Major equity bourses and Treasuries may be stuck in a trading range heading into the long Labor Day weekend. Gyrations on Wall Street have been the major driving force for Treasury market action, and should continue to be so near term. Treasuries will continue to track stocks tit-for-tat.
Monetary policy remains a key preoccupation. The European Central Bank (ECB) meets Thursday, Aug. 30, and Federal Reserve Chairman Alan Greenspan kicks off the Kansas City Fed's annual Jackson Hole forum on Friday, Aug. 31. Meanwhile, there isn't much on the economic data agenda to spark interest.
STOCKS STEADYING? Treasuries lost ground and closed lower last week as stocks rallied hard on Friday, Aug. 24, after the Fed suggested a little more strongly that the end of the easing road may be in sight. The spread between the two-year note and the 30-year bond narrowed to around +170 basis points from +181 basis points earlier in the week on the Fed's actions and as much of the safe-haven money flow related to equities and worries about the Argentina crisis reversed.
Most of the factors that will impact Treasuries near term should keep the trend intact. The biggest wild card is equities, and barring any meltdown, stabilization should prove a little more detrimental to shorter-dated Treasuries. Also, the impending Jackson Hole gathering and ECB meeting could be potentially rile shorter-dated securities.
The ECB meets Thursday amid widespread expectations of a 25 basis point easing, with only small (though non-negligible given the ECB's track record) risk of either a more aggressive 50 bp cut or nothing. While the as-expected move could spark a "sell the fact" trade on the euro, many analysts believe an as-expected ECB cut could eventually help extend euro gains by improving European growth prospects.
ONE AND DONE. Meanwhile, signs that Fed rate cuts are nearing the end should limit the upside potential in shorter dated notes. According to a survey of Fed watchers conducted by S&P MMS, the majority see just one more easing this year. About 65% expect a quarter point cut at the Oct. 2 meeting of the Fed's policy-making arm, the Federal Open Market Committee (FOMC), while the remaining 35% expect the Fed to hold pat at 3.5%. By the December FOMC meeting, 14% could see a 3% target rate, while one respondent forecasts a 2.75% target.
While the markets will be looking for policy clues from the Jackson Hole conference on "Economic Policy for the Information Economy," Greenspan and others may be reluctant to stray from a sterile, more academic assessment of the issues. Greenspan speaks at 10:00 a.m. EDT Friday.
Upcoming economic data will be of interest but not significant in terms of policy considerations. Data include consumer confidence and sentiment, revised second-quarter GDP, personal income and consumption, initial claims, Chicago purchasing managers, and factory orders. Median forecasts from the MMS Survey show little change from prior figures and without any upside surprises, prospects for Fed easing will remain on track. Rupert is a senior economist for Standard & Poor's Global Markets