New York Market: Concern turns to cheer

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By Vernon Silver and Lisa Kassenaar

US stocks may rise this week on expectations of low interest rates and a growing economy. That's a big change from Monday, when stocks tanked on concerns that the Federal Reserve would raise rates. Several bits of economic news - including unexpectedly slow inflation and robust US output - changed some investors' minds.

"The worry has been contained near-term," said Anthony Gray, chairman of STI Capital Management. "The inflation numbers were very good, so it looks like things are OK for a while."

Retail stocks have already seen a boost, being the biggest gainers in the S&P 500 in the past week. Gap, for example, gained 11 per cent, most of it on Thursday, when the government reported that labour costs for US businesses rose at a slower-than-expected pace of 0.7 per cent in the first quarter and that gross domestic product rose at a strong 4.2 per cent annual rate.

Those reports sent the Dow Jones up 111.85 points Thursday. The economic news didn't convince all investors that a rate increase is out of the picture. "We still don't know what the Fed was expecting," said Edgar Peters at PanAgora Asset Management in Boston.

Others disagree. "The Fed is in a box," said Kevin McClintock at Dreyfus. "I don't think there is any way they will tighten credit."

For stocks and bonds, it was one of the most volatile weeks since October when Asia's crisis hit the markets. On Monday, Treasuries posted the biggest loss in six months and then recouped all those losses and more on Thursday. Benchmark 30-year yields ended the week at 5.93 per cent, just two basis points lower than last Friday - after rising as high as 6.09 per cent on Thursday.

Mr McClintock and other big bond investors say the Fed has no incentive to boost the cost of borrowing.

That's because inflation, by some measures, is running at the slowest pace in decades and Asia's slowdown may yet drag on the US.economy. What's more, it's hard to see the Fed raising the cost of capital in the world's reserve currency at the same time as chairman Alan Greenspan is promoting the US role in leading international bail-outs in Asia.

"It would be very hard for the Fed to raise rates, based on the precarious international setting we have," said William Gross at Pacific Investment Management. "Asia has certainly not recovered and it will probably take several years."

Copyright: IOS and Bloomberg