Grim GDP data may grow recession cloud

[Renegade]

Wed Oct 29, 2008 6:50pm EDT

By Richard Leong

NEW YORK (Reuters) - Safe-haven demand for U.S. Treasuries could resume on Thursday, if data were to show economic contraction in the third quarter, reinforcing fears of a deep, protracted recession.

The Federal Reserve offered a grim economic outlook on Wednesday and delivered a widely expected half percentage point interest rate cut in a bid to revive an ailing credit market that may have tipped the United States into recession.

The government's first snapshot of third-quarter U.S. gross domestic product was expected to show a 0.5 percent decline, compared with a 2.8 percent increase in the second quarter, according to analysts recently polled by Reuters.

With fears of the economic downturn lasting well into next year, the Fed may have to lower rates further.

"I think if things get worse, they may lower (rates) again," Andrew Richman, fixed income strategist at SunTrust Private Wealth Management in Palm Beach, Florida, said on Wednesday.

Adding to worries of a worsening economy could be weekly figures on jobless claims, which have already been running at recessionary levels, according to analysts.

The government will release its advance third-quarter GDP and jobless claims data at 8:30 a.m. EDT on Thursday.

U.S. stocks rallied briefly late Wednesday after the Fed's cut rates for a second time this month and sparked a sell-off in Treasuries. But the equity rise was short-lived and safe-haven bids for bonds emerged.

The price on benchmark 10-year Treasury notes was flat at 101-8/32, rebounding from session lows. Their yield, which moves inversely to price, ended near 3.85 percent.

Meanwhile, there is no clear consensus that more rate cuts by the Fed and other central banks could further improve credit and economic conditions. In recent weeks, monetary authorities have undertaken unprecedented steps to solve the global financial crisis.

"The rates are low enough but there is just not enough lending," said Richman. Fed's latest rate cut "is a confidence builder more than anything else given all the extraordinary measures they have undertaken," he said.

There have been signs of increased credit supply as a result of various government programs which essentially guarantee investments like commercial paper and bank debt to shore up market confidence.

The credit thaw, however, has been slow to come and may have happened too late to help a sagging economy.

"Even if the money market improves with time, it may be too late for the economy," said Richard DeKaser, chief economist at National City Corp. in Cleveland.

(Reporting by Richard Leong; Editing by James Dalgleish)
http://www.reuters.com/article/reute...49S96J20081029