U.S. Treasuries troubled as factory costs
doubled
Reuters
By Pedro Nicolaci da Costa
Sep 15, 2005 4:51 PM ET
NEW YORK, Sept 15 (Reuters) - U.S. Treasury debt prices slid on Thursday
after data showing a massive jump in manufacturing costs in September generated
anxiety about rising inflation in the wake of Hurricane Katrina.
The Philadelphia Federal Reserve's regional factory gauge plummeted this
month, a fact that ordinarily might have given the government debt market a
sizable boost.
But accompanying the stagnation in the sector was a doubling of prices paid
by manufacturing firms, which suggested the inflation outlook might have
worsened severely in September.
That worry sent benchmark 10-year notes reeling 11/32 lower for a yield of
4.22 percent, up from 4.17 percent on Wednesday.
"The Philly Fed shows a collapse ... with a surge in prices," said Andrew
Brenner, head of fixed-income at Investec U.S. "This will give the Fed a real
conundrum."
The central bank meets next week to set monetary policy. While most on Wall
Street predict the Fed will raise interest rates by another quarter percentage
point, another wave of weak data could force them to pause later in the
year.
However, if inflation outside the energy sector begins to show visible
acceleration, Fed officials would be caught in a difficult spot as they look to
keep the economy growing without stoking pervasive prices increases.
For now, bond investors appeared more focused on inflation risks than on the
threat to growth from Hurricane Katrina and high energy costs.
This emphasis sent the 30-year bond a full point lower for a yield of 4.52
percent, up from 4.45 percent. Five-year notes dropped 5/32 for a yield of 4.00
percent, up from 3.96 percent.
Two-year notes suffered the least, easing only 1/32 to yield 3.90 percent
from 3.89 percent. The discrepancy between long and short
maturities helped steepen the yield curve, with the spread between 10- and
two-year notes widening four basis points to 32.
AFTER KATRINA
Traders got a full serving of economic data on Thursday, but investors paid
most attention to numbers showing the state of economic activity after
Hurricane Katrina.
The Philadelphia Fed's index of mid-Atlantic factory activity plunged to 2.2
in September from 17.5 in August, far below economists' forecasts for a drop to
14.0.
The new orders index, a key indicator of future growth, dropped into
negative territory for the first time since April 2003, falling to minus 0.5 in
September from 19.8.
Growth at New York State factories also slowed in September, bogged down by
fewer orders and higher costs, but the drop was less significant than that seen
in the Philly Fed and was more or less in line with forecasts.
The New York Fed's 'Empire State' index of overall conditions for
manufacturers fell to 16.97 from August's 23.04, pretty much in line with
market expectations.
Yet the bond market did not manage to make any strides on the figures,
mostly because the survey's "prices paid" component soared to 52.7 from
25.9.
"That's where the market should be focused -- on the emerging inflation
risk," said Josh Stiles, senior bond strategist at IDEAglobal. "This is where
the pricing risk exists, because everbody has been saying that there is no
inflation."
That may have been the case before Katrina hit. The Labor Department said on
Thursday that its consumer price index rose 0.5 percent in August, but
excluding energy and food it ticked up a contained 0.1 percent.
But that was backward looking data, and analysts feared the post-Katrina
world might look a lot different.
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