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March 9, 1989
Mortgage rates are back up to their highs of the year on this morning's news of a strong job market. February NonFarm Payroll gained 372,000, double many estimates, and confirmed the warnings in this space that the economy is stronger than most have believed. Unemployment remained unchanged at 5.3%.
Factory Orders fell 5.4%, a big drop, but nothing more than an aftershock from last week's overstated Durable Goods plunge. Consumer Credit grew a modestly healthy 5.9%. Your clients have been on the receiving end of an avalanche of pessimistic debris since the collapse of the Iron Curtain late last year.
The U.S. could not possibly compete with Japan and a united Germany, we have been told. Old, tough chickens would come home to roost in the form of high interest rates, an unfinancable budget deficit, a worsening trade picture, and above all, a disaster for the dollar.
The dollar would crash. OPEC would no longer accept dollars for oil payments. The world would be awash in irrelevant dollars the American Peso had arrived.
Well, glory be! The superyen that was never to get weaker than 125 to the dollar is suddenly 150 to the dollar and falling (the more yen a dollar will buy, the weaker the yen). Inflation is as bad in Japan as here, and the play money Tokyo stock market has landed on Boardwalk with three hotels.
The deutschmark (DM, for short), wunderkind of stability, demands a higher interest rate than the dollar. German inflation hasn't arrived yet, but it certainly will when nearworthless East German marks are swapped for full power DM. Many believed the DM might stay at a 75cent value or better forever; now the DM is under 60cents and falling.
Surprise strength in the dollar has kept mortgage rates from rising more than they otherwise would have. Perhaps more important, the waves of negative predictions for the postCold War U.S. economy are flat wrong, and your clients need to know.
Investors all over the world have voted with their wallets, and the winner is the dollar. The big numbers next week are retail sales on Tuesday, and wholesale price inflation on Friday. Though the inflation report could produce a happy surprise, rates continue to be more likely to rise than fall.
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