Bonds Vault

February 16, 2001
Marc Dupee

Debt futures reeled after prices at the
wholesale level leapt by their biggest margin in 10 years. The Producer Price
Index (PPI) rose 1.1% and .7% at the core level, blowing away estimates.

T-bonds
(
USH1 |
Quote |
Chart |
News |
PowerRating) plunged within two ticks of a whole point in just 30 minutes
on the threat of inflation. T-bond futures prices move inversely to bond yields
and fell initially because the threat of inflation reduces the odds that the Fed will cut
interest rates. A steep sell off in stocks on the back of dismal earnings
reports spurred flight-to-safety buying of bonds.

The bond market also took a closer look at the PPI and
determined that the report may be a fluke. Other factors are probably working to
keep inflation at bay and are showing up in a correlated gauge of wholesale
inflation. As Tony Crescenzi pointed out on TradersWire BondWire,
“the Journal of Commerce index stayed close to an 18-month low yesterday,
underscoring the notion that today’s reported gain in the PPI was a fluke. At
85.33, the JOC index, which is comprised of key industrial materials such as
steel, copper, cotton, rubber, crude oil and chemicals, is now well below its
2000 high of 92.1 set on September 20 and has fallen a sharp 2.6 points just
over the past two weeks. The index had moved sideways for about three months
after hitting a low of 85.72 on November 3, 2000, before falling sharply the
past two weeks. Given the strong historical correlation between the JOC index
and the Producer Price Index, the JOC index is signaling disinflation in
the months ahead, owing to the current inventory correction and its impact on
manufacturing output.

The key analysis here is “signaling
disinflation.”

T-bonds
(
USH1 |
Quote |
Chart |
News |
PowerRating) and 10-year notes
(
TYH1 |
Quote |
Chart |
News |
PowerRating) formed a
“V” bottom and pullback entries on the long side and traded in
narrowing patterns to close on highs in a pre-holiday shortened session. March
T-bonds closed 17/32 higher at 103 24/32 and 10-years finished 19/32 higher at
105 0/32.

Stock index futures got whacked after Hewlett, Dell, and
especially Nortel issued negative news. Nortel guided lower, in some ways
refuting yesterday’s glowing CIENA earnings report and prognosis. Viewed from
another angle, older-school Nortel may not be as on the ball in the broadband
space as CIENA, in an out-with-the-old-in-with-the-new alert. If any accounting irregularities
emerge about Nortel, as they did for Lucent, NT’s bigger competitor, look for
prices to descend even more than the 33% decline NT stomached today.

Like bonds, currencies readjusted and responded to other economic
news out today that suggested the economy is weak and the Fed will have to remain
aggressive in cutting rates. The prospect of inflation eating away at the value
of the buck did the most to account for the .97 decline to 112.29 in March dollar index futures
(
DXH1 |
Quote |
Chart |
News |
PowerRating) and made good on their Turtle Soup Plus One
Sell signal. Signaling they could reverse Euro FX futures
(
ECH1 |
Quote |
Chart |
News |
PowerRating)
and erased
Swiss francs
(
SFH1 |
Quote |
Chart |
News |
PowerRating) issued Turtle Soup Plus One Buy
signals. Euros erased most of yesterday’s decline and ended up .01280 at
.91670. Francs added .0064 to .5976.

Also indicating a possible reversal from lows by issuing
a Turtle Soup Plus One Buy,
April gold
(
GCJ1 |
Quote |
Chart |
News |
PowerRating) came back from contract bottoms to end 2.7
higher at 259.8. Dollar weakness encouraged buyers. Notice that gold achieved
measured-move objectives out of a fractal pattern discussed in earlier Futures
Markets recaps.

From the Momentum-5
List, cocoa
(
CCH1 |
Quote |
Chart |
News |
PowerRating) jumped to a new contract high on fund
buying.

Bonds Vault

BUY THE FEAR, SELL THE GREED

Quick Links

Company Info

Contact

Company Resources