>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.