|
June 9, 1989
The Producer Price Index data released this morning showed a surprise gain of .9% for the month. A number this bad would ordinarily drive the bond market into the ground, but a big dollar rally is supporting the bond market, and the optimists are still in charge this morning.
In a limited week for economic information, the Purchasing Managers' Index fell to 49.7% from 53%, its first negative reading (below 50%) in 33 months. This index reading is good, solid evidence of economic slowdown. The 11th District COF jumped to 8.648%, and is likely to be higher than the 1year Tbill soon (8.80% and falling). COF does move slower than Tbills, but stays higher after other rates have retreated.
Last week's prediction that the Fed would ease perhaps a quarter of a point in Fed Funds, maybe on Tuesday, turned out right on both counts. The move is a cosmetic one, not big enough to have economic effect by itself, but a reassurance to the bond market that the Fed is not going to cost them a lot of money anytime soon.
Now the game is more complicated, particularly for someone trying to guess what rates will do during the term of a home purchase contract signed in the next week or two.
Why is an easing Fed a complication? The market expected this nudge, as evidenced by bonds gaining nothing since Tuesday's move. Current interest rates require at least one more shove from the Fed to be sustainable where they are, let alone at a lower level. And nobody knows when that shove might arrive, not even Mr. Greenspan.
The Fed's job has been described as the effort to balance a marble on a serving tray while refereeing a hockey game. The Fed feels pretty good about the balance right now, but embarrassing and painful accidents can happen from the blind side. This morning's wholesale price number was a hit from behind, and the marble is on the move again.
A "wait to see" Fed coupled with an overextended bond market rally is a prescription for plus or minus two discount point mortgage volatility in the next couple of weeks, and a better chance for two points at 10.5% than none at 9.5%. It will take significant additional signs of economic slowdown to overcome the Fed's fear of a calling a tooquick truce in its inflation fight.
|
