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September 2, 1988
We got very good employment data this morning, and the bond market is having a medium spectacular rally. Mortgage discounts are off nearly a full point, leaving 10.5s at or close to par. If you locked in at higher levels, you did the right thing: if this data had been unfavorable, our market would have gone to small pieces.
Good news for us is lousy news for the unemployed: Unemployment rose .2% to 5.6%. The numbers that really turned the market were the NonFarm Payroll ones: 219,000 jobs were created in the current period, less than expected, and the prior month was revised down to 200,000, which was about a third less than originally reported. Retail Sales for August were about half the forecast amount. Earlier in the week, Single Family Home Sales were reported down 4.7% in July, and the June gain was revised down; Machine Tool Orders fell 33% in July, Factory Orders fell 3.5%, Leading Economic Indicators fell .8%, and Construction Spending in June was revised from up marginally to down 1.5%.
A data pattern like this helps explain the tendency of many a Wall Street trader to hit the bottle too often. The Street was absolutely convinced that the Fed was going to be forced to tighten hard, maybe even before the election. Traders had long since sold all the bonds they had, and by some reports had sold $36 billion in bonds they did not own (this is "getting short:" selling borrowed securities in a falling price market in the trader's expectation of being able to buy them back cheap later to pay off the borrowing). You may take some black delight in the thought that these traders who so often manipulate us to their advantage have for the moment painfully outsmarted themselves.
The economy may be weaker than thought, and the chance for Fed tightening before the election may now be zero, but the Fed isn't about to ease. This week's weak numbers can be an aberration. The markets will slop around, maybe wildly for a month while trying to find a balance after being so short for so long. My guess is that locking 10.5s near par will be a pretty good bet for the near term.
Fed Governors will sleep soundly tonight, feeling that they have struck a successful blow against inflation, and have not been late or timid. But by 4:00am, at least one of them may wake uncomfortably with the thought, "Did we overdo it again?"
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