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June 23, 1989
Durable Goods Orders fell a surprisingly large 4.2% in data released this morning, and the bond market is reacting well to this sign of weakness in the economy.
Data were too thin this week to add any precision to a rate forecast. The First Quarter GNP was revised up a negligible .1% from 4.3% growth to 4.4%, and a related inflation measure was revised down a little.
The COF index increased to 8.648%, crossing over the one year Tbill, which dropped to 8.45%. ARM borrowers are still getting payment increases based on rates over 11%, while new 30year loans are at 10%. Great deal, those ARMs.
Trading continues to be dominated by Fed and other central bank intervention a massive effort to get the value of the dollar back down. The intervention is in the form of sales of dollars by the billion every day, and corresponding purchase of other currencies. These dollar sales tend to depress the bond market, and mask the Fed's intentions for the future of interest rates.
Fed watching is hard to do at this moment, and it's doubly hard on your clients. The economy is weaker than in winter, but could be described as just "less strong." Inflation is not accelerating as it was last winter, but has stabilized at a scary 6% annual rate. Bond and mortgage prices reflect a belief that the Fed's next move will be to ease. Nobody knows, not even Mr. Greenspan.
Mr. Greenspan's leadership is perhaps the most technical in the history of the Fed. He is getting full advantage from the largest commonpurpose group of economists in the country (the Fed System is a leading employer) armed with computing power vastly greater than 10 years ago. Call it The Wirehead Fed.
Last year, the Fed tried to intercept inflation by tightening early. Some considerable bond market optimism is rooted in hope that the Fed will now try to intercept a recession by easing early. The techies at the Fed are good, but that market hope is a little too convenient for me.
Until the economy declares its growth path, borrowers are playing lockorfloat with about a one third chance that rates go down some more, one third they stay the same, and the last third is bad news. Try not to get too carried away betting on the first third unless you can afford to be wrong.
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