NEW YORK, April 29 - U.S. Treasuries face a triple bill of high profile events on Wednesday: Congressional testimony by Federal Reserve Chairman Alan Greenspan, the Treasury's announcement on its giant quarterly refunding and a closely watched report on regional manufacturing. The interplay of the Fed Chairman's views on the economy, the size of the refunding relative to market expectations, and any surprise in the Chicago purchasing managers' manufacturing index is likely to determine the market's direction.
Some of the bond market's reaction to these events may first be filtered through the stock market's response to them. On Tuesday, stocks rose and bonds fell modestly. At 9 a.m. (1300 GMT), the Treasury will announce the terms of its quarterly refunding operation, comprised of three-, five- and 10-year auctions set for next week. Estimates for the refunding size range from $52 billion to over $60 billion. A refinancing toward the low end of that range could give the market a bit of a boost, relieving the market of some supply fears. A refinancing at the upper end of that range could modestly pressure bond prices, analysts said. Several factors would keep the market from moving out of its current ranges on the refunding news, however. One would be investors' desire to wait to hear the views of Fed Chairman Alan Greenspan when he testifies at 10 a.m. (1400 GMT) on U.S. monetary policy before the House Financial Services Committee.
The market may also want to see whether the Chicago PMI manufacturing index presents any surprises -- comes in either stronger or weaker than expected. Economists polled by estimated, on average, that the Chicago PMI would read 48.9 for April, versus 48.4 in March, pointing to a still stagnant manufacturing sector. Anthony Chan, senior managing director at Banc One Investment Advisors Corporation, said the Fed Chairman was likely to put "a positive spin" on recent data. "The sharp rise in the Conference Board's consumer confidence index for April (reported on Tuesday) fits well with his views that the economy is recovering," Chan said. "You wouldn't necessarily get a bounceback in economic growth just because the war ended, but you will get it this time because of the monetary and fiscal stimulus that was in place going into the war. The war sterilized the impact of the stimulus, but with the war ended, that stimulus will be allowed to work."
Chan maintained that the Fed Chairman will be more comfortable making a prognosis about the economy now that most of the uncertainty related to the war in Iraq has lifted. If Greenspan's outlook is guardedly optimistic, that could put some pressure on bond prices, particularly ahead of next week's Treasury refinancing, when supply will flood the market. Chris Rupkey, vice president and senior financial economist at Bank of Tokyo/Mitsubishi, said Greenspan's testimony may not really break new ground. "He may say the economy has the structural flexibility to bounce back after these shocks," Rupkey said. U.S. gross domestic product grew just 1.6 percent in the first quarter. But Greenspan's testimony might amount to the question: 'Do you believe me or do you believe your own eyes?', Rupkey said.
"Greenspan could say the stock market is coming back, consumer confidence is coming back, and crude oil is reversing its gains," Rupkey said. "Do you look at the data that has already come out or at the forward-looking indicators?" However the market trades on Wednesday in reaction to the above events could all be undone on Friday, based on what the April U.S. employment report shows. Economists believe April will be the third straight month in which American businesses cut the size of their payrolls. If that proves true, there may be little backing for a retreat in bond prices even ahead of upcoming supply, traders said.//