|
March 31, 1989
The bond market enjoyed a surprise halfpoint plus rally late Friday based on rumors that the Purchasing Managers Index (to be released Monday) would show a deepening slowdown in the economy. The market further inferred that the Purchasing number portends a weak Employment report next Friday.
Be wary of too much interest rate optimism in the short term. When a market has already built good news into prices, it has nothing to which to look forward after it gets its wish. Though it is possible that the St. Patrick's Day Massacre was the panic long term top in interest rates, it would be unlikely for the rate improvement we have had since then to continue in a straight line.
One way to manage your deals next week goes like this: if the Purchasing report really is weak (defined as falling below 50% positive), the mortgage market may pick up a whole discount point by Wednesday. Please resist the temptation to wait for another point, as even if Unemployment climbs on Friday, the wage data buried in the report is likely to continue the inflation trend, and trigger a bond market decline. Strong employment data would reduce the bond market to a greasy spot in the road.
All of this week's economic data confirm a slowdown. February Existing Home Sales fell 3.1%, and all Single Family Sales dropped 9.4%. Leading Economic Indicators were down .3%, and Factory Orders fell 2.3%.
An analysis of when the next recession is likely to appear is not very useful to your clients, as capable, educated guesses run from "it already has" to "sometime in 1990." Worthwhile is a short list of patterns common to most postWWII recessions.
Interest rates and inflation peak after the recession has started. The speed with which the Fed loses its fear of inflation and gains fear of Congress determines the length and depth of the recession.
Most important for Colorado: the people worst hurt in a downturn are those who are overextended. Colorado is about as underextended in a speculative sense as it is possible to get. There is good reason to believe that a few million Yankees and LotusLanders will lose jobs, and houses within 100 miles of those seacoasts will lose value, while Colorado continues its recovery.
|
