DJ Debt Futures Review: Undercut By Retail Sales, Greenspan Speech
By Allen Sykora
BEND, Ore. (Dow Jones)--A strong retail sales report, coupled with
remarks about oil prices from Federal Reserve Chairman Alan Greenspan, sent
interest-rate futures sharply lower Friday in Chicago, economist and traders
said.
Some of the weakness was also said to be technical in nature as the
futures initially went higher but stalled around near last months' highs,
then fell back below Thursday's lows in a daily reversal on the charts,
contacts said.
December 10-year notes lost 10 ticks to 113-07, December Treasury bonds
fell 13 ticks to 113 even and March Eurodollars slipped 2.5 basis points to
97.57.
"Clearly, retail sales were much stronger than anticipated," said Sung
Won Sohn, chief economist in Minneapolis with Wells Fargo & Co. "That gave an
indication that consumers are out of the soft patch and moving onto firmer
ground."
The government reported Friday a 1.5% jump in September retail sales, more
than double the consensus forecast for a 0.7% gain. Sales excluding autos
climbed 0.6%, double the forecast for 0.3%.
Several other reports this morning were softer than forecast, and normally
this would have been bullish for bonds.
However, said Sohn, the market was paying closer attention to retail
sales, worried that consumer buying had been one of the weak links in the
economy lately.
The other weaker reports included the New York Fed's manufacturing
survey, U.S. industrial production and University of Michigan consumer-
sentiment index.
"Somehow, the market has pushed that aside and is blaming it on weather
and some other things," said Sohn. "So the primary factor is retail sales,
and Greenspan."
The Fed chairman, speaking in Washington before the Italian-American
Foundation, indicated he is not worried that the rise in oil prices has
impacted the economy substantially so far. The U.S. economy is less
vulnerable to price spikes than it was in the 1970s, said Greenspan.
"I was pleasantly surprised that Chairman Greenspan was so optimistic
about the oil situation," said Sohn. "The price of oil has been going up for
some time and will remain high, in my estimation."
Rising energy prices lately had been frequently cited as a bond-bullish
factor because of their potential to slow economic momentum. November crude
settled up 17 cents to $54.93 and peaked at $55 a barrel.
A technician suggested much of the selling came in the form of profit
taking after the run up during the last week.
Two things happened technically, he explained.
"We couldn't sustain a move through last month's highs, then we had a
reversal lower on the charts," he said. He later characterized the market as
range-bound for the moment and bouncing from the upper end of the range that
has been in place for the few weeks.
December bonds moved to a contract high of 114-08 overnight, taking out
the Sept. 28 high of 114-03. December 10-year notes got up to 113-24, stopping
just 1.5 ticks shy of their Sept. 23 high of 113-25.5.
Now that prices have pulled back sharply since, these highs could act as
a double top, said the technician.
Also, he pointed out, both contracts underwent daily reversals. The
December bonds first moved up through Thursday's peak of 113-16, but then came
back and fell through Thursday's low of 112-23. This had also been an
important chart point since it represented Wednesday's close and failed
resistance as Tuesday's high.
December 10-year notes, besides running out of momentum just ahead of last
month's high, also underwent a reversal when they first pushed up through
Thursday's peak at 113-19 but subsequently fell below Thursday's low of 113-
03.
The technician also pointed out that in the cash market, the 10-year
yield - which moves inversely to the price - held around the closely watched
4.0% level. It bottomed at 3.997% and, as the interest-rate futures were
closing, was back up around 4.055%.
As for weak data the market shrugged off, the New York Fed's Empire State
Manufacturing Survey fell to 17.4 from 27.3 in September, when the forecast
had been for 25.6. Industrial production grew just 0.1% in September, when
economists expected 0.2%. The University of Michigan's mid-month consumer-
sentiment index fell to 87.5 from 94.2 at the end of September, when the
forecast had been for no change.
The September Producer Price Index rose 0.1%, matching the consensus
forecast. However, core PPI excluding food and energy climbed 0.3%, slightly
more than the consensus expectation for 0.2%.
-By Allen Sykora; Dow Jones Newswires; 541-318-8765;
[email protected]
(END) Dow Jones Newswires