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June 16, 1989
Our three month interest rate decline ended on Thursday, and this morning's start is shaky.
In this morning's releases, the Consumer Price Index rose a little more than expected at plus .6%, Housing Starts fell 2.1%, and Building Permits were down .1%. May Retail Sales gained only .1%, and despite continuing incentives, Car Sales were up a weak 1.1%. May Industrial Production was unchanged, and Industrial Capacity Utilization fell .3% to 83.8%. The April Trade Deficit stayed within its new, lower range at $8.28 billion.
These data describe a slowing economy, but not slow enough for another round of Fed easing. The Fed spent the week sending signals that it wants the Fed Funds rate at 9.5% and no lower. Maybe later this summer, but not now.
The improvement in mortgage rates which began in March started as a reaction to too much pessimism, was fueled by signs of economic weakness, and gained speed at the sight of an easing Fed. By three weeks ago rates had fallen faster than anyone thought possible. At that moment, most pros expected a pullback. Instead, rates moved more, pushed by an overdue and oversize rally in the dollar.
The astounding drop in the last ten days to single digit mortgage rates has another source: Beijing. On the morning of June 4, the affluent merchant states of the West Pacific Rim awoke to find the friendly panda next door transformed into a murderous Stalinist beast.
Citizens of Hong Kong, Taiwan, South Korea, and even Japan began to buy dollars in a stampede having nothing to do with exchange value or interest rates. This flight to the dollar is for safety: if I must leave where I am in a hurry, get the money to a place where it is safe. China is not likely to become militarily adventurous, but sharing a bed with an unreliable elephant is disquieting at best.
Dollars can be bought as cash ("transfer my yen checking to dollars at Chase"), bonds, notes, bills, or stocks with a phone call at any hour of the day on the Pacific Rim. Each wave of buying drove down U.S. rates.
An overdone rally, a pausing Fed, the top of a dollar boom, and a temporary Asian panic combine to make me nervous about the next few weeks. The longer term still looks good.
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