Investors increase bets on US rate rise
By Krishna Guha in Washington, and Michael Mackenzie and Daniel Pimlott in New York
Published: May 28 2008 21:50 | Last updated: May 28 2008 21:50
Investors increased their bets on Wednesday that rising oil prices would force the Federal Reserve to raise US interest rates this year, pushing the yield on the 10-year Treasury bond above 4 per cent for the first time since January.
The move came as a government report showed that durable goods orders were stronger than expected in April, and Dow Chemical said it was raising the price of all products by up to 20 per cent to offset rising energy and raw material costs.
Andrew Liveris, Dow chairman and chief executive, said a failure by the US government to address rising fuel costs was causing a “true energy crisis, one that is causing serious harm to America’s manufacturing sector and all consumers of energy”.
He said energy prices were “putting a strain on the entire value chain”.
The futures market priced in a 60 per cent likelihood of an interest rate rise in October, up from less than 50 per cent the day before. As recently as May 8, investors saw virtually no chance of an October rate rise.
“Any data that show the economy is growing call into question the idea that inflation will moderate due to weak growth,” said Rick Klingman, a managing director at BNP Paribas.
“If growth picks up, the Fed will act sooner in raising rates as inflation is currently above their comfort level.”
Meanwhile, the Fed announced the surprise resignation of Frederic Mishkin, a governor and top academic who is close to chairman Ben Bernanke. Mr Mishkin will return to his teaching post at Columbia University.
The yield on the 10-year Treasury has risen by about 70 basis points since March, indicating growing confidence in the medium-term outlook for the US economy but putting additional pressure on mortgage rates at a time when the housing downturn shows no sign of abating.
Investors have signalled confidence in the Fed’s ability to prevent a sustained increase in price trends. An important measure of inflationary expectations – the “break-even” rate for Treasury bonds indexed to inflation – has remained range-bound.
“The rise in nominal yields is less about inflation itself and more about what the Fed will do because of inflation,” said Michael Pond, inflation strategist at Barclays Capital.
Fed officials are divided as to how risky it would be to keep rates at their present level for a while in the belief that economic weakness will moderate inflation risks. However, they agree on the need to respond aggressively if inflation expectations move up.
Analysts said the Dow price increase was the sharpest one-off rise for the industry in years. Energy and costs of hydrocarbon input materials, known as feedstock, for the company will rise from $8bn in 2002 to $32bn this year at current rates. |
