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April 21, 1989
Three events dominated the bond market this week: the first two on Tuesday were Fairy Godmother Department, the third on Thursday in Dirty Tricks. The market is recovering only a bit this morning from Thursday's panic.
Housing weakness reported on Tuesday confirmed for many traders and analysts (though not yet this one) the growing weakness of the economy. March Housing Starts fell 5.4%, and new Building Permits plunged 13.7%. Tuesday's other "good news" had the Consumer Price Index up .5% in March, about as expected, but less than feared.
The mortgage market was still doing well on Thursday morning until the West German equivalent of the Fed (the Bundesbank) suddenly tightened credit. By noon our time mortgage discounts had a fullpoint discount rise. Clients benefitted from lenders who watch, understand, and can react to rapid changes in credit conditions.
As the bond market turns to optimism so strong that a 6% annual inflation rate is good news and grounds for a rally, your clients are on the receiving end of "rates are falling, rates are falling" propaganda. Extreme optimism at this time is probably no more valid than the dark pessimism of a month ago.
The Bundesbank's move on Thursday scared the wits out of the American bond market because if the German central bank is afraid of inflation, and is tightening in response, our Fed presumably has the same concerns. The working relationship between the Fed and the Bundesbank is the closest we have.
It is possible that a recession is close at hand, and the Fed's next move only a month or two away will be to ease. It seems more likely to me that the slowdown will follow an uneven path, and inflation will not moderate for a long time after the economy slows.
Mortage borrowers who are slow to lock to protect themselves will put their purchases at risk. Ten days of strong economic data, however temporary, can send the mortgage market right back to its St. Patrick's Day highs.
Having delivered my cautions against too much optimism, I think we should all feel well about the rate future for the rest of 1989. There may come a time soon when clients who can afford a mistake should float to close, but it's not here yet.
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