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April 15, 1989
The bond market had its second straight Friday rally based on unexpectedly good inflation numbers and weak economic reports. Depending on traders' weekend afterthoughts, Monday's mortgage discounts could be more than a half point lower than Friday's levels, and the best we'll see for a couple of weeks.
Friday's March numbers showed the muchfeared Producer Price Index up "only" .4%, Industrial Capacity Utilization fell .2% to a stillstrong 84.0%, and Industrial Production unchanged. Earlier in the week, March Retail Sales came in up a paltry .1%, and though Car Sales jumped, the jump was propelled by "incentive programs" (that means price cuts in Detroit auto executive jive).
Lost in the bond market optimism about a slowing economy is Friday's data on a widening trade deficit, back out to $10.5 billion for February: exports rose negligibly, while imports climbed 5.3%.
If the trade deficit seems irrelevant to mortgages for Colorado homebuyers, remember that you heard it here that the primary problem facing the Fed now is inflation driven by a weak dollar, not as usual by a toohot economy.
Basics: a weak dollar makes our exports cheap, and imports here more expensive. Neat idea. Should solve the trade problem. New problem: the increased prices of imported cars, oil, and everything else constitute increased inflation. Soon, domestic producers raise their prices because competing imported products have higher prices.
The trade deficit with Japan exploded 25% last month, instead of contracting as wishful thinkers thought. The normal weak currency prescription has had little impact on our trade problems with Japan after two solid years of dollar devaluation. We are left with just the inflation.
The bond market has temporarily lost its fear of another round of Fed tightening, but is due for a bad surprise the next time growing price numbers appear. The "good news" Producer Prices today show a 5%plus inflation rate, and the Fed will not stand for a continuation. They may not tighten soon, but they are not about to ease.
Watch out for reaction to Consumer Price data due out on Tuesday the 18th.
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