Treasury yields slid to their lowest levels in more than two weeks today after two key economic reports detected less wage and price inflation than forecasters were expecting.
However the economic reports failed to change many minds about the likelihood that the
will hike interest rates again next month, with most market participants continuing to see a roughly 70% chance of a hike in the fed funds rate from 5.25% to 5.5% at the Nov. 16 meeting of the
Federal Open Market Committee
The benchmark 30-year Treasury bond leapt a point in the minutes after the 8:30 a.m. EDT release of the third-quarter
Employment Cost Index
reports, and hung onto that gain for the balance of the session. It finished up 1 at 98 8/32, trimming its yield 7 basis points to 6.26%, its lowest since Oct. 12. Shorter-maturity note yields shed similar amounts.
The ECI, which measures wages and salaries and benefit costs, rose just 0.8% during the third quarter, vs. an average forecast for a 0.9% gain among economists polled by
. Wages and salaries rose 0.9%, while benefit costs advanced 0.8%.
GDP grew a bit faster than expected in the first of three estimates, clocking a 4.8% pace vs. the 4.7% average forecast. But the GDP report's price deflator -- a measure of price inflation -- came in at 0.9%, vs. an average forecast of 1.2%.
"We still have a very strong economy with little in the way of underlying price pressures," said David Greenlaw, chief U.S. fixed-income economist at
Morgan Stanley Dean Witter
Greenlaw said the odds still favor a Nov. 16 rate hike, a conclusion bolstered by the fact that the November fed funds futures contract
listed on the
Chicago Board of Trade
didn't budge. "But it's a closer call now." The November fed funds contract closed at a price that discounts a 72% likelihood of a rate hike.
Greenlaw also emphasized the favorable performance of a key subset of the ECI -- the year-on-year growth rate of private wages and salaries, excluding sales occupations. It slowed to 3.3%, the slowest pace since early 1997, from 3.6%. "That's extremely impressive in an environment of tight labor markets and strong economic growth," he said.
Others are even less optimistic about the possibility of a reprieve from the Fed.
The ECI and the GDP deflator "looked good," said Bob Auwaerter, senior fixed-income portfolio manager at
in Malvern, Pa. "But if you look at the real side of the economy, particularly final sales, it still shows the economy as really on fire."
The outcome of the Nov. 16 Fed meeting is "a close call," the fund manager said. "But if I were a betting person I would say they're going to tighten," in part because the final Fed meeting of the year on Dec. 21 is perceived as off-limits due to the Y2K date change a week and a half later. "I think the way they'll couch it is, 'We're just removing the final ease we did last fall to foster liquidity in those market conditions.'"
Today's numbers "call off the dogs in terms of an immediate problem," concurred Michael Pianin, vice president at
ING Futures & Options
. "But the economy is still very strong. The numbers are probably not going to dissuade the Fed from going."
Long-term interest rates can rally even when the Fed is perceived as poised to tighten if the tightening cycle is seen as nearing its end, since rate hikes are anti-inflationary, and long-term yields are based on inflation expectations. "If people think the Fed is doing a good job, and is on top of inflation and ahead of the curve, the long end can still rally,"
Warburg Dillon Read
Treasury market strategist Mark Mahoney said.
Whether Treasuries can sustain their recent rally hinges on whether Fed Chairman
signals anything about the likely course on monetary policy in a speech at 7:30 p.m. EDT tonight.
If he doesn't, Pianin says the prospects are doubtful in the short term. "We're starting to get up against a decent level to start selling again," he said. "It doesn't seem like we're drawing in new buyers on this information. I think we're drawing in short-covering."
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