Its also the economy this time, stupid!
Foreign policy is only for the talk shows.
Henry C.K. Liu Doug Henwood wrote:
> [from TheStreet.com]
>
> NAPM, Fed Officials Bludgeon Bond Market
>
> By David A. Gaffen
> Staff Reporter
> 6/1/99 4:42 PM ET
>
> Bonds fell into a burning ring of fire today, and with each key economic
> release or speech from a Fed official, the flames rose even higher. By the
> time the carnage ended, the 30-year Treasury bond's yield had spiked by 10
> basis points while the two-year note rose by 13 basis points. If, before
> today, the market needed any convincing that the Fed is going to hike
> interest rates come the end of June, it doesn't anymore.
>
> The May Purchasing Managers' Index of manufacturing sentiment, released by
> the National Association of Purchasing Management, rose to its highest
> level since October 1997. Two normally dovish members of the Fed, Alice
> Rivlin and William McDonough, didn't offer any olive leaves today. Both
> said the economic risks had shifted toward inflation.
>
> The July fed funds futures contract, used as a benchmark for what direction
> the market believes Fed policy will take, rose sharply today to yield 4.96%
> and is now factoring in an 84% chance of a rate hike by the end of June.
> The Federal Open Market Committee's next meeting is a two-day affair June
> 29 and 30.
>
> The 30-year bond fell 1 6/32 to 90 19/32, as the yield closed at 5.93%. The
> two-year note closed down 4/32 to yield 5.53%. The difference in yield
> between the two fell to 39 basis points from 43 basis points Friday.
>
> The NAPM's purchasing managers' index rose to 55.2. Until this point, the
> market was struggling, but this release was the blunt instrument to the
> bond market's skull. What disturbed the market more than the headline
> figure was the increases in two previously flagging components. The prices
> paid component eclipsed 50 for the first time since December 1997, rising
> to 52.2 from 49.9, while the employment series rose to 53.5 from 49.5, its
> first reading above that watermark since May of last year. The NAPM survey
> indicates expansion when it is greater than 50, contraction when it reads
> less than 50.
>
> "There was nothing flukish about the PMI," said Jim Kochan, senior bond
> market strategist at Robert W. Baird. "The market is not misinterpreting
> the message here when it's translating this into an increased probability
> that the Fed is going to do something."
>
> This report alone may not be enough to convince the Fed to raise rates,
> seeing as how it is a measure of sentiment rather than tangible figures,
> such as this Friday's May employment report. However, the uniform strength
> in today's release (eight of nine components read greater than 50) raises
> the possibility that manufacturing employment might rise for the first time
> since March 1998, excepting months affected by last year's strike at
> General Motors (GM:NYSE).
> Fed Chairman Alan Greenspan "had been falling back on the manufacturing
> sector to support his more dovish views," said Astrid Adolfson, financial
> economist at MCM Moneywatch. "Without that, he has to join in the camp of
> the more hawkish."
>
> He may be joining his colleagues. New York Fed President McDonough said it
> would be wrong to assume that the huge rise in the April Consumer Price
> Index was a one-time event. He also added, somewhat ominously, that Fed
> members would "do what we have to do to maintain price stability." As
> McDonough is a less restrictive member of the Fed when it comes to monetary
> policy, this is a concern, because it means he may be convinced the time is
> right to raise interest rates.
>
> "We're watching the more dovish people come out of the woodwork and hear
> them say things we haven't heard them say for a long time," Adolfson said.
>
> Fed Vice Chairman Rivlin didn't sound quite as hawkish. Speaking at a
> financial conference in Montreal, she said the 0.7% increase in April CPI
> wasn't enough evidence to convince her of rising inflation. She said the
> balance of risks is shifting toward higher inflation, but her comments
> weren't as worrisome as McDonough's. Instead, she sounded somewhat
> satisfied that the Fed had adopted a bias toward tightening interest rates
> at the May 18 meeting.
>
> "The Federal Reserve's Open Market Committee at its last meeting signaled
> its return to concern about overheating and the possibility of future
> inflation pressures," she said.
>
> It might be that Rivlin is attempting to offset her more alarmist
> colleagues to avoid scaring the financial markets, but as she's the Fed
> member regarded as the most dovish, it's also possible that she'll be one
> of the last to come on board in supporting an interest rate hike.