A Game of Hardball for the Markets
By Kim Rupert
It's late October again, and that can mean only one thing -- the World Series is being played (with the games usually stretching well past bedtime for fans on the East Coast). And while the New York Yankees are down two games to none to the Arizona Diamondbacks, the very fact that they are once again occupying their now-accustomed spot in the Fall Classic this week reflects the amazing resilience of their home city in the face of the September 11 tragedy.
But as the Yankees will be challenged to maintain their winning ways, so too will the Treasury market. And while bond investors don't have to face the Diamondbacks' potent pitching duo of Randy Johnson and Curt Schilling, they are confronted with a formidable lineup of key Treasury events and economic data.
Meanwhile, it will be the data that Federal Reserve Chairman Alan Greenspan takes to the mound on Nov. 6 when he and his staff decide what pitch to throw the markets.
The Treasury leads off Monday with its announcement of quarterly financing plans followed by refunding details on Wednesday. Batting second, the consumer confidence report for October, to be released Tuesday. Hitting third is the National Association of Purchasing Managers' index, or NAPM, for October, set for release Thursday. And the October employment report will bat cleanup Friday. If the most dire forecasts of a 400,000-600,000 drop in nonfarm pyrolls come to pass, the bond market could have a mighty big inning at the end of the week.
Though the Treasury Department is likely to announce fourth-quarter borrowings of about $35 billion to $40 blillion compared to a July 30 estimate of a $36 billion paydown, this curve ball isn't likely to fool the bond market. Indeed, the Treasury market easily digested record corporate and Treasury two-year note issuance last week. Then the market can surely handle another $20 billion to $25 billion in refunding issues.
And despite the change-up to a borrowing need from a surplus, Treasury isn't expected do away with bond buybacks. The strategy of maintaining liquidity in current issues adds support to continuing with the program. Furthermore, buybacks should help keep long-term interest rates low, another of the Bush Administration's goals.
This week's economic data releases will be key to setting the table for Federal Reserve policymakers on November 6. The figures on consumer confidence, NAPM, and especially payrolls, are expected to determine what pitch Fed Chairman Alan Greenspan throws. The market had been pricing in only a quarter point move at the upcoming meeting in the wake of the two more aggressive 50 basis point actions in the immediate aftermath of September 11.
But that was before the recent run of data showing much steeper than expected declines in retail sales, durable goods orders, and housing. Weakness in those numbers has increased the likelihood of another half-point easing.
Indeed, should upcoming data reflect similar weakness, we at Standard & Poor's MMS doubt the Fed would want to throw the market anything off-speed. Instead, look for another fastball right down the middle: another 50 basis points off the Fed funds rate to a 2% target.
Rupert is a senior economist for Standard & Poor's Global Markets