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Bond suffers after ECI
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July 29, 1999: 9:35 a.m. ET
Strong sign of wage inflation knocks long bond down more than a full point
By Staff Writer Robert Scott Martin
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NEW YORK (CNNfn) - Signs of wage inflation on the rise forced U.S. bonds into a sharp retreat Thursday, leaving already inflation-wary Treasury investors looking over their shoulders at the looming shadow of the Federal Reserve and rising interest rates.
Shortly after 2 p.m. ET, the benchmark 30-year Treasury bond fell 25/32 of a point in price to 88-3/4. The yield, which moves in the opposite direction, climbed to 6.07 percent from 6.01 percent Wednesday, after hitting 6.11 percent earlier in the session, the highest in about a month.
The primary architect of the bond's decline was an unflattering second-quarter employment cost index (ECI) report released early in the day. The index, a key gauge of inflation pressures brewing in the salary side of the U.S. economy, showed wages and other compensation rose 1.1 percent in the last there months, a sharp increase over both the first quarter's minimal 0.4 percent growth rate and the 0.8 percent economists had braced the bond market to expect.
Wage inflation is a particularly sore subject for bond traders after months of stern warnings by Federal Reserve Chairman Alan Greenspan and others that rising salaries will be the crack in the economy through which broader inflationary pressures will be most likely to gain a firm toehold.
As such, the news that wages are rising faster than previously thought left the Treasury market unsettled while investors reviewed Greenspan's most recent comments on the subject.
In the question-and-answer session that followed the second leg of his summer Humphrey-Hawkins report, the Fed chief stressed productivity -- the ability of laborers to work efficiently -- as the main bulwark keeping inflation out of the economy. However, he also warned that increasing productivity is unlikely to last forever, which would in turn open the door for inflationary forces.
Given the stable U.S. labor force, robust economic growth such as that enjoyed by the United States in recent years cannot be sustained unless productivity grows in step. Otherwise, employers will find themselves forced to compete more acutely for effective workers by raising compensation, feeding inflation from the salary side.
Other than the gloomy ECI report, bond traders found few positive surprises in the day's barrage of economic data.
The weekly jobless claims report came in at a lower- than-expected 275,000 new unemployment claims filed, indicating an unforeseen tightening in the labor market as fewer U.S. businesses laid off workers. In the wake of the ECI, the statistic -- often considered a minor indicator by bond traders -- painted an increasingly vivid picture of an economy on the brink of increasing labor pressure, with hints of steepening wage inflation on the edges.
Meanwhile, although the simultaneous release of advance second-quarter gross domestic product (GDP) statistics should have provided balm to the bond market by pointing at slowing economic growth, the inflation component of the data was unchanged. The advance GDP grew at a rate of 2.3 percent between April and June, far slower than the final first-quarter expansion of 4.3 percent and the 3.3 percent economists had forecast.
Because growth generates inflation, the headline figure was bond-positive. However, the implicit price deflator -- the primary quarterly indicator of broad inflationary forces -- remained steady at 1.6 percent, in line with forecasts but ominously showing few signs of slowing.
Weak dollar feeds bonds' weakness
Bond traders looking for comfort overseas found little support from the dollar's continued decline. The greenback has plunged to five-month lows against the yen and two-month lows on the euro, driving overseas investors from dollar-denominated U.S. bonds in its wake.
A strong U.S. currency increases the real value of the fixed dollar returns Treasury debt offers, encouraging global traders to buy into U.S. bonds. However, as the bond market has ruefully learned in recent trading, the opposite is also true, as a weak dollar prompts internationally oriented investors to cash out of Treasurys.
In early New York trading, the greenback had fallen nearly an entire yen in value to 115.16 yen, while the euro gained on the dollar to trade at $1.0705.
Currency traders said the irrepressible yen was the main story of the day, as the Japanese currency got a firm lift from bullish industrial data and the Tokyo stock market rally that followed. Global traders sold out of dollars to buy into Japan's apparent economic recovery, leaving the greenback starved for inflows.
Meanwhile, the threat of a fresh round of dollar-buying from the Bank of Japan (BOJ) remained subdued at best. Since last week, the BOJ has largely retreated from its policy of supporting the dollar in a range of 118-122 yen, leaving the market to determine exchange rates on its own.
Japanese monetary officials have formerly stated their desire for a weaker yen, which would buttress their nation's recovery from recession by encouraging exports. 
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