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[08:02 US BOND NY Outlook: CPI To Determine If FOMC One More & Out]
* Tame CPI Seen Allowing FOMC to Exit After Another 25 bp
* Stronger CPI and the Bond Bear Growls Anew
* Reactive Trading On the Data
* Flatter Curve Near Regardless as Pros Pressure Twos into Auction/FOMC
* Hedge Funds Accumulate paper for Anticipated Y2K Run
The market question is not whether the FOMC will raise rates or not next
Tuesday. Bank on it, they will. Most likely by 25 bps, but 50 bps is not out
of the question if this morning"s CPI number prints off the charts --as was
the case in May when a 0.7% rise shocked the market and sent bonds tumbling
down over two points. Rather, the question appears whether this morning"s
consumer inflation read comes above/below/at the consensus estimate of 0.3%
overall, and 0.2% for the core. Whereas last Friday"s benign PPI was warmly
greeted --by a market seeking relief after stumbling badly as it
miscalculated the interest in the 30-year bond auction-- it pales in market
importance to the CPI. The consumer price index is deemed a more inclusive
and realistic read of the economy"s current inflation and future inflation
potential. In consequence it is seen as carrying a much greater weight, than
PPI, with Fed policy markets. Although there are other market concerns
--there always is-- expect CPI to not only set the market tone for today"s
session, but very likely the bulk of the sessions heading into the next high
data risk event, the next payroll report.
Somewhat incredibly the refunding, is all but a memory. The paper served
to cover many a leverage short and curve position and to realign market
players for what appears to be a bullish run into Y2K. The curve"s once
battered belly appears to now be the favorite of many a leverage account
although the new 30- year bond made a bit of an heroic recovery yesterday
picking up nearly a half a point on the bond basis as well as 3 bps versus
the front of the curve. As was projected by many in the market, players,
particularly the muscular hedge funds, used the refunding to reverse bearish
bets. They now appear to be both outright long and heavily engaged in curve
flattening trades.
Whether, or to what degree, these price action shapers stay with their
current market sponsorship will undoubtedly be determined by this mornings
CPI release. Expect an at or better than consensus read, just as was the
case with PPI, to send them right to the markets bid side and in a big way.
An above consensus read will inevitably put the market in a tailspin the
magnitude that will be determined by the degree CPI is above consensus.
Through it all the pressure is seen as staying on the curve to flatten
further. The street and other leverage players have been doing a masterful
job manipulating the curve in response to the impending supply, with the
refunding the quintessential example. With the 2-year next on the supply
docket, look for this issue to continue to underperform as it has done
post-refunding right into next Wednesday"s auction.
The overnight session saw a vast improvement in activity from the
previous sessions morbid pace with govpx volume doubling to $2.5 bln. Flows
came from all quarters -Asia & European real money, Swap & Related market
desks, Hedge Funds and Dealers themselves-- they were two-way initially,
with an eventual better bias to the sellside. There appeared little rhyme or
reason behind the various transactions outside of the desire for players to
get square ahead of this morning"s data releases.
Note, Daimler Chrysler is set to price its $3.75 bln 3-tranche deal mid-
morning. The $1 bln 5-year & $2 bln 10-year fixed portions are thought to
contain both a swap and hedge unwind component, with the market already seen
set up for this eventuality. Out as well this morning will be the data
releases of July Housing starts -seen up 4.0%-- and CAP U & IP for July
--seen up .4% to 80.7 & up 1.0% respectively--. While in the scheme of
things these secondary data reads are important, today and likely the next
two weeks will be mainly about CPI.--kl/pb
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