|
August 12, 1988
We got another lousy number this morning, Producer Prices up .5% in July, and the bond market is tanking again. My guess is that rates are about as high as they are going to get for the next month: FHA discounts on 10.5s may get up to 3.00, but that should be about it.
The Fed tightened hard on Tuesday, taking Fed Funds to at least 8.1%. The bond market will probably bounce around for the next month, tending to overreact to each economic data release. Any strong evidence of a weaker economy can cause temporary rallies in 10.5s back to par, which should be taken advantage of by your clients.
I don't consider the election to be much rate protection later on this fall: if the economy continues to show strength, and the Fed does not respond, the market will raise rates for the Fed. The Fed's problem is that it usually takes up to six months for the economy to respond to tightening; the Fed seldom knows when it has tightened enough or too much, and as a result tends to overdo everything in both directions. I believe the Fed has acted enough now (it has acted strongly and early) because inventories have started to build, and the money supply measures show very sharp declines in growth.
There is so much data being thrown at you that it may be helpful to know which items attract a lot of media attention, but have little to do with mortgage rates:
The Discount Rate. Usually a nonevent. This used to be a powerful tool, but the politicians figured it out, and so the Fed moves the rate only to confirm what it has already done in the Fed Funds market. Fed Funds aren't sexy on the evening news: the bond market went to pieces on Tuesday because Funds moved, not because of the Discount Rate.
The Prime Rate. Nothing whatever to do with mortgage rates. In the last ten years, Prime has been as much as five points over or two points under mortgage rates prevailing at the same time. Another "political" rate.
The Stock Market. By some measures, the debt markets (bonds, bills, and mortgages) are ten times the size of the stock market. The Fed eased in response to the Crash, and was surprised to find that the Crash had little impact on the economy.
|
