>> 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.