bb:Barron’s :Are the Fed and BOJ About to Part Ways on Rates?
JULY 17, 2000
Are the Fed and BOJ About to Part Ways on Rates?
http://interactive.wsj.com/articles/SB963617245635069433
.htm
By William Pesek Jr. interactive.wsj.com
The newest thing about the new global economy is how
central bankers do their jobs. In the old days, say, 12
months ago, a central banker faced with a decade-long
recession wouldn't be raising interest rates.
And one faced with the tightest labor markets in
generations and plenty of stimulus in the system would be
tapping on the monetary brakes. But as we see from the Bank
of Japan and the Federal Reserve these days, the opposite is now true.
BOJ Governor Masaru Hayami, faced with stagnant growth and
the recent failure of the huge department store chain Sogo
Co., wants to raise interest rates when officials meet
Monday.
Across the Pacific, Fed Chairman Alan Greenspan is waxing
philosophical about the miracle of the computer and what
dreams may come from rising productivity in the U.S.
economy.
It's not surprising, then, that global bond
markets walked in place last week as investors struggled to
get a handle on the outlook for short-term rates in the
world's two largest economies.
Greenspan heads to Capitol Hill Thursday to give his
semi-annual report on monetary policy, and the markets are
anxious to see whether he'll be wearing his hawk claws or
offer a more dovish assessment of economic trends.
But the International Monetary Fund weighed in last week
with warnings that "decisive policy action" by the Fed is
needed to keep the U.S. from overheating. And the odds
favor Greenspan leaving open his options for an August 22
tightening. Amid fears Greenspan will return to his hawkish
roots, bond buyers were in short supply in the U.S.
The Japanese government bond market fared a bit better, but
investors generally held their collective breath to see if
Hayami would defy the world -- and economic logic -- with a
rate hike. U.S. yields rose last week, much to the
frustration of fixed-income investors watching the equities
market edge higher.
The rate on the 10-year Treasury note ended the week at
6.08%, compared with 6.01% a week earlier.
The 30-year T-bond yielded 5.88% late Friday,
compared with 5.86% a week earlier.
interactive.wsj.com
Much of the trepidation reflects concerns that investors
won't hear what they want to from Greenspan.
What they'd like are reassurances that the Fed thinks the
slowdown is for real and inflation risks have been
contained. But Greenspan may be more inclined to offer a
watchful-waiting scenario, one where policy-makers agree
things are cooling off but they want more evidence of the
trend. One reason the Fed may contain its soft-landing enthusiasm
is to avoid a rally in stocks and bonds.
Indeed, if investors think policymakers are done tightening,
happy days will be here again on Wall Street,
which could boost Main Street.But the bigger reason is
doubt about the sustainability of the slowdown.
The Fed, for example, continues to worry that
extraordinarily tight labor markets will boost inflation.
And some senior Fed officials admit there's confusion over
whether U.S. employment growth is slowing because there's
less demand for workers, or fewer to hire.
If it's the former, officials say, the central bank can
be less vigilant this year. But if the latter is true and
labor growth is slowing because there's nobody to hire,
the central bank may need to raise rates further.
A new report by Bridgewater Associates seems to corroborate
the Fed's --and the bond market's -- worst fears.
Economist Greg Jensen finds that the pool of
available labor is smaller today than at any point in the
nine-year-old expansion. He points to the most recent
Manpower survey, which shows that
-35% of U.S. corporations want to hire workers this quarter
-while a mere 5% want to cut employees.
-That spread is the widest of the current expansion,
-suggesting the unemployment rate will slide in the months ahead.
Of course, some were under the mistaken impression last
week that Greenspan isn't worried about wage trends.
A financial newswire put out a market-moving headline
reading: "Greenspan Comments Suggest He Sees Little Pressure on Wages."
The bond market jumped to attention on the news, hoping
Greenspan was signaling an end to the central bank's tightening campaign.
Problem was, he suggested nothing of the kind,
prompting market advisory outfits like Stone & McCarthy Research Associates
and BondTalk.com to warn clients
against trading on the flawed news dispatch.
It's not the first example of creative interpretation
on the part of the media, nor is it likely to be the last.
But the episode demonstrated just how starved journalists
and investors alike are for clues about whether the Fed
will raise rates next month. And although reminders that
the best inflation may be behind us are everywhere, an
August tightening remains a possibility.
A survey by the National Association for Business
Economists found that
-more companies are raising prices than at any time during the last five years.
- A third of respondents said they'd boosted prices in the second quarter and
-half planned to do so later this year.
Such developments may not sit well with the Fed or the
bond market.
While inflation pressures remain reasonably tame,
investors want to be certain the Fed's on top of things
before committing new cash to the market.
But so far, little has changed in the economy's strong-
growth-low-inflation run this year.
-Retail sales rose a stronger-than-expected 0.5%.
-The Commerce Department also announced an upward revision
to May sales data; sales were up 0.3% during the month, not down 0.3% as initially reported.
Yet things weren't exactly booming in June, as evidenced
by a modest 0.2% rise in industrial production,
off from a 0.5% rise in May.And official inflation measures, despite the surge in oil prices this year, remain
soft. The producer price index rose 0.6% in June thanks to
higher energy costs. But excluding energy and food
products, wholesale prices fell 0.1%.
"I think we have to admit at some point that inflation
just isn't a problem and that the Fed should declare
victory," says Lawrence Kudlow, chief economist at ING
Barings.
Kudlow thinks the Fed is done for the year and will begin
slashing rates, putting the yield on the 10-year note at
5.50% by the end of 2000. Otherwise, he fears, inflation
risks will rise exponentially.
Kudlow thinks the bond market's rate structure is telling
a cautionary tale of tight money policy.
Indeed, he's not alone in thinking that quality-spread
trends in the bond market are signaling trouble ahead.
When the gap between Treasury yields and those of corporate
debt widen to current levels, recession is often on the
way. And with spreads widening somewhat these days,
some fear the worst.
On average, investment-grade corporate bonds yield 1.8
percentage points more than Treasuries compared with 1.3
points at the start of the year.David Ranson and Doug Beath
of H.C. Wainwright think such concerns are misplaced,
however. True, quality spreads, which historically have
been measured against Treasuries, are widening, but they're
not nearly as wide as many believe. The reason is that Treasury yields are being artificially depressed by
expectations that Uncle Sam's on the way to paying off most
of its public debts. That "hoarding" effect has sharply
lowered Treasury yields. But even if spreads between
corporates and Treasuries are wide, the gap between yields
on corporates of different quality is near historical
norms. One didn't sense much turmoil in corporate
bond-land last week, when issuers took advantage of a
stable rate environment to sell debt. Huge deals came from
names like General Motors Acceptance Corp., which sold off
$2 billion in global bonds, and Household Finance, which
priced $1.3 billion of 10-year global notes. Goldman Sachs sold $1.25 billion of debt, while General Electric Capital
priced $500 million of debt.The issuance boom comes at a
time of rising investor demand for so-called spread
product, at least if taxable-bond mutual-fund flows are any
guide. According to AMG Data, funds that traffic mainly in
investment-grade or high-yield corporate debt have enjoyed
net inflows in three of the last four weeks. In the week
ended July 12, for example, investment-grade funds pulled
in $327 million and high-yield funds attracted $38 million.
Treasury funds, by comparison, experienced just $20 million
of inflows.
The Bank of Japan's desire to end its zero-interest-rate
policy is getting surprisingly little attention in U.S.
markets.
Yet even after its "wasted decade," Macquarie Bank
strategist Rory Robertson points out that Japan remains a
big player in the global economy and that Monday's policy
meeting is potentially a major event for financial markets.
Japan's massive budget deficits mean it now has the
world's biggest government bond market.
Furthermore, the yen is one of the "big three" global
currencies and the Japanese equity market is huge.
A quarter-percentage-point hike in Japan's short-term rates
isn't a done deal. It's likely that policy-makers will
consider the implications of last week's collapse of
department store operator Sogo. It was the second-largest
corporate bankruptcy in Japanese history and could hurt
consumer confidence and cause big problems for the
company's business partners.
Already, capital is shifting from Japanese stocks into
government bonds.
The yield on the benchmark 10-year bond ended the week at
1.705%, down from 1.755% a week earlier.
interactive.wsj.com
Yet Hayami is leaving little doubt that Japan soon will
have its first rate hike in a decade.
The BOJ's nightmare
in all of this, Robertson points out,
is a market overreaction in the form of sharply higher bond
yields and falling equity prices.
While a 25-basis-point rise has been talked about for
months and a near-term move should cause only a ripple in
Japanese money markets, there's no guarantee that things
will go smoothly.
Indeed, the rest of Asia is watching.
The 1997-98 Asian financial crisis is officially over,
but such conventional wisdom seemed to escape investors
last week.
-The Philippine peso hit a 30-month low, the
-Indonesian rupiah reached a 16-month low and the
-Thai baht changed hands at its lowest rate in nine months.
Indeed, one could be excused for wondering if Southeast Asia is on the verge of another meltdown.
That's unlikely, notes David Gilmore of Foreign Exchange
Analytics.
But the currency volatility is a reminder that Asia still
has it problems and Japan's weakness is perhaps the
biggest one. |
