DJ Debt Futures Review: Soars After Soft Philadelphia Fed Survey
By Allen Sykora
BEND, Ore. (DowJones)--Interest-rate futures in Chicago soared Thursday in
the wake of a surprisingly weak business survey from the Philadelphia Fed,
traders and analysts said.
Buy stops were triggered during the move, particularly in the longer end
of the yield curve, contacts said. Furthermore, added one, some convexity-
related buying might be starting to occur on uneasiness that yields could
continue to fall enough to encourage another round of mortgage refinancing.
Dec 10-year notes settled up 23 ticks at 113-02, Dec Treasury bonds closed
up a full point plus 8 ticks at 112-15, and Mar Eurodollars gained 7.5 basis
points to 97.645.
The futures already had a stronger tone around late morning, helped
partially by a benign Consumer Price Index report, contacts said.
The market then accelerated to the upside after news that the Philadelphia
Fed's business index fell to 13.4 in September from 28.5 in August.
Expectations had been for a more modest pullback to around 24.5.
This prompted a sharp rally in prices across the curve as traders
continued to pare back their expectations for future Fed tightening, market
watchers said. Besides the Philadelphia Fed survey, there also are ideas that
economic setbacks from hurricanes that have hit the southeastern portion of
the U.S. could also prompt the Fed to be less aggressive with future
tightening, said John Person, head financial analyst in Chicago with Infinity
Brokerage Services.
"It (the hurricanes) could cause more slowdown in the next quarter," he
said. Thus, Person continued, some market watchers might be starting to wonder
if the Fed will even hike rates next week, as previously thought.
At the moment, the Oct federal-funds futures contract is nearly fully
pricing in another 25-basis-point tightening. However, many in the market may
be starting to think that even if the Fed does hike next week, their post-
meeting statement could include some language suggesting this would be the
last tightening for a while, pointed out Mark Ungewitter, portfolio manager in
Boston with Investors Bank & Trust.
"The effect of these fundamental (economic) numbers has been cumulative,"
said Ungewitter. "Things have been coming in on the weak side for a few weeks
now. Today, you had the CPI and the Philly Fed.
"Going into next week's Fed meeting, I think the market believes the Fed
could possibly pause here and not raise rates. Or if they do raise rates, they
could indicate there is going to be a pause (going forward)."
Essentially, the same occurred in reverse when the Federal Reserve
lowered rates for the last time more than a year ago, said Ungewitter. Even
though rate cuts are bullish for bonds, the market sold off after that easing.
"The market knew it was the last cut in the easing cycle," he said.
The yield on 10-year notes, which moves inversely to the price, fell as
far as 4.057%, its weakest level since April 2. Should it fall back as far as
3.90% to 3.85%, some 30% of mortgage holders conceivably could find it to
their advantage to refinance, related Ungewitter.
Since market participants tend to try to factor in developments ahead of
time, some mortgage-related convexity buying may already be starting to occur,
he said.
Dec bonds traded as high as 112-22, shattering their Sept. 3 high by 20
ticks. The futures hit their most muscular level since March.
Buy stops were hit in the bonds as they moved through several key
technical levels, including the areas around 111-23, 112 even and 112-08, said
Person.
"There was a barrage of heavy short covering," he said. "Stops were
elected. It's been fueling itself and funds have been buying. Buying begets
buying in this market in this environment."
Dec 10-year notes traded up to 113-05.5, moving only slightly ahead of
their Sept. 3 high of 113-03.5.
Earlier this morning, the government reported that both the overall
Consumer Price Index, plus core CPI excluding food and energy, rose 0.1%
during August. Both forecasts had been for a 0.2% increase.
Yet one other report showed that first-time jobless claims rose 16,000 to
333,000 during the week ending Saturday. Various consensus forecasts had been
for around 335,000 to 345,000 claims.
The lone report on the calendar for Friday is the University of Michigan's
consumer-sentiment index around 0845 CT (1345 GMT). Expectations are for a
reading of around 96.5, which would be up from 95.9 at the end of August.
-By Allen Sykora, Dow Jones Newswires; 541-318-8765
[email protected]
