Rising U.S. rate futures shrug off buoyant GDP

By Burton Frierson

NEW YORK (BestGrowthStock) – U.S. interest rate futures rose on Friday as investors doubted that data showing the economy grew at its fastest rate in six years would hasten monetary tightening from the Federal Reserve.

U.S. gross domestic product grew at a 5.7 percent rate in the last three months of 2009, much better than analysts expected but not enough to dispel worries that the pace of expansion could slow markedly.

The early read on stronger growth closed out a year in which the economy contracted at a 2.4 percent pace, the biggest decline since 1946, and analysts say they are well aware of weaknesses still clouding the growth outlook.

Much of the fourth-quarter growth came as companies simply didn’t allow inventories to run down as much as previously, while a 10 percent jobless rate is unlikely to go away soon, leaving analysts to wonder how soon the economy can withstand rate hikes.

“Fed hikes are certainly a second-half-at-best scenario, and what the market continues to grapple with is whether 2010 is even really in play. It’s not obvious,” said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.

“I think it’s probably not quite as bearish for rates as it appears on first blush,” Lantz added about the GDP data.

A separate report also showed that consumer sentiment hit a two-year high.

Interest rate futures were higher across the board, though not dramatically so.

The November contract is the first to fully factor in a hike from the Fed’s current historic low target of 0.0 to 0.25 percent.

Earlier this year, the August contract was in play for the first rate increase.

“I certainly can’t see a case for hiking any sooner than August. August would be the earliest because the Fed is going to need to see how the summer selling season in housing goes,” Lantz said.

Some analysts cautioned, however, that the firming rate futures, reflecting a decrease in bets on hikes, might leave some investors poorly placed if subsequent data affirms the fourth-quarter’s strength.

Given prevalent doubts about and bets against the economy’s staying power, some analysts say a bigger risk is that investors will have to take into account rate hikes that could be closer than many thought.

“Everyone has basically said it’s a U-shaped recovery, not a V-shaped recovery,” said David Dietze, chief investment strategist at Point View Financial Services in Summit, New Jersey.

“With a few more months of superior GDP and consumer sentiment we may hear noises coming out of the Federal Reserve that monetary tightening will be sooner rather than later.”

Elsewhere, dollar Libor rates came off a multi-day record low of 0.24875 percent to reach 0.24906 percent, a one-week high.

Stock Market Investing

(Editing by Padraic Cassidy)

Rising U.S. rate futures shrug off buoyant GDP