No More Easy Homers for Bonds
By Kim Rupert
We're bullish on Bonds. But that's Barry Bonds, home run slugger for the San Francisco Giants, not the Treasury bond, which has shown little of the power to extend its streak after posting six consecutive winning sessions.
While we expect Barry Bonds to maintain his record home run pace into the All Star break, we at S&P MMS doubt the long bond will be able to keep up. There is not a lot on the near-term calendar to excite the 30-year, or the rest of the Treasury curve, for that matter. However, the market will be closely monitoring data later in the week and the Fed's Beige Book on Wednesday for some direction.
Upcoming figures on retail sales, industrial production, producer prices and and consumer prices could set the stage for underperformance by longer-dated Treasury issues as traders weigh varying factors regarding the potential for more rate cuts by the Fed, against the threat of inflation from overstimulation, and increased budget concerns with the tax cut now in effect.
Median results of the latests survey of Fed watchers by S&P MMS suggest more of a mixed bag of data that is likely to exacerbate the uncertainty over just how much stimulus the Fed has in the pipeline. With further weakness expected in most real sector and labor data, especially in manufacturing, another rate cut looks to be in order.
But whether the Fed will again have to swing for the fences, or whether Greenspan will soon be giving the "take sign," will be up for increasing debate, especially as the June 26-27 meeting of the Federal Open Market Committee (FOMC), the Fed's policy-setting arm, approaches. Survey medians show a 0.3% rise in retail sales, +0.4% ex-autos, while industrial production should fall 0.4% to bring capacity down to 78%. The consumer price index (CPI) for May is expected to rise 0.4% overall, and 0.2% core (excluding food and energy).
A CAUTIOUS FED.
Survey results also show near unanimous expectations for another rate cut at the June 26-27 FOMC meeting, though the 3.75% median indicates the Fed will be taking a more cautious approach. The vast majority polled (86%) forecast the less aggressive 25 basis point cut this month, with 9% expecting the Fed to stay on track with a 50 basis point rate reduction, and 5% expecting no further easing. They say that with the 250 basis points of easing in the pipeline, the tax cuts now in place, and the economy apparently on the road to recovery, a greater than 25 basis point cut risks overstimulation.
Some say recent Fedspeak also shows growing Fed sensitivity to overdoing it. But most don't believe the economy is out of the woods yet, and expect another 25 basis point rate cut will be in order for the August 21 FOMC meeting. And indeed, many said the Fed could be swayed into a 50 basis point rate cut this month if upcoming spending and housing data, two stalwarts for the economy, reflect increased weakness.
While the market currently sees little chance for a 50 basis point rate cut this month, heightened expectations for such would help pull down shorter dated yields. Meanwhile, the long end has suffered to varying degrees by less bullish supply considerations, a less favorable budget outlook, asset allocation shifts, and/or rising inflation fears. All of these dynamics could be coming to a head this week given the various sector and confidence data on the calendar, as well as the Fed's Beige Book report on Wednesday.
Rupert is a market economist for Standard & Poor's