UPTREND REMAINS INTACT FOR DEBT FUTURES
The six basis point rise of the past
month in U.S. debt futures may be extended next week by a
series of U.S. economic reports, analysts said, as long as the
dollar holds firm.
    "Interest rates have declined by approximately 50 basis
points over the last month, largely over indications that
inflation is not as high as people had feared and the narrowing
U.S. trade balance, in nominal terms," Samuel Kahan, chief
financial economist with Kleinwort Benson Government
Securities, said.
    Kahan said recent government reports have shown strength in
the economy during the first quarter, but his concern is
whether the U.S. economy will sustain that strength in the
longer term.
    Weak U.S. economic growth could hurt the dollar, which has
become more important to the direction of debt futures than the
beneficial impact on interest rates of a sluggish economy.
    The median trade expectations for Tuesday's U.S. Consumer
Price Index and Durable Goods reports are up 0.4 pct and down
1.5 pct, respectively.
    Meanwhile, the eight billion dlr drop in the M-1 money
supply announced this week was "surprising, much larger than
expected," according to Kahan. "Unless quickly reversed," such
a trend "will ensure that June M-1 growth will be negative,"
Kahan said.
    Taken in conjunction with M-2 and M-3 aggregates which
Kahan said have "slowed to a crawl, below Federal Reserve Board
annual targets," the consequences could be a hint of economic
weakness down the road, he said.
    Based on chart formations, T-bond futures may be poised for
further gains, although the advance has been slowed recently,
analysts said.
    September T-bonds "are up almost six points since about May
18," Merrill Lynch debt analyst Jim Duggan noted. September
bond futures climbed from the low of 87 a month ago to over 93
in mid-June, Duggan said.
    While follow-through buying has aided the advance so far,
and bouts of short covering have prohibited a slide through
chart support, the rally in September T-bonds has been thwarted
above the 93 level.
    "The 93 level is formidable resistance and must be taken
out before this activity is anything other than a trading range
market," Carroll McEntee and McGinley Futures debt analyst
Brian Singer said.
    The dollar remains the key fundamental factor, and the U.S.
currency has made little headway of late, analysts said.
    "The critical variable remaining in the market is the value
of the dollar," Kahan said.
    Additional influences next week will be possible
developments ahead of an OPEC members meeting, and the impact
and size of the U.S. budget deficit, "although these will not
be in the forefront of the market early next week," Kahan said.
    In looking ahead to the U.S. Treasury mini-refunding
auctions of 24.25 billion in T-notes on Tuesday, Wednesday and
Thursday, Singer said the market will likely greet the results
with little excitement. However, a successful auction could
prove to be a turning point, depending on prevailing market
psychology.
 Reuter
