The Dow Jones Industrial Average found itself on the business end of 10,000 today, allowing the bond market a modest move higher today. This, in spite of a nearly inconceivable revision to GDP that put the fourth-quarter growth rate at 6.9%.
Equity weakness allowed the market to shrug off the GDP revision, but more interest rate hikes from the
threaten, and a few straight weeks of important economic data beckon, so the upside seems limited, strategists reckon.
What resulted today was a bit of a reversal of the yield curve's ongoing trend: two- and five-year notes rallied for a change, while the long end lagged. (Including the 30-year's wild downturn, which reminds one of
, habitually overcorrecting its orbital irregularity.)
Lately, the benchmark 10-year note was up 4/32 to 101 3/32, dropping the yield 1.7 basis points to 6.35%. The two-year note gained 6/32 to 100 5/32, the yield dropping 10.2 basis points to 6.415%. The 30-year bond, trading more like a commodity due to expectations for diminished supply, fell 8/32 to 101 9/32, pushing the yield up 1.8 basis points to 6.155%.
The fourth-quarter rate of GDP was revised upward to 6.9% from an original 5.8%. The revision was due to stronger-than-expected government and consumer spending, as well as higher exports in the December trade figures. This is the strongest rate of GDP since the second quarter of 1996, when GDP grew at a similar rate. Economists were looking for a 6.4% rate, according to
The market was able to shrug off today's figure for a couple of reasons -- the inflation component, the implicit price deflator, was unchanged at 2%. The personal consumption deflator, a figure Fed Chairman
now looking at an inflation barometer, was unchanged at 2.5% for the quarter. Secondly, the market regards the figure as old news, as the first quarter is one month from completion.
But strategists believe the stock market's support is fleeting, unless it crashes. Consumers won't stop spending because of the Dow's recent downturn -- it generally takes several quarters of stock market gains for consumers to change their habits. In addition, there are other factors that boost consumer demand, such as job security and gains in home equity. In other words, heed this GDP report -- there may be more like it to come.
"It's a reminder that the economy began the year with a tremendous amount of momentum," said Jim Kochan, senior fixed income strategist at
Robert W. Baird
in Milwaukee. "You're not going to see 6.9% GDP in the first quarter, but we could see 4% to 5% again. Stocks are finally buckling, and that's one element in the things
the Fed is watching, but it's only one factor propelling spending at a stronger pace, and not the most important."
He thinks the bond market could return to earth next week, with both the
National Association of Purchasing Management's
Purchasing Managers' Index
due out. "You may undo this rally in the front end of the curve," said Kochan.
Richard Schwartz, senior vice president at
New York Life Asset Management
, said the rally, which reverses recent gains in the long end, is mostly technical, as participants take the opportunity to take profits on recent trades on a quiet day. He thinks the trend of lower long-term rates and higher short-term rates will reassert itself due to current market fundamentals.
"I would still be a believer that the dominant themes in fixed income are going to be continued monetary tightening and a lack of supply on the long end," Schwartz said.
The threat of diminished supply boosted this bond within striking distance of 6% in recent days -- but the Treasury's proposed buyback of long-dated securities hasn't materialized yet, perhaps a disappointment to bonds today. (
didn't say anything about the program to reporters today.)
The March bond futures contract, traded on the
Chicago Board of Trade
, fell 19/32 to 94 29/32.
Real GDP increased 4.1% in 1999, higher with the first estimate of 4%, and less than 1998's 4.3% rate. Positive revisions in all components of GDP -- consumer spending, government spending, inventory investment, and exports -- were responsible for the staggering quarterly figure, the
"It was a strong and broad advance, and so I don't think the surprises were in any one category," said Joe Carson, chief U.S. economist at
Warburg Dillon Read
. "The breadth of the advance was impressive."
Personal consumption expenditures, which accounts for about two-thirds of GDP, increased 5.9% in the fourth quarter, compared with an increase of 4.9% in the third quarter, and an original estimate of 5.3%. Government purchases rose 9.6% in the fourth quarter, compared with an original 8.4% estimate.
Businesses increased inventories $68.7 billion in the fourth quarter, following an increase of $38.0 billion in the third quarter. The trade deficit continues to be a drag on GDP, but exports did increase in December, which added to the gains in GDP. For the quarter, exports rose 8.7%, compared with an original 6.9% estimate, and imports decreased.
fell to a seasonally adjusted annual rate of 4.59 million in January, down from a revised 5.14 million rate in December. The rate is the lowest since November 1997. Economists polled by
were looking for the rate to decline to 5.04 milion.
Currencies and Commodities
The dollar was weaker against the yen and stronger against the euro this morning. Of late, dollar/yen was traded at 110.14, down from 111.31 yesterday. The euro continues its horrid performance since inception, lately at $0.9735 from $0.9929 yesterday.
Crude oil for April delivery on the
New York Mercantile Exchange
closed above the $30 a barrel mark again, which isn't supportive for bonds. It ended the day at $30.28, up from a $29.97 close yesterday.
Bridge Commodity Research Bureau Index
closed at 207.22, down from 210.30 yesterday.
Gold for April delivery on the
closed down to $294.7 per ounce from $300.9 yesterday.