Fixed income the market search for

The debate on the direction of oil prices rages on. Oil bears will cite "demand destruction" and oil bulls will cite "tight supply". The futures market for the time being seems to be siding with the bears, but not in a big way. Data from the New York Mercantile Exchange show that the net short speculative position in the oil futures market has increased to about 11,659 contracts.

To put this into perspective, since 2000, the largest net short position was 71,928 contracts in December 2001 while the largest net long position was 129,615 con¬tracts registered in July last year. Therefore, the current level of net short position might suggest a nearequilibrium in oil prices and hence a neutral influencing for bond prices for the time being.

This means the market will look to other catalysts for direction, such as the verdict at today's Monetary Policy Committee meeting. We are in the minority camp, looking for no change in the repo rate this time around. Besides the sparring between the Finance Ministry and the Bank of Thailand, the fall in oil prices has reduced the urgency of an aggressive tightening. This week's release of economic data showed that growth in the second quarter had disappointed to the downside, coming in at 5.3 per cent whilst economists had estimated 5.8 per cent.

What is more worrisome is that the economy is becoming overreliant on exports again, as domes¬tic demand was under pressure from oil and political instability in the period. Slowing government spending actually shaved about 20 basis points off the overall growth rate. Furthermore, recent political events raised the risk of a leadership vacuum and could stymie growth even further.

Still, a pause in interestrate hikes this time around should not allow bonds to post any large gains, as we view that the accompanying statement will lean towards further tightening as well as the need to normalise rates - that is, to reduce the level of negative real interest rates. Also, the market will be pay¬ing close attention to the supply schedule for bonds. Therefore, the combination of such events is likely to leave the bond market in consoli¬dation mode.