Focus on strong economic reports
Interview: Keefe Bruyette & Woods---Coats, Craig---Fixed Income Strategist (slow)
>> let’s get you caught up now on the rest of the numbers today. the new york stock exchange finishing higher on the day by about 75, almost 76 points. the amex up 45. the russell 2000 small caps up 10.50. the broader market average, the wilshire 5000 finishing up 154 points on the day, 1.5%. crude oil in new york fell for the 11th time in 12 sessions on speculation that an energy department report will show u.s. inventories rose last week. crude down 1.2% at $29.56 a barrel at the close of floor trading. taking a look at the bond market now, it did reverse course after the fed decision, bonds which were down finishing higher on the day, the 10-year up by about a half, the five-year up 3/8. on the shorter end of the curve the two-year note about 3/16 on the day and the three-year note up about a quarter, the 10-year note at this point reversing almost 13 basis points move today down six basis points at 4.2% on the yield. taking a look at currencies, the dollar finishing lower against the yen, higher against the euro, lower against the pound. treasuries did erase their losses today, after the federal reserve said a slowdown with inflation remains a concern. this increased speculation the central bank will leave its interest-rate target at a four decade low for most of the next year. craig coates is executive vice president and head of fixed income at keefe, bruyette & woods. he joins us from the trading floor in new york.
>> good afternoon, michael.
>> we saw strong economic reports this morning, we saw treasury yields start to rise then all of a sudden the fed came out and gave us basically the same statement they have been operating under for the last six weeks and treasuries completely reversed course. what’s going on there?
>> i think there has been a little bit of question mark on the part of market participants over the last several weeks. it’s risen from the strong retail sales we’ve seen, from the talk about the labor markets improving, claims have been improving and then, of course, the last labor statistics we got were better, and we have been faced with a question of how much longer the fed is going to continue on this path, especially when perry made his comments last week about “considerable period” may not mean what we all thought it did earlier in the year.
>> do people really think the fed might make a significant statement on rates today? >> no. i think people were looking for confirmation. i think everybody believes that the economy is just starting to recover. we may be seeing a g.d.p. number around 6%. but everybody, i think, believes that the recovery is fairly fragile and that the fed is going to do everything it can to make sure that it gains traction before it does anything. i think we’re going to have to see several months of a couple hundred, 200,000-300,000 employment numbers a month, consumer spending continue strong, corporate investment is going to have to pick up and we’re going to be settling into 4-5% g.d.p. numbers before much longer goes on here and they probably will even think -- won’t even think about changing or tightening their statements until late spring.
>> there was talk earlier this summer about whether the bond market was misunderstanding the fed. it would seem today if the fed wants to keep interest rates low as long as possible the bond market got the message loud and clear today.
>> yes, they did, and i think a lot of the carry trades have gone back on, i think people who were worried about a tightening in the first quarter of this year are now looking maybe something that might even be the summer or even after the presidential election. we had the two-year note back up to 2% 6-8 weeks ago, it’s rallied back into the mid 160’s, the curve steepened by 10 basis points today and this is a sign of the belief that most market participants believe that money is going to remain fairly accommodative from the fed for a considerable period of time of time.
>> the fed follows the market, the market anticipates what the economy is going to need. when do we see that―do we see that continue? we have been seeing a fall in yields―i mean a fall in bonds, a rise in yields as we get better economic numbers. does that continue even with this fed statement now?
>> well, i think you had secretary snow’s comments in europe last week about it’s a natural event to have interest rates move higher as economic data improves. that’s going to take place. near-term i think most people are going to be comfortable with the fed wanting to see several months of very strong labor growth. they’re going to want to see consumer spending to remain strong. they’re going to want to see some pricing power back in. the c.r.b. is up 3% alone this month and a lot of commodity prices are up 15% since august. if you take out oil and energy costs that go through that pipeline. so we’re looking at things which are improving, but obviously the fed wants to make sure that things are well entrenched before they do anything to change that.
>> real quick before we go here, you mentioned the c.r.b.―the commodity prices rising higher. are people still worried about deflation? do they think the fed is still really worried about deflation?
>> the fed did mention that today, they mentioned that deflation is still the predominant economic concern. i personally don’t see that. it makes me wonder if they’re seeing something that i don’t see or the markets don’t see.
>> or just trying to convince you of something?
>> yes, and with all the treasury supply that’s coming, 60-65 billion to be announced refunding within a week and a $26 billion two-year note auction tomorrow --
>> we’re going to have to leave it there. thank you very much, craig, craig coats, executive vice president, co-head of fixed income at keefe, bruyette & woods. the world’s largest director seller of cosmetics.
