The Federal Reserve held interest rates steady Thursday, extending a yearlong breather for borrowers. Although policymakers observed improvements on inflation, they made clear they were not ready to declare victory on that front.
Wrapping up a two-day meeting, Fed Chairman Ben Bernanke and his central bank colleagues left an important interest rate at 5.25 percent, the same as it was last June. The decision was unanimous.
The Fed’s decision means that commercial banks’ prime interest rates _ for certain credit cards, home equity lines of credit and other loans _ should stay at 8.25 percent.
Before the Fed’s interest-rate pause, borrowers had endured two years of rate increases. The current period of level rates can help them regain their footing by paying down or consolidating debt.
Looking at economic conditions, Fed officials said readings on “core” inflation, which excludes energy and food prices, have gotten “modestly” better in recent months.
In noting this improvement, they abandoned language in previous statements that described underlying inflation as “somewhat elevated.”
Even so, Fed policymakers continued to identify the “predominate” risk to the economy as inflation’s failure to moderate as they now anticipate. “A sustained moderation in inflation pressures has yet to be convincingly demonstrated,” according to the statement.
Stocks ended the day almost flat. The Dow Jones industrials dipped 5.45 points to 13,422.28, as investors’ hopes for a rate cut continue to fade.
On the sidelines for eight straight meetings, the Fed does not want investors or consumers to think it is letting down its guard on inflation.
“The Federal Reserve remains on inflation watch,” said Lynn Reaser, chief economist at Bank of America’s Investment Strategies Group.
Inflation is bad for the economy and for the pocketbook. Out-of-control prices can eat away at paychecks, investments and standards of living. “And once expectations of higher inflation start to take hold, it is very difficult to dislodge them,” Reaser explained.
Core inflation rose 2 percent over the 12 months ending in April. That compares with March’s 2.1 percent annual increase. Economists predicted underlying inflation should dip below 2 percent for the 12 months ending in May. That report was to be released Friday.
Gyrating energy prices are a wild card to the inflation outlook. Economists said there is always a risk that higher energy prices could affect other prices, which would boost underlying inflation.
In trading Thursday, oil prices briefly topped $70 a barrel for first time since Sept. 1, but then settled back to $69.57 a barrel. Nationally, gasoline prices have eased in recent weeks but are above $3 a gallon in some cities.
The Fed once again said future rate moves will hinge on what incoming data says about inflation and economic growth. Many economists believe the Fed will keep rates steady at its next meeting Aug. 7, and probably through the year.
Fed policymakers upgraded their assessment of the economy’s performance. They said growth appeared to have been moderate over the first half of the year despite the housing slump. In its previous assessment, in early May, Fed officials noted that growth had slowed in the early part of the year.
The economy barely moved in the year’s first three months. It grew at a rate of just 0.7 percent, the slowest in more than four years.
Among the factors for the anemic shows are the housing slump, lackluster business investment, a bloated trade deficit and cutbacks in federal spending. Consumer spending, however, was brisk, preventing economic growth from stalling out.
A rebound is anticipated from April through June. Economic growth in those months could clock in anywhere from a 2.3 percent to better than a 3 percent pace, according to various projections. A few forecasts suggest growth could come in closer to 4 percent.
The Fed stuck to its forecast that the economy probably would expand “at a moderate pace” over upcoming quarters.
Even as the economy has endured a nearly yearlong sluggish spell, the jobs market has proved sturdy.
Employers nearly doubled the number of jobs they added to payrolls in May, allowing the unemployment rate to hold steady at a relatively low 4.5 percent. This solid job market, which also has produced wage gains for workers, has the potential to keep inflationary pressures alive, the Fed noted.
The Fed’s goal is for the economy to slow sufficiently to fend off inflation, but not so much as to slide into a recession.
By Jeannine Aversa
AP Economics Writer- Washington
Posted by bondsblog as FED Watch at 9:17 AM EDT
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Treasuries were little changed amid concern hedge fund losses tied to subprime mortgages will become more widespread.
Two-year yields touched the lowest this month as investors shifting out of riskier assets pushed equity indexes down across Europe. Government securities may also be buoyed before reports forecast to show consumer confidence fell to a 10-month low in June and new home sales declined.
There is “concern about the subprime mortgage market and hedge fund losses,” said Werner Fey, a fund manager at Frankfurt Trust Investment GmbH in Frankfurt. “We expect this bullish trend to continue.”
The yield on the benchmark 10-year note rose less than 1 basis point to 5.09 percent by 7:45 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/2 percent security due in May 2017 fell 1/32, or 31 cents per $1,000 face amount, to 95 15/32. The two-year yield was little changed at 4.89 percent after touching 4.86 percent, the lowest since May 30.
European stocks dropped for a fourth day, following losses in the U.S. and Asia, sending Europe’s Dow Jones Stoxx 600 Index down almost 1 percent to 389.34 in London.
Yields on 10-year notes have declined 25 basis points from a five-year high on June 13 amid signs a housing slump is curbing economic growth.
Home Sales
Purchases of new homes probably fell to 922,000 in May from 981,000 the previous month, while the Conference Board’s consumer confidence index likely dropped to 105 in June, the lowest since August, from May’s 108, according to separate Bloomberg News surveys.
Traders now see a 40 percent chance Federal Reserve policy makers will lower the target rate for overnight lending between banks a quarter percentage point by the end of the year, compared with 2 percent a week ago, futures contracts show.
All 112 economists surveyed by Bloomberg predict the Fed will keep its benchmark rate at 5.25 percent for an eighth straight time on June 28.
Losses at Bear Stearns Cos. and the U.K.’s Queen’s Walk Investment Ltd. have sent investors to the haven of government notes.
The slide in two-year yields may be poised to end, a technical indicator shows. They failed to hold below 4.87 percent, a significant level based on a series of numbers called the Fibonacci sequence.
Monthly Auctions
A break past one level in the series indicates the yield may fall to the next. The sequence correctly projected the yield would decline to 4.87 percent after sliding through the prior key level of 4.97 percent last week.
Two-year notes lagged behind longer-maturity debt yesterday before the government sells $18 billion of the securities today in its monthly auction. The Treasury Department is also scheduled to sell $13 billion of five-year notes tomorrow.
The extra yield that 10-year notes offer over two-year debt narrowed for a second straight day to 19 basis points from 22 basis points at the end of last week.
Notes may fall because the demand for safety that also drove the market yesterday may be starting to fade, said Minako Iida, a fixed-income strategist for non-yen debt at Barclays Capital Japan Ltd. in Tokyo.
“The flight-to-quality buying of Treasuries will be a short-lived phenomenon,” Iida said. The economy is growing fast enough to push 10-year yields to 5.4 percent by the end of December, she said.
To view the original article, click here.
To contact the reporter on this story: Gavin Finch in London at gfinch@bloomberg.net ; Wes Goodman in Singapore at wgoodman@bloomberg.net
Posted by bondsblog as Market Trends at 7:47 AM EDT
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The week kicked off with a slightly firm tone, Friday’s uptrade has flowed through to the overnight session. The modest grind higher comes on light volumes and no major overnight data. The market continues to consolidate in the 5.11%-5.15% range ahead of this week’s full slate of key events. Between the FOMC, 2- and 5-year supply, PCE, GDP revisions, Durable Goods, and Housing data
– we expect a further refinement of policy/economic expectations will provide some meaningful trading direction.
Today offer’s an updated installment of housing data — with the Existing Home Sales report this morning — RBSGC forecasts a rebound to 6.15 mn units in May vs. 5.99 mn in April. Despite the call of a stabilization in sales, we continue to expect home prices will be the wildcard — do we see a leak lower as homeowners reduce their resale expectations? We’ll admit, strength in both units sold and prices will be a major challenge to our core-thesis of housing weighing on the consumer.
We also get information on another key aspect of the housing saga, with the remittance reports due to be released today — although working through the data may delay any meaningful analysis until Tuesday. That said, we expect a rise in delinquencies will be evident and weigh on the related asset classes — much of this is priced in. As has been the case recently, the primary risk is to a downtrade in the asset class and a spillover into a broader credit spread event
– from our perspective, this is, once again, a bullish steepening event.
HIGHLIGHTS FROM THE U.S. GOVERNMENT BOND WEEKLY:
The bond market in the week just passed was not the master of its own fate, but rather the residual of events in other markets — really, credit and the CDO story — and of an issuance slate that approached 40 bn. As spreads moved, so went Treasuries. We cannot extract a forecast per se other than do say, watch spreads.
Still, we expect that the credit story will be around for the summer and so continue to press for a steeper curve and create a broader potential for systemic risk. Systemic risk, in this example, does not necessarily mean a financial system issue that requires the Fed. It could, but we’re not there yet.
The systemic risk we refer to is in the broad market’s exposure to credit
(overweight) vs. Treasuries, and the pain trade of credit widening.
We get some important information this week in the form of remittance reports – which will tell us how much paying or not paying is going on in the mortgage world, specifically we focus on the subprime community. This could prove to be an important spark — and you can assume the market expects worse news.
As for the bond market? We seemed to have found a footing at the pre-CPI lows that marks the lower end of the range AND we’ve hit a wall with 10s around 5.05% that marks the upper end. We will play against those areas and go with breaks.
Position-wise we’re flat.
TACTICAL BIAS: We are near-term range players and monitoring external events to determine which end of the range we’ll probe. Things are very, very, balanced.
Positions are something of a non-event having moved to neutral though in the last week there’s been a small skew to more long (SMR, CoT, JPM). That’s a marginal negative, though month end would clear that exposure up in passive fashion. The data has been mixed, too — enough to price out any Fed activity in 2007, but hardly enough to drive in tightening. The week ahead offers glimmers of new information, but we don’t really see this providing a new direction.
Our eyes will focus on three things. First will be the remittance reports that could soothe the subprime market or send it packing. We assume a rise in delinquencies etc will show in the data, and so hurt the related asset classes, but this may be priced in. The risk is for a trouncing of the asset class and a credit spread event following — steepening, probably bullish.
We like steepening as a theme, but we’ve moved a long way and 2s and 5s are the next supply hurdles. Further, and again this is not something in the bond market’s control, the curve action will depend on other markets. Technically and fundamentally, we see 2s/10s testing 25-30 bp and holding near 15 bp — current levels near 22 bp don’t provide great placement. Our call on the curve has been good, but to some extent for the wrong reason. What we had in mind primarily was ease potential and a trough to first ease move of 45 bp in 2s/10s. We assumed, too, that the curve would move that way due to credit widening as is transpiring. We still think that the curve can move sharply — some would say normalize — regardless of Fed anticipation as credit issues are the dominant theme.
Because we cannot anticipate beyond the range parameters, we’ll GO-WITH a break under the assumption that the market will have had better information than we do know. Vis a Vis the curve we get the FOMC and, of course, no move. We don’t see the Fed as a flattening event, though. Its hawkish inflation rhetoric has been driven home and we see it at the point of diminishing returns. Consider RBSGC’s forecast for a 0.1% MoM gain to Core PCE on Friday, or 1.8953% YoY — the lowest since March ‘04.
IMPENDING EVENTS
* Existing Home Sales, May — 6.15 mn vs. 5.99 mn Apr
* Corporate deal pricings likely.
* Remittance reports due — but details likely to be delayed
OVERNIGHT EVENTS:
* German GfK Consumer Confidence Survey Jul, 8.4 vs. 7.4 revised-Jun and 7.4 consensus. Despite upbeat economic sentiment, European yields continued to fall
– down 2-3 bps across the curve.
* Global equities traded lower — with the Hang Seng off 0.8% and the Nikkei down 0.5%. Also helped the fixed-income bid.
* German Q3 auction calendar announced — total issuance 36 bn euros vs. and expected 39 bn. This lower-than-expected 36 bn of issuance is vs. 50.5 bn in redemptions — net paydown of 14.5 bn in Q3 vs. 11.5 bn expected.
OVERNIGHT FLOWS: Overnight volumes were very light (but normal for a Monday), with cash trading at 66% of the 10-day MA and TY at 79%. 2s were the most active issue with 39% marketshare, while 10s took 29%, and 5s just 22%. We saw real money buying in 10s and foreign bank interest in 10s as well. There was some bank selling of 10s and real money selling in the 3- and 9-year sectors.
Away we heard of hedge fund interest in 2s and real money buying in 5s. Asian real money selling of bills and buying of 10s. In addition, we heard of European hedge fund buying of 5s and 10s — but overall volumes remain modest for this generally slow session.
NOTE: The views expressed are not of Bonds Financial but of the unaffiliated author. Bonds Financial Inc. makes no claim to and regarding the accuracy, correctness or completeness of the views expressed
Posted by bondsblog as Morning Call at 8:00 AM EDT
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