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May 19, 1989
The mortgage market has had a good week, and is finishing with its best day today. Though discounts are not greatly lower than at last week's end, the good news has been the market's ability to ignore evidence of a strong economy.
New data had Industrial Capacity Utilization up .4% to 83.9%, which wiped out the slowdown earlier in the year, and Industrial Production as a whole was up .4%. Though April Housing Starts fell 2.7%, New Building Permits jumped 7.2%, indicating future housing strength. The Consumer Price Index climbed .7%, but traders comforted themselves in the knowledge that a stray spike in energy prices accounted for all but .2% of the rise.
The Trade Deficit narrowed to $8.85 billion in March, way under the expected $10 billion or more. The improvement was due to a rise in exports at double the rate of import growth. Rapidly growing exports mean a rapidly growing U.S. economy; three months ago, strong export numbers had bond market players crowding the exits.
The interest rate pattern of the last two weeks is testimony to the power of the Fed.
Before April, the market's primary uncertainty was when the Fed would tighten again, and how much. Through April and the first part of May, the run of economic data showed a rapid slowdown. Since then, the bond market has lost all fear of Fed tightening. Investors don't need the Fed to ease outright in order to bid interest rates down, they just need for the Chairman to put the hammer out of sight.
Two weeks ago every newspaper in the land contained speculation about the onset of a recession. The last two weeks' data do not remotely suggest recession: at best the data suggest less inflation than feared, and healthy economic growth just below the Fed's fear threshold.
The bond market may have overdone its rally, but from a Colorado real estate perspective, we'll take it. Late winter fears of mortgages at 12% are not going to materialize this year. Maybe the Fed will have to cool things off again, but we are very likely to have interest rates within a range which will sustain our local recovery.
Manage your deals accordingly: two or three discount point wobbles, but no big swings in sight.
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