CPI Cross-Currents

  • June 13, 2000
  • Marc Dupee

Interest rate futures fell, while stock index futures,
energies and Federal Funds futures rallied, presenting conflicting messages
going into Wednesday’s important Consumer Price Index Report. 

Interest rate futures sank after Federal Reserve Bank of
New York President William McDonough said it was too early to “declare
victory” over inflation. In their biggest drop in weeks, September T-bonds
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fell almost 1 point, dropping 25/32 to 96 23/32. 10-year notes
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lost 6/32 to 97 26/32. Lower T-bond and note futures came despite a report from
the Commerce Department showing retail sales fell for a second month–more
economic evidence that the Fed’s six interest rate hikes since last year are
slowing the economy. 

Furthering the argument for lower inflation, the July Federal Funds futures (FFN0)
ratcheted up to a one-month high, and traced a cup-and-handle, portending
further gains, and lower yields ahead. The Federal Funds futures have been very
accurate in predicting Federal Reserve policy. Since mid-May the Federal fund
futures have risen nearly 23-basis points, leaving the implied yield just
slightly above last month’s levels and showing that the market is pricing in a very
low likelihood of a Fed rate hike. The Federal Funds futures are suggesting
that there will not be a surprise in Wednesday’s CPI.

Wednesday’s CPI will be the last major piece of economic
news before the Fed convenes for its next FOMC meeting on June 27. The rapid
rise in oil prices remains a concern and still presents a potential hurdle for
both bond and stock index futures advancement. 

In his Borsellino’s
S&P PM, Lewis Borsellino made the following prescient observation about
trading in the S&P pit: “The (fair value) premium (between the S&P
futures and cash) is anywhere between 22 and 19.70, depending on Libor or T-bill
rates, and the SPU is consistently trading above this level. In fact, the
premium is trading closer to 24, well above fair value. What does this mean?
Simply put, this is bullish. We use this as an indicator of market sentiment. If
arbs are willing to take the other side of program orders at higher levels it is
due to their inability to get the other side of the trade done at ‘fair value’
levels. To me, it is a green light, especially with a market that has been
weaker over the past few sessions.”

The September S&Ps
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after Borsellino’s commentary at 11:45 AM ET, pulling back 10 to test Monday’s
close before blowing through the 1480 level specified in Borsellino’s
S&P AM and closing up 25.50 at 1494.50. NASDAQ 100 futures
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also staged a late rally, coming nearly 200-points off lows to end up 115.00 at
3832.50, just off the session’s high.
Dow futures
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Due to surveying methods, last week’s Producer Price
Index may not have captured the majority of the run up in the price of oil,
gasoline and natural gas, three of the hottest futures markets in May. In the
CPI, however, that survey
period is based on the average price of prices logged by field representatives
throughout a particular calendar month and therefore might capture the recent
gain in energies. This afternoon’s API report on oil and distillate stockpiles
will be closely watched as a gauge of energy inflation. 

Wednesday’s CPI will be the last major piece of economic news before the Fed
convenes for its next FOMC meeting on June 27. The rapid rise in oil prices
remains a concern and still presents a potential hurdle for both bond and stock
index futures. Energy prices have broken out of high-level consolidation ranges
and have pushed to contract highs. July crude
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both registered on the Momentum-5
List and closed up more than 1.7% each at 32.56 and 1.0622, respectively.
Heating oil
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New 10-Day Highs List, also added .0064 to close at .7851.

 

The retail sales report, evidence of a slowing US economy, was a negative for dollar index futures
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The September contract made good on its Implosion-5 List
reading and finished down .47 at 106.09. Recent members of the (Monday’s)
Momentum-5 List, the EuroFX
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and Swiss francs
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respectively. 

Finally, in the softs, the leader of the Momentum-5
List, July sugar
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