industrials -11.07 at
9234.47, DJU98 -3 at 9305, Dow Utilities -.12 at 290.87, OEX -.55
at 575.69, S&P 500 -2.77 at 1174.81, SPU98 -2.40 at 1183.40, NASDAQ
Composite +26.13 at 1994.54, and the Russell 2000 +2.55 at 461.98.
The NASDAQ posted its sixth consecutive record-high close
yesterday.
Stock market breadth was slightly bearish yesterday with
declining issues (1,548) leading advancing issues (1,408) by a
narrow 11 to 10 margin. Yesterday's volume was very heavy at 722
million shares while declining volume accounted for 52% of the
total. The percentage of NYSE stocks above their 200-day averages
was unchanged at 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 (304) exceeded the number posting new 52-week lows
(284).
The NASDAQ staged another powerful rally yesterday and closed
higher by 1.33%. The Russell 2000 rose .56% while the S&P 500 and
the Dow lost .24% and .12% respectively. For the year-to-date, the
NASDAQ is in first place with a 27.01% gain followed by the S&P 500
at +21.06% and the Dow at +16.77%. The Russell 2000 continues to
lag with a 5.71% year-to-date gain.
Bearish factors for the stock market included (1) weakness in
the drug shares, (2) supply concerns with stock issuance remaining
strong, according to Securities Data Company, as $71 billion in
common stock and closed end funds were sold in the first half of
1998 (the second highest amount in a 6-month period after 1997's
second half) while Q2 set a quarterly record of $43 billion, (3)
profit taking with the cash S&P 500 up 9.95% over the past month on
yesterday's all-time high of 1181.48, (4) valuation concerns with
the S&P 500 trading at a record 28.2 times 12-month trailing
earnings and 24.4 times forecasted earnings, and (5) indications
that bullish sentiment is at an extreme level with the 10-day
average of the call/put ratio on the OEX near an 8-month high.
Bullish factors included (1) continued strength in the Asian
and European stock markets overnight, (2) the better than expected
Q2 earnings which are only mediocre, but are still beating the
lower expectations, and (3) strength in the technology sector as
the NASDAQ continued to surge higher to post a new all-time high.
Among the companies expected to report Q2 earnings today and
their consensus estimates according to First Call are: Gillette
($.33), Coca-Cola ($.47), Office Depot ($.27), McGraw-Hill ($.72),
Microsoft ($.48), SBC Communications ($.50), Sun Microsystems
($.71), and Tellabs ($.42). Tomorrow, Tyco International ($.51),
Case ($1.60), DSC Communications (-$.12), and Healthsouth ($.28)
are expected to report.
At the top of yesterday's most active list was bellwether
technology issue Intel (+4.42%) which changed hands 42.02 million
times. Investors looked past Q2 earnings, which fell 29% year-on-
year, and instead focussed on expectations for a pick-up in the
second half. Intel, however, issued only a modest forecast for the
second half of 1998. The company said that Q3 sales would likely
only show a small gain, if any, from Q2 levels but that sales for
the entire second half would be above first half levels. Investors
were also cheered as Intel appeared to escape the slump in Asia as
sales in Japan actually rose. Consensus estimates, however, are
still for Intel's earnings to fall in 1998, the first such decline
after nine years of record profits. Compaq traded 32.75 million
shares and fell .37% after reporting a Q2 gain of only 2 cents
which was still better than expectations for a break- even quarter.
Of the S&P 500's 89 sub-groups, 57 fell yesterday while 31
rose. Market breadth was bearish as 309 of the S&P 500 stocks
closed lower while 172 rose. The money-center bank sub-index was
among yesterday's worst performing sectors on a capitalization
weighted basis. BankAmerica (-2.77%) led the slide despite
reporting that Q2 earnings met expectations.
Of the 30 Dow stocks, 18 fell yesterday while 11 rose.
Earnings reports dominated action in the Dow stocks yesterday.
Cost-cutting measures at Eastman Kodak (+8-3/4 or +11.86%) are
paying off and the company reported yesterday that its Q2 profits
rose 23%, sharply higher than expectations. Kodak also said that
it regained a small portion of market share from rival Fuji Photo
Film in the second quarter. Caterpillar slumped 4-1/16 points
(-7.22%) after it reported lower than expected Q2 earnings and
shrinking profit margins.
The cash S&P 500 posted an all-time high of 1181.48 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 461.97 yesterday where it was up 6.53%
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 that was
posted on April 22. The Dow Industrials index posted a 2-1/2 month
high of 9305.53 yesterday where it met resistance just below its
all-time high of 9311.98 (May 4). The NASDAQ composite index rose
to a new all-time high of 1994.71 yesterday where it was up 16.3%
from the Jun 15th 4-1/2 month low of 1715.19.
Commodities -- CRB closes little changed with crude oil pacing
gains -- The CRB index yesterday closed down -.05 points at 210.05
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 up +.73% on a
month-on-month basis but down -10.66% on a year-on-year basis.
Closes: Energy: CLQ98 +.32 at 14.87; HUQ98 -.0106 at .4694;
HOQ98 +.0046 at .3932; NGQ98 -.035 at 2.231. Precious Metals:
GCQ98 +.5 at 294.5; SIU98 +1.8 at 534.3; PLV98 +7.4 at 390.3.
Grains: S X98 -3-0 at 578-0; SMZ98 +.70 at 152.10; BOZ98 -.52 at
24.99; C Z98 -3-2 at 233-4; W Z98 -1-4 at 285-0. Livestock: LCQ98
-.27 at 62.20; FCQ98 -.50 at 70.05; LHQ98 -.38 at 50.32; PBQ98
-1.02 at 51.45. Softs: SBV98 -.01 at 8.66; KCU98 -.10 at 107.10;
CCU98 -26. at 1557.; JOU98 -.65 at 104.50. Industrials: CTZ98 +.15
at 72.50; HGU98 +1.60 at 76.55; LBU98 -5.00 at 274.50.
Aug crude oil was the CRB's biggest winner yesterday as the
contract rose +32 cents to close at $14.87. On Jun 15th, crude oil
futures touched a 12-year low of $11.40 on the weekly-nearest chart
(Jul 98 contract). The American Petroleum Institute reported after
the close Tuesday that crude oil stockpiles fell -6.3 mln barrels
to 334.7 mln barrels. The report demonstrated the first effect of
recent OPEC production cuts as refiners deplete stockpiles
purchased at lower prices and offer products at very favorable
margins. Seasonal maintenance work on North Sea oil platforms is
reducing British and Norwegian production.
Sep cocoa was the CRB's biggest loser yesterday as the
contract fell -26 to close at 1557. On yesterday's contract low at
1555, the contract fell 222 dollars (12.49%) from the May 15th
7-month high of 1777. Recent rain in the Ivory Coast eased a dry
spell since the beginning of the month. The crop has otherwise
received good weather since May. The US Chocolate Manufacturers
Association is expected to report tomorrow that Q2 cocoa grinding
rose from one year ago. US chocolate makers ground 99,189 tons of
cocoa in Q1 which was +3.9% higher than one year ago.
August gold yesterday closed up +.5 at $294.5 but 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 -- May manufacturing shipments fell by -1.0%, while
inventories edged +0.6% higher. That pushed the May
inventories-to-shipments ratio up +0.02 points to 1.32 months.
That is still rather tight on a historical basis and does not point
to an inventory overhang in the Canadian economy. May new orders
fell by -0.4%, while unfilled orders climbed by +1.1%.
June existing home sales edged +0.2% higher to 19,353 units.
On a year-on-year basis, sales climbed by +9.1%. However, the
value of June home sales slipped by -0.2% from May, bit climbed by
+6.5% (yr-yr) to C$3.169 billion. The strength in existing home
sales could help fuel strength in consumer spending and points to
the slow narrowing of the Canadian output gap.
May new vehicle sales climbed by +1.1% (mo-mo) and by +10.3%
(yr-yr). The strength in new vehicle sales was fueled by strength
in light-truck sales as car sales fell by -1.0% (mo-mo).
The April budget surplus totaled C$1.6 billion, little changed
from the year-earlier surplus of C$1.5 billion. April marked the
first month of FY 1998-99 amid expectations for a surplus in the
current fiscal year.
The Canadian dollar yesterday closed .76 cents weaker at
C$1.4867/US$, as it fell to another new all-time low of C$1.4873.
The Canadian dollar has been pressured by the Asian crisis and the
subsequent collapse in commodity prices. Yesterday's tumble was
accelerated by the weaker-than-expected May manufacturing survey.
The Sep Canadian bond yesterday settled -.46 points at 124.91
as it moved farther down from last Wednesday's contract high of
126.18 (6/15/98). The Canadian 10-year cash yield yesterday
settled +9.6 bp at 5.373% 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 -13 bp at 94.75, as it
fell farther below the 2-1/2 month high of 94.93 (7/3/98).
The Toronto-300 stock index yesterday closed +1.0 point at
7388.10 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 mildly softer as consolidation sets in
against the yen and mark -- The dollar yesterday pushed higher in
Asian trading, sold off in European trading, and then rebounded
through the US session to finally settle a bit softer. Dollar
closes (3PM NY): cash dollar index -.11 at 101.37; dlr/yen +.55 at
140.56; dlr/mark -.0047 at 1.7986; dlr/Swiss -.0095 at 1.5113;
stlg/dlr +.0025 at 1.6355; USD/CAD +.0076 at 1.4867. Mark closes:
mark/yen +.51 at 78.14; stlg/DM -.0032 at 2.9423; mark/FRF -.0001
at 3.3531; mark/lira +1.14 at 986.31; mark/Swiss -.0031 at .8401.
Futures closes: DXU98 -.15 at 101.17; JYU98 -.0026 at .7179; DMU98
+.0015 at .5579; SFU98 +.0045 at .6658; BPU98 +.0018 at 1.6304;
CDU98 -.0036 at .6732; ADU98 +.0009 at .6251.
The dlr/yen yesterday closed +.55 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 -.47 pfennigs
at 1.7986 DM, as it held above Tuesday's 2-1/2 week low of 1.7950
DM. On Tuesday'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) the emerging
stability in the Russian markets following Monday's pact with the
IMF which underpinned the mark, (2) some 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) the weak
Canadian May manufacturing survey which pushed the Canadian dollar
to another new all-time low, (3) expectations for only a token BBK
tightening ahead of EMU, and (4) the underlying strength in US
domestic demand.
The dollar/yen was underpinned yesterday by news that Japanese
Foreign Minister Keizo Obuchi is the leading candidate for Prime
Minister. Mr. Obuchi is seen as someone who will not push for the
financial reforms started by Mr. Hashimoto. His election could
dash hopes that Japanese action on the economy would become more
aggressive with the installation of a new government, thereby
boosting the dlr/yen.
European Comment -- The European markets today will focus on
(1) today's release of the UK June public-sector finances report,
and comments by BBK member Krupp, (2) the European credit markets
which closed mixed yesterday, and (3) the European stock markets
which closed sharply higher yesterday.
Germany -- June wholesale prices fell -0.4% (mo-mo) and -2.2%
(yr-yr). German wholesale prices have now fallen in 4 of the last
6 months. The decline was led by fresh vegetable prices which fell
11% (mo-mo), coffee (down 5.8% mo-mo) and heating oil (down 4.8%
mo-mo). Yesterday's report provided further evidence that German
inflationary pressures remain under wraps.
May west German manufacturing orders were revised mildly
softer to -0.6% (mo-mo) from the earlier report of -0.4%. The
revision was largely overlooked by the financial markets.
The BBK yesterday drained a net 100 million DM at its weekly
repo operation. The operation was conducted at the fixed 3.30%
rate seen for the past 9 months.
The German credit market closed little changed yesterday. Jun
wholesale prices fell -0.4% m/m and -2.2% y/y, slightly more than
expected and the second straight monthly decrease. The ECB's
Duisenberg said that the improvement in European growth will
provide a favorable starting point for the euro. The German credit
market is focussed on Jun M3 money supply (May +4.4% y/y) and the
Jun Ifo business climate index.
The 10-year Bund yield yesterday closed -2.0 bp at 4.678%
after posting an all-time low yield of 4.651% last Friday. Liffe
Sep Bunds yesterday closed up +.13 at 108.78 after posting a
contract high of 109.15 on Monday. The Liffe Sep Euromark
yesterday closed up +.005 at 96.395 after posting a contract high
of 96.410 last Friday.
The Dax index yesterday closed up 13 points at an all-time
high settlement of 6108 (+.21%) after posting an all-time high of
6150. The Dax is up +43.73% for the year to date in mark terms and
+43.43% in US dollar terms. Daimler-Benz boosted the Dax yesterday
after Chrysler, which the German company is buying, reported better
than expected Q2 profits. Germany's wholesale prices data for June
also provided evidence that inflation remains tame.
France -- The French franc yesterday closed .01 centime
stronger at 3.3531 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 lower yesterday upon reopening
after the holiday break. Bearish factors included the recent
decline in the US credit market. Last week, the inflation rate
remained below the BOF's 2.0% y/y ceiling for the 23rd consecutive
month. The French credit market is focussed on today's auction of
FFR 15 bln in 2-year and 5-year notes and May industrial production
and May manufacturing production.
The 10-year Notional yield closed down -1.5 bp at 4.803% after
posting an all-time low yield of 4.758% last Friday. The Sep
Notional bond closed down -.27 at 104.82 after posting a contract
high of 105.21 last Friday. The Sep Pibor closed -.005 at 96.375
after posting a contract high at 96.400 last Friday.
The CAC40 stock index reopened yesterday after the Bastille
Day holiday and closed +88 points higher at an all-time high
settlement of 4344 (+2.07%). The index did, however, remain below
last Thursday's all-time high of 4363. The CAC40 is up 44.86% for
the year-to-date in franc terms and up 43.61% in US dollar terms.
French stocks had some catching up to do yesterday as the rest of
Europe's stock markets rallied on Monday and Tuesday.
UK -- UK April average earnings rose by +5.4% (yr-yr) and were
stronger than expectations for a +5.2% (yr-yr) increase. Moreover,
March average earnings were revised a bit stronger to +5.3% (yr-yr)
from the previous report of +5.2%, and Feb earnings were revised a
bit stronger to +5.0% (yr-yr) from the earlier report of +4.9%.
The +5.4% (yr-yr) increase in April underlying average earnings was
the strongest increase in 5-1/2 years. While bonus payouts
accounted for 0.9 points of June's +5.4% increase, the BOE made it
clear in the minutes from the June MPC meeting (see below) that it
would be misleading to look at earnings without taking into account
bonuses.
June claimant-count employment rose by +700 workers from May.
That was a bit weaker than expectations for a -2,500 worker
decline. Still, the unemployment rate remained unchanged in June
at the 18-year low of 4.8%.
Yesterday's report revived talk that the BOE will move to
raise rates again, possibly as soon as its early August meeting.
At +5.4% growth, average earnings are well above the +4.5% limit
that the BOE says the economy can sustain without sparking further
inflation. Moreover, the BOE's minutes (see below) made it clear
that the MPC is focused on earnings growth as an inflationary
indicator.
The BOE's minutes from the June MPC meeting revealed that the
MPC voted by an 8 to 1 margin to tighten base rates by 25 bp to
7.5%. The lone dissenter was DeAnne Julius, a known dove. The key
reason put forward for the rate hike was the acceleration in
average earnings growth in March. The minutes said, "the earnings
data showed that domestic inflationary pressures were stronger than
previously thought and so the need for domestic demand growth to
slow down became more pressing." Some of the members even
questioned whether a 25 bp hike would be sufficient to reach the
government's 2.5% target for inflation. Given the fact that
yesterday's data showed a further acceleration in earnings growth
in April, compounded by the upward revision to Feb and March
earnings, it is no wonder that the UK markets are anticipating a
further tightening, perhaps as early as next month.
Sterling yesterday settled -.32 pfennigs at 2.9423 DM, as it
moved farther 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 sharply lower yesterday on a
stronger than expected Jun employment report. Apr average earnings
rose by +5.4% y/y and were stronger than expectations of +5.2%.
The BOE's minutes from the June MPC meeting revealed that eight of
the members voted for a 25 bp tightening to 7.5%. The UK credit
market is focussed on today's British Chamber of Commerce quarterly
survey.
The 10-year gilt yield yesterday closed +7.0 bp at 5.870% and
held below the Jun 19th 1-3/4 month high yield of 5.931%. Sep
gilts yesterday closed down -.51 points at 108.44 where they
remained within the 3-week trading range. Sep short sterling
yesterday closed down -.100 at 92.150 where it remained above the
Jun 19th 5-1/2 year low of 92.020.
The FTSE index closed higher by 51.3 points at an all-time
high settlement of 6151.5 (+.84%) yesterday. The FTSE is up 19.78%
for the year-to-date in sterling terms and up 18.97% in US dollar
terms. Stocks in the UK were able to shrug off the unexpected rise
in April average earnings and instead focus on the global rally in
stock prices. British Telecom rose 1.75% after the company
announced that it would use the proceeds of the sale of its 20%
stake in MCI Communications to buy back 10% of its own stock.
Asian Comment -- Japan -- The LDP yesterday laid out the
process for choosing its new leader following Monday's resignation
of Prime Minister Hashimoto. Nominations for the party leadership
will be made on Monday. That will be followed by the election for
the party leader on Tuesday. The election date is to be formally
announced later today. Assuming that the election goes smoothly,
the LDP hopes to call an extraordinary session of the Diet by July
30th to formally elect the party leader as prime minister.
Japan's Foreign Minister, Keizo Obuchi, is emerging as the
leading candidate for Prime Minister after several officials from
the ruling Liberal Democratic Party said that he would run for the
job. In fact, Mr. Obuchi yesterday received the backing of his
faction within the ruling party. Since former party chief cabinet
secretary Kojiyama also hails from that faction, Mr. Obuchi's
endorsement will make it very difficult for Mr. Kajiyama to mount
much of a campaign.
The BOJ's Policy Board meets today amid expectations for no
change in monetary policy. While the BOJ's decision to leave its
policy unchanged was not unanimous at its June 12th and June 25th
meetings, the Board is not expected to ease during the current
period of political uncertainty. Still, the BOJ will certainly
discuss the possibility of an easing at today's meeting as it tries
to reach a consensus on the proper monetary stance.
May industrial production was left unrevised at -2.0% (mo-mo).
May industrial inventories fell by -1.7% (mo-mo) and climbed by
+3.6% (yr-yr), as the inventories-to-sales ratio fell by -1.4%
(mo-mo) and climbed by +17.5% (yr-yr). The sharp slowdown in
production is tied to the effort among Japanese producers to pare
inventory growth amid the sharp slowdown in domestic and overseas
demand.
The weakness in domestic demand was visible in the June Tokyo
department store sales report of -5.3% (yr-yr). That added to
May's -1.5% (yr-yr) slide. The weakness in sales is even worse
when one considers just how soft the base is following the April
1997 hike in the consumption tax which triggered a sharp drop in
retail sales through the final 8 months of last year.
The Nikkei index yesterday closed up 123 points at 16,612
(+.76%) as it continued to extend Monday's rally. Tuesday's rally
in the S&P 500 to an all-time high helped support Japanese stocks
yesterday. On the July 2nd 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 8.88% for the year-
to-date in yen terms and is up 1.06% in US dollar terms.
Tokyo Sep JGBs yesterday closed +.43 points at 132.03 where
they rebounded above Tuesday's 9-week low of 131.59. On Tuesday's
low, the contract extended its 1-1/2 month downmove from June 5th's
contract high to a total of 2.84 points. In London, Sep JGBs
settled at 132.03, unchanged from the Tokyo close. The benchmark
No. 182 10-year JGB closed -4 bp at 1.405%, well above the recent
all-time record low closing yield of1.130% (6/2/98). The Dec
Euroyen yesterday settled +0.5 bp at 99.220 as it held above
Monday's 2-week low of 99.170.
Asian Stock Market Closes: Hong Kong Hang Seng +3.15%,
Australia All-Ordinaries +.72%, Singapore Straights Times
Industrials +1.30%, South Korea Composite Index +2.18%, Thailand
Stock Exch +3.03%, Taiwan weighted index +1.11%, Philippines
composite index +.51%, Malaysia composite index +3.14%, China SE
Shanghai A -.06%, Indonesia Jakarta composite index +.75%.
OPTIMA FINANCIAL NEWS SCHEDULE^ Thursday 7/16/98
A. Today's News (local & GMT release times shown)
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.
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 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.
Fri US 0830 ET 1230 May goods & services trade deficit expected
-$14.3 bln, April -$14.5 bln.
1000 ET 1400 University of Michigan releases its early July
consumer sentiment index, June -0.9 points to
105.6.
1030 ET 1430 Fed Governor Gramlich testifies before the
Senate Banking Committee regarding
mortgage reform.
N/A Deputy Treasury Secretary Summers &
Japanese MOF official Sakakibara participate
in a symposium on the Asian crisis in
Chatham, MA.
N/A Earnings: Tyco International ($.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.
Sat US N/A Deputy Treasury Secretary Summers &
Japanese MOF official Sakakibara participate
in a symposium on the Asian crisis in
Chatham, MA.
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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