Short view By Philip Coggan - Financial Times
Short view By Philip Coggan
Published: June 29 2006 03:00 | Last updated: June 29 2006 03:00
Copyright The Financial Times Limited 2006
If the Federal Reserve raises interest rates by a quarter of a percentage point today, it will be the 17th successive meeting where it has made such a move and the 17th successive time markets have anticipated it.
The build-up to this announcement has been rather different than for most of the others. Just three months ago, markets were hoping the Fed would have stopped tightening by this stage. So investors have greeted the run-up to this announcement with rather less equanimity than they have for the 16 previous decisions.
Furthermore, the bond market "conundrum", noted by former Fed chairman Alan Greenspan early last year, seems to have disappeared. For a long period when the Fed first raised rates, bond yields actually fell. In the run-up to this announcement, bond yields have been driven remorselessly upwards, rising in nine successive sessions.
Ten-year US Treasury yields briefly hit 5.25 per cent, their highest in four years, on Monday, up from 4.4 per cent at the start of 2006. Two-year yields have also risen to 5.25 per cent.
Although the yield curve is inverted slightly (short rates higher than long rates), as it has been on various occasions this year, there has been no sign of the massive inversion that often presages recession or a sudden shift in Fed policy.
JPMorgan estimates the chance of a US recession next year at 1-in-3, implying there is a 2-in-3 chance that the economy will keep growing.
So there is a chance the markets could still be vulnerable to bad economic news. "It is interesting to note that set against all this hawkishness on rates, both equities and commodity markets have been content to range trade," says Charles Diebel of Nomura. "This begs the question of whether the liquidity removal process has done all the damage it is going to do or whether there is another down-leg to come.
"The latter is our preferred scenario," Mr Diebel adds, "if only because the unravelling of positions thus far has been too orderly and if the central banks are really serious in their intent to squash inflation, they are likely to have serious effects on equities and commodities as a result."
Published: June 29 2006 03:00 | Last updated: June 29 2006 03:00
Copyright The Financial Times Limited 2006
If the Federal Reserve raises interest rates by a quarter of a percentage point today, it will be the 17th successive meeting where it has made such a move and the 17th successive time markets have anticipated it.
The build-up to this announcement has been rather different than for most of the others. Just three months ago, markets were hoping the Fed would have stopped tightening by this stage. So investors have greeted the run-up to this announcement with rather less equanimity than they have for the 16 previous decisions.
Furthermore, the bond market "conundrum", noted by former Fed chairman Alan Greenspan early last year, seems to have disappeared. For a long period when the Fed first raised rates, bond yields actually fell. In the run-up to this announcement, bond yields have been driven remorselessly upwards, rising in nine successive sessions.
Ten-year US Treasury yields briefly hit 5.25 per cent, their highest in four years, on Monday, up from 4.4 per cent at the start of 2006. Two-year yields have also risen to 5.25 per cent.
Although the yield curve is inverted slightly (short rates higher than long rates), as it has been on various occasions this year, there has been no sign of the massive inversion that often presages recession or a sudden shift in Fed policy.
JPMorgan estimates the chance of a US recession next year at 1-in-3, implying there is a 2-in-3 chance that the economy will keep growing.
So there is a chance the markets could still be vulnerable to bad economic news. "It is interesting to note that set against all this hawkishness on rates, both equities and commodity markets have been content to range trade," says Charles Diebel of Nomura. "This begs the question of whether the liquidity removal process has done all the damage it is going to do or whether there is another down-leg to come.
"The latter is our preferred scenario," Mr Diebel adds, "if only because the unravelling of positions thus far has been too orderly and if the central banks are really serious in their intent to squash inflation, they are likely to have serious effects on equities and commodities as a result."
posted by Carlos T Mock at 11:13 AM
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