|
March 24, 1989
The bond market is closed for Good Friday, so reaction to today's release of a 1% gain in February Personal Income will have to wait for Monday.
The markets are more frightened of rapid income growth than any other element of inflation data. Costdriven increases in inflation (OPEC oil and droughtscarce food prices) are not as dangerous as toorapidly growing incomes. If we have too much money to spend, the price of everything ratchets up; if incomes are flat, we can't afford to pay the higher prices for long, and inflation moderates.
Other data this week reflect a slowing economy, and I hope it's not a false signal like the one late last summer. February Durable Goods Orders dropped 3.6%, Inflationadjusted Weekly Earnings fell .6% in February (good news see paragraph above), and the 4th Quarter 1988 GNP was revised up a little to 2.4% growth.
The happy surprise this week was Consumer Prices in a gain of only .4%. However, the pig of expanding wholesale prices has yet to move through the python to consumer prices. As forecast in this space in past weeks (accurately) the market is likely to react badly to inflation numbers for quite a while no matter how the Fed and the economy perform. Lock in before any CPI or PPI release.
The drama to watch in the next two weeks is the tension between the Fed and the bond market. Until a half dozen years ago, the Fed was a thousand pound gorilla that moved the market however it wished. Now the owners of the hugely expanded national debt hold over $2,500,000,000,000 in Treasury bills, notes, and bonds (triple the 1978 total). If those debt holders decide inflation is a bad problem even if the Fed isn't in a mood to tighten, the debt holders will sell and drive rates up on their own.
The stage was set Wednesday when Mr. Greenspan volunteered publicly that the Fed had no need for immediate tightening. If the debt holders belive his judgement, we are likely to have a lovely point or two improvement in mortgage discounts. If not, we'll go to %11.50 and stay for a while.
Market tops and bottoms tend to be defined by panics like last week's. Headless chickens are a positive sign. Except, of course for the chickens. Don't let anyone talk you or your clients into believing that disaster is nearby.
|
