ECI, GDP -- All Letters Spell 'Rally' for Bonds - TheStreet

ECI, GDP -- All Letters Spell 'Rally' for Bonds

The benign Employment Cost Index and gross domestic product reports are easing yields sharply.
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Bond bulls couldn't have asked for anything better today. This morning's economic releases, the third-quarter

Employment Cost Index

and

GDP

, showed that wage inflation is still not an imminent threat, while the economy continues to grow. Bond prices are up sharply, at one time gaining more than a point.

The ECI rose just 0.8% in the third quarter, less than the 0.9% consensus estimate as polled by

Reuters

. GDP growth was 4.8%, ahead of expectations for a 4.7% increase. The GDP will be revised twice during this quarter.

Lately the 30-year Treasury bond was up 29/32 to 98 5/32, dropping the yield 6 basis points to 6.26%, the bond's lowest yield in nine trading sessions. At one point, the bond was up 1 1/32.

"I think there is a chance that this rally can persist, but won't it get more momentum unless we get a relatively mild employment report," said Dana Johnson, senior managing director at

Banc One Capital Markets

.

The Employment Cost Index, one of the most closely watched measures of wage inflation, rose 3.1% on a year-over-year basis. Wages and salaries are rising at a 3.3% annual rate of increase, compared with 4% in the third quarter of 1998.

The market: Join the discussion on

TSC

message boards. But

Barclays Capital

, in a comment, notes the disparity between the ECI's 0.8% increase in private wages and salaries and the 1% increase in average hourly earnings as compiled in the monthly employment reports. "The average hourly earnings data are based upon a much larger sample of establishments, so we would give them more weight," the comment stated.

GDP grew at a 4.8% rate in the third quarter, and second quarter growth was revised upward to 1.9% from 1.6%. The implicit price deflator, this report's measure of inflation, rose just 0.9%. Forecasts as polled by

Reuters

were for a 1.2% rise, so this report also boosts the market's confidence with the inflation outlook. Consumer spending rose 4.3% in the third quarter, compared with a 5.1% increase in the second quarter. Business investment rose 14.9%, compared with a 7% rise in the previous quarter.

However, as stock analysts trumpet this release as evidence that the Fed won't be raising rates come Nov. 16, the bond market is taking a more cautious approach. In recent days several Fed officials have sounded grave, warning that monetary policy actions don't affect the market for at least a year, which seems to leave them open to a move in two weeks.

"It should help those who are a little discomforted sit a little easier," said Rich Yamarone, senior economist at

Argus Research

. "I don't think that'll change the minds

of the Fed which may be already made up.

But this may be the final rate hike of this cycle."

The fed funds futures contract listed on the

Chicago Board of Trade

was lately pricing in a 64.3% probability of a

Fed

rate hike, from 5.25% to 5.5%, at its next meeting on Nov. 16. Yesterday, the November fed funds contract was pricing in a 72.9% chance of a rate hike.

In terms of data, the only concerning news for the Fed was the drop in initial jobless claims to 278,000 last week, from a revised 293,000 the previous week. The four week, moving average fell to 293,500 from 299,500.