US CREDIT OUTLOOK-Techs, not data, may halt 5-day slide
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By Andrew Priest
NEW YORK, April 16 (Reuters) - U.S. Treasuries will likely
find little in a mixed bag of economic data due on Tuesday,
including consumer price inflation and industrial production
figures, to pull out of a shuddering five-day plunge,
strategists said.
The wild card could be equities.
Another bout of nausea in U.S. stock markets, possibly
sparked by an after-hours profit warning on Monday by Internet
equipment maker Cisco , could at least help Treasury
prices to stabilize, they said.
"The dominant theme on Tuesday may be the way equity
markets react to Cisco. This could give a measure of hope to
the Treasury bulls," said Alan Ruskin, research director at
4Cast Ltd.
"In recent weeks, the Treasury bulls have had a pretty bad
time as the Nasdaq has recovered," he added.
Cisco Systems Inc. said on Monday that its third-quarter
pro forma earnings will miss analyst forecasts and that it will
lay off a total of 8,500 workers -- in line with its earlier
estimate of job force reductions.
Treasuries have stumbled lower over the last week, erasing
most of their 2001 gains along the way, as hopes of more
aggressive Federal Reserve interest rate cuts have been knocked
off course by some recent stabilization in stock prices,
If equity markets shrug off Cisco's pain -- the firm said
its business environment had never been more challenging --
there is little reason why Treasuries' recent plunge should end
any time soon, analysts said.
"We expect more capitulation of Treasury market positions,"
said Gemma Wright, fixed income strategist at Barclays Capital.
"What we are beginning to see is that the worst of bad
corporate profit expectations are priced in and so people have
looked at short term yields and said 'Maybe we don't belong
here.'"
The government will release consumer price inflation data
for March on Tuesday at 8.30 a.m. EDT(1230 GMT). Economists
polled by Reuters expect the rate to have inched up by 0.1
percent (0.2 percent higher excluding volatile food and energy
prices) versus 0.3 percent in February.
Also due for release at the same time are data for housing
starts and real earnings numbers, both for March. Industrial
production data is due at 09.15 a.m. EDT(1315 GMT). Economists
expect production to have contracted by 0.1 percent last month
versus a fall of 0.6 percent in February.
While oil prices have trudged higher in recent sessions --
Nymex crude oil for June delivery stands close to $29 a barrel
versus $25.59 at the beginning of April -- the general
inflation picture remains benign and should not be a hurdle in
the way of further Fed rate cuts, strategists said.
Although Treasuries have been a better bet than stocks so
far this year, the government bond market's fishnets are now
looking a little laddered.
Yields on longer-dated U.S. government debt are now higher
than they were at the beginning of the year, when evidence of
an economic slowdown was piling in.
Thirty-year bonds now yield 24 basis points, or 0.24
percentage point, more than at the close of 2000 and 10-year
note yields are up 15 basis points. Yields move opposite to
prices.
As evidence of a steep slowing in economic activity mounted
at the beginning of the year, Treasuries prices rallied, led
higher by interest rate sensitive shorter-dated instruments.
Two-year notes yield 64 basis points less than they did at
the turn of the year, but as stocks have moved higher in recent
sessions, cash parked in the safe harbor of Treasuries has
shifted back, sending yields 40 basis points higher in a week.
IRRATIONAL RELIEF?
Market players still believe the Fed will push on cutting
interest rates in coming months. But as the economic picture,
albeit still grim, has appeared to stabilize, so expectations
for sooner and deeper cuts have evaporated.
Futures contracts traded on the federal funds overnight
bank lending rate now indicate market participants seealmost
no chance of an intermeeting Fed cut. The next scheduled
meeting is on May 15, when a 25 basis point, or quarter
percentage point, cut is seen as the most likely move.
The Fed has cut rates by a half percentage point on three
occasions this year, beginning with a surprise move on Jan. 3,
which came between its regular meetings. The federal funds rate
currently stands at 5.00 percent.
"The market was so incredibly negative in terms of the
economy because of the quick move by the Fed in January. This
raised the specter of what they were seeing in the future. Now
the Fed speakers are talking of an uptick in growth by the end
of the year," said Wright.
REUTERS
Rtr 17:18 04-16-01 |
