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INTEREST RATE WATCH
Prepared by
R.J. O'Brien & Associates, Inc.
Global
The almighty dollar, that great object of universal devotion throughout the land. Washington Irving
The short-term knee jerk reaction is to sell stocks. In a few days or weeks, when people recognize we are almost the only game in town, that should change. Ed Yardeni, economist
Things were getting a little boring for the first half of the week, but then on Thursday, the shock wave from Asia hit full force, sending the U.S. stock market reeling and the long bond soaring. Everyone was talking of a rush to value and safety, but if so, why bonds? Traditionally, investors fearing for their financial health seek out three-month Treasury bills for their safe haven, but this time the longer maturities were the preferred investment vehicle.
Another surprising development was the relative weakness of the U.S. Dollar. Normally, you would expect that the depreciating currencies of Southeast Asia would help propel the U.S. Dollar higher, but the dollar index is nowhere near its market peak of early August, and the dollar index actually declined during Thursday's tumultuous trading session. Instead, worried investors sought the safety of the Swiss currency, which is backed by gold (which fell to new lows). Sound confusing?
If long U.S. bonds are the preferred investment vehicle, it's not the foreigners who are doing the buying. In the latest week (as of October 22, 1997), the face amount of marketable U.S. government securities held in custody by the Federal Reserve banks actually declined by $7.208 billion to $628.649 billion. The growth rate of foreign purchases of our debt is falling. So even if we are the “only game in town,” the foreign appetite for our financial assets seems to be abating.
When Fed Chairman Alan Greenspan gave his veiled warning to the financial markets a few weeks ago, he mentioned that some of the factors holding inflation in check may only be temporary. The strong dollar was one of those factors. This week, “senior Fed sources” (requesting anonymity) stated that “global economic developments are likely to keep a lid on the U.S. Dollar, and thus the benefit to U.S. inflation seen from appreciating dollar over the past few years will ebb gradually from here.” The price index of U.S. imports for all commodities declined 0.1% in September to 97.8. It was the fourth decline in as many months, and left imported prices down 3.46% when compared to September, 1996).
Given the importance the Fed has placed on the firm dollar, its failure to strengthen during the Asian currency turmoil must be worrisome, and it will be a major factor in any decision to raise rates.
Credit market bulls do have a valid point in that Southeast Asian currency depreciation should lead to slower economic growth in the region and that this will lead to weaker demand for U.S. goods and services. That's probably true, but it should be noted that the leaders of the region's biggest economy, China, is reducing its interest rates in order to increase growth from the current “low” level of 8.5%. Also, it is likely that growth in other regions of the world will offset any such weakness. Those Fed sources we cited earlier said that “the likelihood that growth in European economies will speed up in the next year or more will draw away investment capital from the U.S. In addition, economic growth is very strong in Canada, Mexico and the nations of South America. In any event, the burden of proof is on the bulls, for the latest numbers show vibrant export growth. U.S. exports rose by 0.2% in August, which is a very solid 9.57% increase over the same month a year ago. This increase surpassed the 8.82% yearly increase in imports, and left the August trade deficit at approximately the same level as it was last August. We don't believe foreign trade will be a drag on the U.S. economy in 1998.
Fundamental
Federal Reserve Chairman Greenspan delays testimony to Congressional Joint Economic Committee to October 20 from previously scheduled October 28th. News item.
Is there any significance to the fact that Mr. Greenspan will now be testifying a day after the release on October 28th of the Employment Cost Index? Prior to the onslaught of the Asian currency debacle, the markets were quietly awaiting the news for a clue as to whether the Fed would act to raise rates at its November meeting. There are two reasons we believe the ECI will show accelerating wage growth.
One, in the last Personal Income Report, income was revised higher for the last three months. In the wages and salaries sector, the last three monthly increases were 0.8%, 0.1% and 0.8%, a jump from the preceding two month figures of a 0.3% and a 0.0% increase.
Two, Sindlinger's polls show that consumers are reporting strong income growth. We have always found Sindlinger's polls to be highly reliable, and higher income levels should mean more consumer spending leading to strong economic growth.
Finally, the Fed's latest money supply figures show accelerating monetary growth. In the last three months, M2 has grown at a 7.1% rate and M3 at a 10.9% rate. It should translate into strong economic growth well into 1998.
October 24, 1997R.J. O'Brien & Associates, Inc.
555 West Jackson Blvd., Ste. 700, Chicago, Illinois
THE ALLENDALE ADVISORY REPORT |
ASTRO-TREND |
SPRING OUTLOOK
COMMODITY FUTURES FORECAST WEEKLY REPORT
THE OPTION ADVISOR
COMMITMENT OF TRADERS ANALYSIS-CURRENCY CONTRACTS
MYERS ON FUTURES |
NIKKO MARKET COMMENTS |
NIKKO MARKET COMMENTS
SORTING IT ALL OUT |
INTEREST RATE WATCH |
FINANCING AND THE “NEW” CANADA
U.S. TREASURY BOND TECHNICAL ANALYSIS
ITALY: WILL MARKET OPTIMISM BE REWARDED
SEEING THROUGH THE ILLUSIONS IN STRUCTURED FINANCE
EL NINO OUTLOOK |
THE REAPER MARKET COMMENTS |
WEEKLY OUTLOOK
YOU SHOULD BE FULLY INVESTED FOR THE NOVEMBER-DECEMBER-JANUARY RALLY
Copyright 1997, by Consensus Inc. All American and Pan American rights Reserved. editor@consensus-inc.com
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