01/26 14:37
All Wall Street Dealers Foresee a Half-Point Rate Cut (Update3)
By Heather Bandur
New York, Jan. 26 (Bloomberg) -- All 25 bond dealers that trade directly with the Federal Reserve now say the central bank will cut interest rates by a half-percentage point, to 5.5 percent, next week.
Banc One Capital Markets Inc. changed its forecast this morning to a half-point from a quarter-point cut after Fed Chairman Alan Greenspan's testimony to the Senate Budget Committee, said Anthony Karydakis, an economist at Banc One in Chicago.
Yesterday, ``Greenspan made the comment that the economic slowdown has been `very dramatic' and then proceeded to say in the same breath that growth now `is close to zero' while inflation remains exceptionally well contained,'' Karydakis said.
``We get the clear impression that he is, indeed, uneasy about the extent of the current slowdown and is willing to implement bolder action to minimize risks going forward,'' he said.
Treasuries rallied yesterday on Greenspan's comments, but fell today as investors bet that prices already reflect a 5.5 percent fed funds target. On the week, the yield on the benchmark 10-year note rose 9.2 basis points to 5.26 percent, while the yield on the two-year note, among the securities most sensitive to changes in Fed policy, rose 1.9 basis points to 4.75 percent.
Already Priced In
``With all the help for the economy on the horizon, it's hard for the Treasury market to do a lot better,'' said Peter Cordrey, who helps oversee $130 billion at Prudential Asset Management in Newark, New Jersey. ``Now the game is how soon we are going to see the economy turn around'' with help from a rate cut and an expected tax cut by President George W. Bush.
Some investors interpreted Greenspan's lack of substantive comments in his prepared text yesterday as validation of a half- point cut this month.
``If he thought the market was being too aggressive in its rate-cut expectations, he might have come out to derail that,'' said Gary Pzegeo, who helps manage $2 billion at Evergreen Investment Management in Boston. ``Given that he didn't say that much, that means that the Fed will do another 50 basis point cut.''
Bond traders have priced in about an 85 percent chance of a half-point rate cut, said Andrew Pyle, senior economist at Scotia Capital in Toronto. On the day, the implied yield on the February fed funds futures contract, a close gauge of Fed-rate expectations for that month, fell 3 basis points to 5.52 percent. That yield has fallen 59 basis points since the end of last year, suggesting heightened rate-cut expectations.
Rate Cut Bets
The Fed surprised investors on Jan. 3 by cutting the target, which affects the cost of borrowing for businesses and consumers, a half-point, to 6 percent. Fed policymakers had raised the target six times since June 1999, by a total of 1.75 percentage points, and had left it at 6.5 percent since May 2000 until the Jan. 3 cut.
Sixteen dealers surveyed predict the Fed will cut rates an additional quarter-point by the end of the first quarter, bringing the target to 5.25 percent.
Thirteen of them see the target at 5 percent by the end of the first half of the year. Three banks said the Fed will cut the target to 4.5 percent, while two of them see the target at 5.5 percent by that time.
``The market is still pretty confused and looking for direction,'' said Mario DeRose, a strategist at Edward Jones & Co. ``Greenspan gave some hints that the Fed will stay aggressive, and we will probably see 50 basis points next week. But, he also came out on the side of tax cuts,'' which may spur rising inflation later on during year, he said.
Banc One is the only dealer to forecast that the Fed will raise rates -- after cutting them by a half-point -- by the end of the year.
The results of the survey follow:
FIRM TARGET TARGET TARGET TARGET
1/31 End Q1 End Q2 End Q4 ABN Amro Inc. Inc. 5.50 5.25 5.00 5.00 BNP Paribas Securites Corp. 5.50 5.00 4.50 4.50 Banc of America Securities LLC 5.50 5.25 5.00 5.00 Banc One Capital Markets, Inc. 5.50 5.50 5.50 5.75 Barclays Capital Inc. 5.50 5.50 5.25 5.25 Bear, Stearns & Co., Inc. 5.50 5.25 5.00 5.00 CIBC World Markets, Inc. 5.50 5.25 5.00 5.00 Credit Suisse First Boston 5.50 5.50 5.00 5.00 Daiwa Securities America Inc. 5.50 5.25 5.00 4.50 Deutsche Bank Alex. Brown Inc. 5.50 5.25 5.00 5.00 Dresdner Kleinwort Benson 5.50 5.25 5.25 5.25 Fuji Securities Inc. 5.50 n/a 5.00 4.75 Goldman, Sachs & Co. 5.50 5.25 4.75 4.50 Greenwich Capital Markets, Inc. 5.50 n/a 5.25 5.25 HSBC Securities (USA) Inc. 5.50 5.25 5.00 5.00 J.P. Morgan Chase & Co. 5.50 5.25 4.75 4.75 Lehman Brothers Inc. 5.50 5.25 5.25 5.25 Merrill Lynch & Co. 5.50 5.25 4.75 4.50 Morgan Stanley Dean Witter 5.50 5.25 4.50 4.50 Nesbitt Burns Securities Inc. 5.50 5.25 5.00 4.75 Nomura Securities Intl. 5.50 5.50 5.00 5.00 SG Cowen Securities Corp. 5.50 5.50 5.50 5.50 Salomon Smith Barney Inc. 5.50 n/a 5.00 5.00 UBS Warburg LLC 5.50 5.25 4.50 4.50 Zions First National Bank 5.50 5.25 5.00 5.00
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