Macro Monitor

Strong likelihood the Fed will tighten in next few months, but today’s market rates may already factor in future 25-50 basis point Fed bump up in short rates.

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New inflation fears and strong economy contributing to higher yields. Think Fed may tighten (50% likelihood) in coming months to slow down amazing economy.

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New inflation fears and strong economy contributing to higher yields. Fed may tighten in coming months to slow down this high powered economy.

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Big Rise in Treasury yields has resulted in improved risk/reward profile for T-bonds.

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1998 Inflation Projections: CPI expected to end 1999 about unchanged from year end 1998 levels (year over year change of 0.0%).

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At current levels U.S. T-bonds are viewed as neutral.  U.S. T-bond upside potential now only slightly above downside potential.

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All in all, inflation pressures are expected to remain minimal. Through 1999, the CPI and PPI will likely remain between an environment of mild inflation and mild deflation.

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At current levels U.S. T-bonds are no longer viewed as attractive. U.S. T-bond potential downside now about matches upside potential. Our 17 year old 5% T-bond target was achieved last month.

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T-bond achieves Leuthold long term target of 5%: hedge fund turmoil and Asia induced flight to quality has helped drive rates down too far, too fast. When some of the short term distortion subsides, yields could pop back up.

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T-bond ahead of itself, fueled by flight to credit quality...Yields could back up should Asia outlook improve, or equity market rally significantly.

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Bond market still ahead of itself, fueled by flight to credit quality...But money flows could slow, should Asia outlook improve, or Japan act decisively.

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Bond market getting ahead of itself, fueled by flight to credit quality...But money flows could slow, should Asia outlook improve or Japan act decisively.

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Asian crisis not helping much (yet), putting brakes on strong U.S. economy (except on earnings)...Asia (including Japan) will become heavier “drag” on U.& in next six months...Inflation likely to increase slightly but still viewed as tame.

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Near term, bond market now stabilizing after being roughed up during most of April…We see no imminent Fed loosening or tightening in the cards at this point.

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Near term, bond market now stabilizing after being somewhat ahead of itself...No Fed loosening or tightening in the cards at this point.

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Asian crisis not yet applying brakes to strong U.S. economy...Asia should be bigger “drag” on U.S. in next six months. Near term, bond market still correcting from being somewhat extended.

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The U.S. yield curve could mildly invert in 1998, even with a passive Fed.

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Today's moderately positive sloping yield curve may evolve into a flat or mildly inverted yield curve later in 1998...

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Wage pressure is only cloud on inflation horizon.

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Yield curve typically inverted about 62% of the time.

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