NEW YORK, June 30 - A survey of the nation's manufacturing, including pricing trends in that sector, will likely be the focus on Tuesday for a government securities market newly sensitized to the latest economic data. If the Federal Reserve had demonstrated a long-term commitment to low interest rates in its latest policy move, the market might have been less reactive to signs that the economy was starting to percolate, analysts said. But the Fed's modest quarter-percentage point rate cut -- when many in the market had anticipated a more aggressive half-point reduction -- and its failure to mention so-called non-conventional tools for keeping interest rates low mean the market must watch for the latest evidence on economic activity and worry that when the economy accelerates, the Fed could allow monetary policy to tighten. "Since the Fed bailed on its implicit commitment to the market that it would underwrite lower long rates... that means the economic data become the dominant theme for the market," said Dominic Konstam, head of interest-rate strategy at Credit Suisse First Boston.
Because the Fed did not enunciate its commitment to low interest rates for a year or two, the market will respond to various economic reports as it did on Monday, breaking a three-session losing streak on relief that a regional survey of U.S. manufacturing was not any stronger than forecast. "We're range trading off the data and if (the nationwide) ISM index is stronger than expected, the danger is the market will trade off," Konstam said. The market expects that the nationwide Institute for Supply Management index, due at 10 a.m. (1400 GMT) on Tuesday, will show meager production growth at U.S. factories in June. A survey of Wall Street economists pegs the Institute for Supply Management's gauge of U.S. industry at 51.0 in June, compared with 49.4 in May.
A reading above 50 indicates growth while a figure below that level points to contraction. One aspect of the ISM report that could draw the market's attention is what happens to the prices paid component. Because that gauge slipped in the Chicago NAPM index, the price component of the nationwide ISM report takes on more significance, said Joseph LaVorgna, senior U.S. economist at Deutsche Bank Securities. "The price numbers are very weak," said LaVorgna. "The Fed wants to see some inflation, but that's a function of demand and demand is slow." June vehicle sales, also due on Tuesday, are expected to be lackluster. Car sales are expected to total an annualized 5.4 million in June, up from 5.3 million in May, according to economists polled by . Truck sales are estimated to have slipped to an annualized 7.5 million, from 7.7 million in May. Konstam said the Fed must now worry about how the market will trade if economic data strengthen. The Fed wants long-term rates to stay low to stimulate the economy, especially business investment, but the market will not remove the long-term risk premium if it believes that economic recovery will lead to higher interest rates. If the Fed wants the market to believe in a future of low long-term rates, it will have to "jawbone" the market in some fashion, analysts said. Konstam said it would be easy to coax prices up and yields lower if the market was already moving in that direction. "But if the market is prone to go down, then putting it back into the mindset of trading on economic data will tend to put pressure on the market," he said.//