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Markets may be less confident of soft landing

ZURICH: Tight labour markets and higher oil prices appeared to have raised fears in financial markets over the prospects for a benign slowdown in the world's major economies, the Bank for International Settlements (BIS) said on Sunday.

In its quarterly review, the BIS said stock and bond markets "seemed to be brimming with confidence" in late 1999, believing monetary policy could engineer a soft landing in the United States and support non-inflationary growth in Europe.

"The month of January 2000 found the very same markets wavering in their views," it said in the report, released ahead of its publication on Monday.

The change followed evidence of faster growth in much of the world in late 1999, driven by the U.S. economy but also by signs of growth picking up in other countries like Germany and Japan.

"The first few weeks of January 2000 marked a change in market sentiment," the BIS said, adding U.S. December jobs numbers published on January 7 underpinned such worries.

The BIS serves as a bank and a forum to world's central banks. It makes no predictions, but can serve as a sounding board for developments in world financial markets.

When the U.S. Federal Reserve and the European Central Bank raised interest rates in November, "the equity markets welcomed the moves", it noted. But these rallies stalled as later data showed no signs that growth was slowing.

Such uncertainty led to large price swings, with the daily change in the Standard & Poor's 500 index averaging 1.2 percent in January compared with an 0.6 percent during the 1990s.

CONCERNS EVIDENT ALSO IN BOND MARKETS

"The weeks surrounding the turn of the year highlighted how quickly market sentiment can change," the BIS said.

The changed feeling was also apparent in bond markets.

The steepness of the short end of the curve just before the Federal Reserve began tightening last June suggested bond market participants thought rate increases would be "pre-emptive rather than heralding a prolonged period of further tightening".

Such benign expectations persisted into the fourth quarter, when the flatness of the U.S. and also European yield curves suggested bond market participants still felt only a modest further tightening would be needed in the coming quarter.

In Japan as well, optimism "led to the view that the policy of zero interest rates might now last much longer than a year".

But since then, yields of European and U.S. long-dated bonds have risen sharply on news of rising oil prices and continued tightness in the U.S. jobs market last month.

By the end of January, the BIS noted, U.S. two- and five-year yields had risen by 30 basis points.

However, there may be a positive aspect as well. If the U.S. yield curve appears to suggest more tightening is expected than before, participants "still saw such policy as pre-emptive and likely to be effective against inflation."

The BIS also cautioned that the yield curve has been affected by other factors including the U.S. Treasury's reductions in its regular refundings, cited as a factor behind an inversion in the U.S. curve.-Reuters