Greenspan expected to help bonds, hinder dollar -
Tuesday, July 20, 2004 1:02:26 PM
CHICAGO (AFX) -- Alan Greenspan will have a receptive audience in the bond market and a less receptive crowd on the currency side if the Federal Reserve chairman sticks to his anticipated script Tuesday and Wednesday on Capitol Hill
"Look for the chairman to be bond-market friendly and dollar unfriendly in his appearances this week," said Robert Brusca, an analyst with Fact and Opinion Economics
Greenspan is scheduled to testify to the Senate Banking Committee on Tuesday afternoon and will appear before the House Financial Services panel on Wednesday for a second round of questions. While what is viewed as friendly to one is generally seen in opposite terms for the other, the foreign exchange and Treasury markets all the same "are linked at the hip," said Bob Gay, chief interest-rate strategist at Commerzbank Securities
Higher interest rates chip away at the value of fixed securities, while boosting the value of the U.S. currency. Since inflation is not currently seen as an epidemic problem, the markets see the climate as one of having ample time as rates edge higher at the controlled pace touted by Greenspan and his colleagues. "It's a very benign environment for bonds," said Gay. Conversely, the dollar is "looking at another leg down if we're to have a soft landing," said Gay, a former Federal Reserve economist
"We think this recovery has been uneven enough, and the news from overseas is spotty enough, that the Fed will not want to urge the markets to turn rates higher," said Brusca
While Greenspan is viewed as likely to acknowledge some upswing in inflationary indicators, "a benign tone from Greenspan's remarks should mitigate bearish fallout on bonds, but won't be beneficial for the dollar," said Kim Rupert, an economist at Action Economics
"He may mention that higher oil prices are dragging the economy down and why the Fed will remain diligent and raise rates again next month when the Fed meets to decide their policy," said Kevin Giddis, managing director, fixed income, Morgan Keegan & Co
"He may offer a glimpse of what the Fed thinks about the economy and inflation, but don't expect him to drop any bombshells of information that indicate what the Fed's next move will be," said Giddis
A "reiteration of a 'measured' policy stance could help extend gains, particularly in the shorter-dated instruments," Rupert said of the U.S. debt market
And, Friday's drop in Treasury yields may have stemmed from "dovish expectations on Greenspan, [but] the bullish curve flattener is more reflective of a benign inflation outlook," said Rupert. The financial markets are generally assuming that Greenspan will stick to his measured pace stance in raising interest rates, barring some compelling economic reason to do otherwise
"There is only downside for the Fed if it takes a hard line on getting the funds rate back to neutral in an expeditious fashion without a clear and present danger from inflation or without a firm and growing job-creating economy," Brusca said
The Fed hiked short-term lending rates 25 basis points at the end of June, with the first such increase in four years bringing the target loan rate to 1.25 percent. The lowest cost of funds, apart from Japan, is seen as steadily rising with further 25 basis point increases, the next coming in August
"If the data hadn't done his work for him over the last month, [Greenspan] would be talking a very mellow line. But fortunately for our story, the market has done all the heavy lifting for him already," Gay said of data that generally has shown an expanding economy with relatively tame inflation
The market is "now accepting his story uncritically... so in a sense the markets are clued in as to how to read the tea leaves," Gay said
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