US TSY MKT OUTLOOK: EXPECTATION SHIFTS TO OCT. FED TIGHTENING
By Jill Bebar
NEW YORK (MktNews) - The market's expectation has shifted to largely anticipating a 25 basis point Federal Reserve rate increase next week, and some analysts are saying the market would be disappointed if the Fed does not act.
Sentiment shifted Friday after unexpectedly bearish economic data, including new home sales and sharp increases in the prices paid components of both the National Association of Purchasing Management and Chicago purchasers surveys, analysts said.
"It is becoming more and more obvious the U.S. economy is not slowing down. The Fed cannot afford to do nothing now and run the risk of being locked in a 5 1/4% funds rate through year-end," said James Kochan, bond market strategist at Robert Baird & Co in Milwaukee.
Zane Brown, director of fixed income at Lord Abbett & Co., agreed. "It would be favorable to tighten and get it out of the way instead of shifting the bias and painting a dark cloud hanging over the markets throughout the balance of the year," he said.
On Aug. 24 the Fed increased short-term interest rates 25 basis points and kept a neutral bias.
On the international front, Jim Glassman, economist at Chase Securities, said there is a dramatic shift in thinking, with many more market participants looking for the European Central Bank to raise rates on Thursday. This follows a round of strong data and hawkish comments from ECB officials this week.
Analysts said participants expressed caution on Friday's September employment report. Kochan said there was risk to the upside since the August report was more friendly with non-farm payrolls at 124,000.
A median forecast in a Market News survey of economists calls for non-farm payrolls to increase to 225,000. The unemployment rate is expected it remain steady at 4.2%.
Analysts said there were rumors Monday's Bank of Japan's third-quarter Tankan survey will be on the strong side. Glassman said the survey was crucial to the currency markets because signs of economic strength in Japan have bolstered the yen vs. the dollar recently.
Glassman said bond market players will remain on edge about higher interest rates until there are more definitive signs of slowing in the consumer sector.
Next week's calendar also includes August housing completions Monday, August leading indicators and nonmanufacturing NAPM Tuesday, August factory orders Wednesday, September Challenger layoffs, September chain store sales and August consumer credit Thursday and August wholesale inventories and September ECRI and CIBCR inflation indexes Friday.
>>>Looks like no guarantee that bonds will sustain any rally
>>>if the Fed decides to hold rates at current level. |
