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September 16, 1988
The bond market is a little weaker this morning, but we've had two good weeks in a row.
Economic data released this week describe a clear slowing in the rate of growth of the economy. We don't yet know if we are seeing the beginning of a nogrowth period, or just a pause in the strong 1988 expansion, but there is certainly more justifiable hope for lower mortgage rates now than at any time since last winter.
The big number this week was the dramatic decline in the Trade Deficit from $13.22 billion to $9.53 billion, the lowest deficit since 1984. Also, it was the "right kind" of decline: imports contracted sharply, which relieved fears of overheating from too much export growth. Industrial Production rose only .2%, and July was revised up an equivalent amount. August Retail Sales grew an anemic .2%, and July's were revised down to a marginal gain. Industrial Capacity Utilization edged up .1% to 83.7%, but the gain was attributed to high utility operating rates during August heat waves.
Next week we get the CPI on Wednesday, and Durable Goods Orders on Friday; as always, try to lock before surprises. My guess is that mortgage discounts are likely to drift up for the next 10 days or so. We've had a lot of improvement and are due for a little correction. Longer term, the Fed will not do anything before the election, but further signs of economic weakness (particularly in employment) can cause long term rates to come down no matter what the Fed does. It may be just wishful thinking on my part, but I think there is more going on here than just a breather in a sustained period of Fed tightening. Rates may have topped out.
Despite the negative slant to this week's Camera article on mortgage banking, I'm an optimist for rates and the economy, and particularly for Colorado, but one note of caution is in order. Lost in the economic news is the extraordinarily low level of energy prices. Nobody knows when that market will turn (Three years? Five?), or how much (back to $25/bbl? $35?), but I sure wouldn't want to be on an ARM when it happens. If you have to use one, please don't forget to refinance out.
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