The day prior to a
Federal Open Market Committee
meeting is usually reserved for pulling nose hairs. But Treasuries managed a half-point rally today, reversing some of last week's almost continuous selling that had lifted bond yields to its highest levels in a month.
Virtually nobody on the Street is expecting the Fed to raise the fed funds target tomorrow from its current 5.25%, so today's rally wasn't exactly broad-based. Trading was quiet for most of today's session, with most of the gains coming in the last hour, partially due to position squaring, but in part also due to a
story suggesting Hurricane Floyd will have reduced the wage and workweek gains in September's
report, to be released Friday.
Of late, the 30-year Treasury bond was up 19/32 to trade at 100 12/32, dropping the yield 3 basis points to 6.10%.
"What will be important is what the Fed does in the statement" explaining the Fed's action, said Astrid Adolfson, financial economist at
. "The market could easily lose any gains if the bias is to tighten."
She's referring to the Fed's practice of adopting a specific directive toward either raising or lowering interest rates at the next Fed meeting or in the period leading up to that meeting. Until this year, this was a meaningless event, because it wasn't announced until following the
But the Fed's policy of more disclosure has made figuring out the bias another source of worry for Treasury market participants. Because many feel the Fed is not finished raising rates, economists expect the Fed to apply the bias at this meeting, or at least some kind of strongly worded statement indicating their current concerns about the strength in demand and the tightness in the labor market.
Michelle Laughlin, Treasury market strategist at
, believes the market will rally if the Fed were to stick to its current neutral stance, because the market would interpret this non-action as a sign the Fed is through changing policy this year. (There are two more Fed meetings left this year, Nov. 16 and Dec. 21.)
"I wouldn't be surprised if it went back to a tightening bias," said Laughlin. "I wouldn't read more into it than this is standard operating procedure." Between February 1994 and March 1995, the Fed met 11 times. It raised rates seven times, and shifted to a tightening bias the other four times.
Many think the Fed was resigned to skipping this meeting since the release if its statement after the Aug. 24 rate hike. "With financial markets functioning more normally, and with persistent strength in domestic demand, foreign economies firming and labor markets remaining very tight, the degree of monetary ease required to address the global financial market turmoil of last fall is no longer consistent with sustained, non-inflationary, economic expansion," the Fed said.
"They left the last meeting ready to take a break," said Suzanne Rizzo, U.S. economist at
The Treasury market got a boost in the afternoon partly due to the
Market News International
story reporting that Hurricane Floyd may depress the
average hourly earnings
average weekly workweek
components of the September employment report, to be released Friday. The story, published at 2:13 p.m. EDT, sources an official from the
Bureau of Labor Statistics
, and reports that the
figure is unlikely to be affected by the hurricane. A weather-infected report obviously does not mean that the economy is slowing -- it's just mucking up the data. But whispers of an employment report falling short of expectations is the kind of thing bond traders love to take advantage of, even if it's not backed up by any fundamentals.
The average forecast for Friday's report is for an additional 218,000 in new nonfarm payrolls, and for average hourly earnings to rise 0.3%, according to
. The average weekly workweek is expected to fall 0.2 hours to 34.4 hours.