US BOND OUTLOOK:GREENSPAN SPEAKS; PPI AND CPI ALSO AHEAD
By Ellen Taylor
NEW YORK (MktNews) - The U.S. bond market faces a powerful troika next week in Federal Reserve chairman Alan Greenspan's Humphrey-Hawkins semi-annual testimony to Congress on the state of the U.S. economy and January producer prices on Thursday, too with consumer prices closely following on Friday.
As if the $32 billion supply hurdle it faced this week wasn't enough - in which Wall Street by most accounts suffered through the worst refunding in history - sprinkled in between those market-moving events will be key data on the December trade imbalance, January housing starts and permits, industrial production for January, business inventories, January capacity utilization - not to mention economic surveys from the Atlanta, Philadelphia and Kansas City Federal Reserve districts.
And to think, that anyone of the bond traders out there could have decided to work at the New York Stock Exchange as a career instead of being beaten and bruised by roller coastering 30-year bond yields over the past two weeks.
"The Greenspan Humphrey-Hawkins will be the first hurdle next week for the market," said George Adell, director of fixed-income research at Starboard Capital Markets. "If he tells us he expects slower growth and higher inflation and the reverse happens in upcoming data, then it'll look like a charm."
The bottom line for next week is that economists generally expect to get upbeat consumer surveys on the economy, small gains in industrial production, and slower housing starts because of the "three weeks of snow and ice that are still on the ground in the east coast," as one trader said.
"Greenspan, CPI and PPI will be the key factors, and in that order," said Carol Stone, an economist at Nomura Securities. "It will be interesting if Greenspan outlines what risks he sees that tilt the balance towards inflation" as policymakers said in their directive on Feb. 2.
"That would be helpful but it still won't let the market predict future monetary policy any better. And his testimony is the consensus of those members on the FOMC and not just Greenspan's opinion," Stone pointed out. The inflation data for January is seen as modest, with oil and tobacco prices the key factors behind any upticks. Early estimates from most economists are for a +0.2 rise in the PPI, with the core up 0.1%. Overall CPI is expected to increase by 0.3%, with the core up 0.2%. The December trade report is seen producing rises in both imports and exports, for another large deficit.
What Greenspan does or doesn't reveal about the likely future path of the Fed's monetary policy is less clear, traders and strategists said. Thus Greenspan's testimony is the wildcard that will set the tone for where yields are a week from now, they said.
"Greenspan is the Big Kahuna next week," said one bill trader. "But I think we'll see the curve steepen more next week if oil goes even higher to $35 a barrel or there's another surge in stocks. The Fed may be closer to the end of tightening than the market is thinking, and may only raise rates one more time" to a 6% fed funds rate.
Many traders think the new May 30-year bond's yield will be capped at 6.50% after zigzagging between about 5.95% and 6.36% over the past eight days.
Carol Stone, an economist at Nomura Securities, said that PPI is likely to rise by 0.2% overall, with the core flat while she sees CPI up 0.3%, +0.2% in the core measure due to a rise in tobacco prices that occurred too late to be included in the data used to calculate the PPI. The estimate generally jibes with the preliminary Market News International survey of economists, which sees an 0.2% overall rise with the core up 0.1%.
"Some new price information would be helpful" for the markets, Stone said. "Is the pace of the economy changing at all? A lot of people were surprised today when retail sales went down in some stores to such an extent that, excluding automobiles, sales actually fell" in January.
Friday's trade data for December is not expected to move Treasury prices unless it exerts a major influence on the dollar, analysts said. But the dollar currently is tethered to a variety of currencies for different reasons and its level changes due to vastly different relationships with those currencies. So it is unlikely to rise or fall consistently on a wider or narrower deficit, the economists said. In November, the trade gap widened to $26.5 billion from $25.6 billion in October.
"The deficit will be about the same as the one we got in December but the market will be immune to it," said Stone. "It will move the market if it moves the dollar but there are economic events that affect the dollar in many parts of the world now."
Still, the fundamentals at week's end don't put the bond market on solid footing as Monday approaches, traders said. Commodities prices have been on an upswing over the past week and there's still at least six more weeks of winter weather to prop up heating oil prices, traders and strategists said.
"It remains clear that the bond market is still in the grips of a bear market with little end in sight," said Tony Crescenzi, a senior strategist at Miller Tabak & Co. "Fresh 18-month highs in the CRB index, rising gold prices, and $30 oil are reasons to stay bearish, especially with (new) inflation data ahead next week." |
