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August 25, 1989
Mortgage rates were unchanged this week, which was a great victory, considering the market's performance so far in August.
We had little economic data with which to work this week. Existing home sales rose 1.2% in July, certainly not a weak sign, and auto sales rebounded. Though July Durable goods orders fell 1.9%, June's were revised to up a strong 1.4% from up .1%.
As the jump in mortgage rates from 9.25% to 10%plus will testify, the bond market has gotten used to the idea that the Fed is not going to ease again soon. The question now is whether or not the economy is in a new acceleration. If it is, the Fed will tighten, not just stay put.
Next week's data will give you and your clients all the guidance necessary to play the market. Clients who can afford to be wrong will get a nice adrenaline ride, and may win the game. Clients who are short of excess cash should lock before Tuesday if possible and before Friday if not.
Tuesday will bring the initial estimate of Third Quarter Gross National Product "the Flash GNP" in slang. If the Flash is a growth rate over 3%, we are in for a rough couple of weeks. It will take a number under 1.5% growth to help the bond market much.
Friday's follies this week are the monthly Unemployment and Payroll reports. If Unemployment stays down, and Payrolls show a brisk rise, just hunker down and try not to get hit by any of the big pieces.
Despite the gloomy potential next week, there are several grounds for optimism. The market has digested the S&L bailout and the first of its related bond sales. The market has also absorbed a flood of normal Treasury bond sales, and dumping of mortgage backed securities by failed and failing S&Ls. Last, any pronounced improvement in rates of the kind we've had since March is guaranteed to have a rebound, and this rebound has about run its course.
Political pressure on the Fed to ease continues. Representative Lee Hamilton, an otherwise sane man (who earned respect as a memeber of the IranContra panel) has introduced legislation to remove confidentiality from Federal Reserve proceedings. Pressure of this kind to ease frightens the bond market and typically produces the opposite reaction no matter what the Fed does.
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