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Strategies & Market Trends : Trader J's Inner Circle -- Ignore unavailable to you. Want to Upgrade?

To: Triffin who wrote (16184)	6/17/1999 12:26:00 AM
From: Nicole Bourgault	Respond to of 56535

U.S. CREDIT OUTLOOK - Greenspan testimony By Ellen Freilich NEW YORK, June 16 (Reuters) - Federal Reserve Chairman Alan Greenspan's congressional testimony is the key event for U.S. credit markets on Thursday. As Greenspan's testifies about the economy and monetary policy before the Joint Economic Committee of Congress, financial markets will listen carefully for hints -- if not outright confirmation -- that the Fed intends to raise interest rates at its June 29-30 policy meeting. And traders and analysts will look closely at the context of any such hints. Analysts said the markets will listen for reassurance that a potential rate increase at the end of June would not mark the start of an aggressive campaign of multiple credit tightenings intended to ward off inflation ghosts, but rather just a gradual unwinding of the three-part easing the Fed undertook last fall to ameliorate a global financial crisis. ''The markets are looking for clarity, though I don't think they are likely to get it exactly because Greenspan can't pre- empt the FOMC (Federal Open Market Committee) and its decision- making process,'' said Dana Johnson, managing director and head of research at Banc One Capital Markets. Johnson said the market expects to hear words that would endorse the view that a 25-basis-point rise is likely in June. It does not expect to get a sense that the Fed thinks it has fallen ''behind the curve'' in the inflation battle and is about to embark on an aggressive tightening process, he said. Greenspan is not likely to say directly that the Fed will start to unwind last fall's easing process, Johnson said. ''But if Greenspan says that some acceleration in growth outside the United States is emerging and that our markets are functioning relatively normally, that says indirectly that the Fed doesn't need the easing it put in last fall,'' he said. Joseph Keating, chief investment strategist at Grand Rapids, Mich.-based Kent Funds, said the markets expect Greenspan to praise the economy's performance, to comment on productivity and to acknowledge that inflation remains low. But Keating said the markets are also likely to come away from the testimony with the, ''realization that we don't need that extra easing that was put into the system last fall when turmoil hit the capital markets.'' And that is a conclusion that the markets could live with, Keating and other market observers said. ''The markets would be comfortable with 25 to 50 basis points taken away because, as an asset manager or investor, nobody wants to see an upturn in inflation,'' Keating said. ''It's a matter of taking a little short-run pain for the long-run gain of maintaining the low inflation, low interest rates and economic growth that has driven these markets.'' With the May Consumer Price Index that came out on Wednesday reading unchanged, ''who could ask for anything more or rather, who could ask for anything less?'' said Neal Soss, chief economist at Credit Suisse First Boston. Soss said after the flat May CPI reading, Greenspan's testimony is more likely to be constructive from the market's point of view. What the flat May CPI reading did for the markets is to deny policy makers a rationale ''for some open ended cycle of tightening related to an overheating economy,'' Soss said. But the markets and the economy can live with a partial unwinding of last fall's easings, he said. ''To raise the federal funds rate a quarter of a point to declare that the financial crisis is over makes a certain amount of sense, at least to the Fed,'' he said. And a quarter-point tightening will not harm such a strong economy, Soss said. ''If they can raise rates 25 basis points without harm, why not do it?'' Johnson said Greenspan's testimony on Thursday would not form the basis for a market rally. For a rally to ensue, the market has to see signs that economic growth is beginning to taper back a bit, he said. Johnson said the goal of Greenspan's testimony would be ''to endorse what the market now thinks.'' As a result, he said, ''the market will be priced very similarly (Thursday) to what it is right now.'' On Wednesday, the benchmark 30-year Treasury bond finished at 88-26/32, up 19/32, to yield 6.07 percent. Prior to Greenspan's testimony, scheduled for 1000 EDT/1400 GMT, the market will get jobless claims numbers for the latest week and trade figures for April. Economists polled by Reuters estimated, on average, that new jobless claims totaled 308,000 in the week ended June 12, down from 323,000 a week earlier. Economists also estimated that the U.S. trade deficit remained fairly steady at $19.8 billion in April, compared with a $19.7 billion gap in March.