Macro Monitor

No, we do not expect to see inflation over 3% by the end of 1987 or even in 1988. Actually, deflation seems more probable. But from the bond and stock market investors’ standpoint in coming months, inflation perceptions are expected to become more important than reality.

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The bond market traded in a narrow range in December, but did show some spark in the first days of the new year. For most of December, it looked like the bond players took an extended vacation.

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Having been a super bull on the bond market since 1981, this publication has turned more cautious. A number of readers have asked for details and elaboration. Today we still view the bond market trend as up, but think a sharp decline might occur sometime in 1987, with T-bond yields rising by as much as 300 basis points.

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Even considering these deficit related problems, we have to remain cyclically bullish on T-bonds for the next few months. The bond market just has too much going for it. Most of our inflation work remains cool, but this month we present two momentum measures for the PPI and CPI that may appear ominous to some.

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The bond market worked lower in the first half of September but rallied later in the month, cutting losses for the month in half. Short rates were little changed during September.

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Bonds moved higher in August but did not make new highs. However, it is only a matter of time. Most of our inflation work is still cool, but this month we present one of our tools that is mildly disturbing. The commodity spot price diffusion index seems to be on the rise, although not yet in negative territory.

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Bonds held their own in July but did not make new highs. However, it is only a matter of time. We don’t expect much in August but look for a move below 7% for T-bonds by year end.

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Bonds rallied strongly in June but did not make new highs. However, it is only a matter of time. Look for a test of the highs in July. Also, introducing “Inflation Watch,” a new regular feature that will report on our ongoing inflation research work.

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May saw the T-bond market come down into our buying zone and we are buyers in this issue. We expect 7% on T-bonds before 1986 is over (now 8.50%) and maybe lower. The stock and bond markets do not have to move together as May clearly demonstrated.

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April was a consolidation month and we think there could be weakness in the last half of May, carrying T-bonds to the 8%-8.25% level. However, we look for 7% before 1986 is over and possibly even 6%.

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Incredible action again in March. Long T-bonds are beating stocks year to date. Short-term and long-term bonds look higher and don’t ignore the possibility of a “return to normalcy” (6%) in 1986. It seems unlikely, but it could happen sooner than even we had imagined.

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Incredible February action. 8% looks like a trouble zone for a while, but we still expect to see 7.5% or lower over the next twelve months. Traders should be selling some bonds around 8%.

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For the month the bond market, except for Municipals, ended just slightly lower than it started.

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1985 was a vintage year for bonds, with long bond total returns more than matching the big publicized move in equities.

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Long T-bonds have broken into single digit territory but not by much. However, all in all, bond market action was amazingly good in November, all things considered. Hold existing bond positions. Action on the deficit could bring a blow off move.

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The bond market is back up trying to punch through its old peaks of June, July and September 1985.

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A large trading range has developed which is likely to be unbroken for a while. Tactically, we would continue to use the 10.20%-10.40% zone (long T-bonds) for profit taking.

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The cyclical bull market may still live, but the best of the move is behind us. 9% T-bond yields may be realized in the next year or so, but in coming months not much upside action is expected from current levels.

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The cyclical bull market still lives, but the best of the move is behind us. 9% T-bond yields may be realized in the next year or so, but shorter-term not much upside action is expected from current levels with a 10.40%-11.40% range expected to prevail for a few months.

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The cyclical bull market still lives, but the best of the move is behind us. 9% T-bond yields should be realized in the next year or so, but shorter term not much upside action is expected from current levels. Actually, a correction seems more likely, maybe to 11.3%-11.5%.

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