AAP Economics: Overnight debt/forex report

AAP General News (Australia)
02-14-2001
AAP Economics: Overnight debt/forex report

by Garry Shilson-Josling

AAP Financial Markets Economist

Tel: 61 2 9322 8737 Fax: 61 2 9322 8600

US Treasuries weakened on Tuesday, with the short end bearing the brunt after a report
of unexpectedly strong retail sales in January and Federal Reserve chairman Alan Greenspan's
testimony to Congress.

The testimony lacked the apocalyptic flavour many analysts appear to have expected.

It was mainly devoted to explaining the inventory correction currently under way in the US.

Greenspan noted that confidence is still "at a level that in the past was consistent
with economic growth", and that the Fed's central forecast is for growth of 2 to 2 1/2
per cent through 2001.

But he also said that "as the FOMC noted in its last announcement, for the period ahead,
downside risks predominate".

The key uncertainties are chance of a "break in confidence" and the unknown stage the
inventory correction has reached.

Greenspan was clearly careful not to over-emphasise the downside risks. This was interpreted
by may observers as suggesting the Fed believes the fed funds rate could stay steady at
5.50 per cent for an extended period, or at least that the end of the monetary easing
is in sight.

A more plausible view is that the Fed is simply going to watch how the slowdown pans
out and act accordingly. The idea that the Fed, confident in its forecasts, has already
made up its mind about the path of economic growth and interest rates in the next few
months is contrary to one of the comments Greenspan made during his testimony: "Our economic
models have never been particularly successful in capturing a process driven in large
part by nonrational behavior."

In any case, yields at the short end of the curve ended 5-6 basis points higher, a
relatively small rise given the significance of Greenspan's testimony, but were little
changed at the long end. (See the table below for closing yields and changes.)

The Australian debt market tracked Treasuries. The 6 tick loss by June 90 day bill
futures and the 7 ticks loss by the March 3 year bond reflecting the flashes of optimism
in Greenspan's testimony.

In the foreign exchange market, the Australian dollar pulled back with the euro as
it slipped against the US dollar in response to the market's impression that Greenspan's
speech implied less chance of a rate cut.

The Aussie stalled below USD0.5400 in early overnight trade before probing support
at USD0.5325 after Greenspan's testimony became available, while the euro dropped from
USD0.9300 to support below USD0.9200.

The US dollar softened against the yen, pulling back from JPY117.50 to just over JPY116.50,
in spite of the strong retail sales data and the Greenspan effect, as the market took
profits on the dollar's run up last week from JPY114.50.

The are no likely market-moving Australian economic statistics due today -- the Westpac
Melbourne Institute index of consumer sentiment should show consumers a less confident
than they were at times last year, but not exactly miserable either.

US RETAIL SALES

Seasonally Adjusted

===================================================

Month: Oct-00 Nov-00 Dec-00 Jan-01

Total

US$ million 272490 270931 271266 273268

monthly pct change -0.1 -0.6 0.1 0.7

annual pct change 6.9 5.0 3.3 3.5

Excluding autos

US$ million 205352 204753 204802 206405

monthly pct change 0.1 -0.3 0.0 0.8

annual pct change 7.4 6.2 4.1 5.0

Durables

US$ million 111647 110315 110349 111209

monthly pct change -0.5 -1.2 0.0 0.8

annual pct change 4.5 1.0 0.2 -0.5

Non-durables

US$ million 160843 160616 160917 162059

monthly pct change 0.2 -0.1 0.2 0.7

annual pct change 8.6 7.8 5.6 6.4

===================================================

Source: US Census Bureau

OVERNIGHT MARKETS

========================================================

US interest rates: Yield changes:

(Late New York) Yield Latest Prev. day

3m T-bill (disc.) 4.91% 0.00% 0.02%

3m T-bill (yield) 5.03% 0.00% 0.02%

2 year note (cash) 4.72% 0.06% 0.02%

5 year note (cash) 4.88% 0.05% 0.01%

10 year note (cash) 5.07% 0.02% 0.02%

30 year bond (cash) 5.41% 0.00% 0.03%

========================================================

Australian futures: Yield changes:

Instrument: Price Yield O'night Prev. Day

90 day bills (Mar) 94.54 5.46% 0.03% 0.01%

90 day bills (Jun) 94.57 5.43% 0.06% 0.02%

3 yr bond (Dec) 95.08 4.92% 0.07% 0.02%

10 yr bond (Dec) 94.685 5.315% 0.045% 0.025%

========================================================

Foreign exchange: Changes:

Rate: Level O'night Prev. day

AUD/USD 0.5339 -0.0042 -0.0006

AUD/JPY 62.28 -0.81 -0.35

AUD/GBP 0.3677 -0.0027 -0.0008

AUD/EUR 0.5802 0.0019 -0.0013

USD/JPY 116.65 -0.54 -0.58

EUR/USD 0.9197 -0.0093 -0.0002

EUR/JPY 107.30 -1.61 -0.57

GBP/USD 1.4511 -0.0007 0.0014

========================================================

* Note: The tables of debt and forex prices show the changes between the previous Australian
afternoon closes and the end of overnight trading, along with the changes in the preceding
24 hours.

AAP

KEYWORD: MORNING REPORT

2001 AAP Information Services Pty Limited (AAP) or its Licensors.