> 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.