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September 9, 1988
The bond market reacted calmly to this morning's reported .6% gain in Producer Prices, and loan discounts remain within a point of par at 10.5%. The producer price number ordinarily would move the bond market down a long ways, as the number indicates wholesale price inflation of over 7% per year. However, Wall Street is still short in record volume, and there isn't much of anyone left to sell. Also, there are a few more hints of a slowing economy.
The Fed has a variety of ways to signal its intentions to the markets; some the politicians and press have figured out, others are too technical to get a public response. The "too technical" ones are thoroughly understood on Wall Street, and the Fed uses these with all the gentleness of a punch in the nose. On Wednesday, as this week's drop in rates continued, the Fed stepped into the market to sell securities, and thereby warned us all not to get carried away with lower rates. Despite all the blue smoke and mirrors from the Fed, it has a duty to make sure that the markets don't get carried away the wrong way.
We are going to get a lot of data in the next two weeks, but it may be another month before we get a continuation of last Friday's weakening economy pattern. Next week's big numbers are the Trade Deficit on Wednesday, Industrial Production on Thursday, and Capacity Utilization on Friday. If you have sensitive deals to do next week, it would be a good idea to get them locked before Wednesday morning. I'll guess that the Fed is through tightening, maybe for a long time, but as the economy crests out, we can still have some scary weeks and high discounts.
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