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September 15, 1989
The bond market is up a little on wobbly legs, and mortgage discounts are down accordingly in response to a blizzard of economic news released today. This is the first big supply of data since the end of August.
The inflation front has better cosmetics than wrinkles. The Producer Price Index (wholesales prices) fell .4% in August, much more than expected. However, minus the volatile food and energy elements, the "core" inflation rate came in at plus .5%. Now, it's true that energy and food prices count in the total (at least for those of us who eat, heat, drive, and cool), but a 6% base annual inflation rate is not going to help the Fed to ease.
Measures of economic activity are slower than last winter, but do not reflect a slowdown from here. Retail Sales for August rose .7% (though only .2%, if the automobile price war is excepted), and the July figure was revised up from plus .5% to plus .9%. Industrial Production gained a pleasant .3%. The Capacity Utilization Rate remained unchanged at a high 83.8% (a factory usage rate of 85% is thought to be dangerously inflationary). No recession here, or nearby.
The Merchandise Trade news was superb, better than anyone predicted, and has caused a powerful dollar rally this morning. A drop in imports has been the objective of the Fed for years, and it's what's happening. Imports fell 2.5% in July, leaving the trade deficit at its lowest monthly level since 1984 at $7.58 billion. The June gap was revised down, as well.
Any dollar rally usually drives bond prices up and interest rates down, as investors sell yen and deutschmark denominated paper in order to buy dollar bonds and bills (and Ginnies and Fannies). The bond market, though up a bit, did not react well at all to this morning's inflation and economic data. Bond market pessimism underwhelmed the dollar rally.
The plain english forecast: mortgage rates will stay flat or rise with only a slim chance of meaningful drop this week. Political pressure may force the Fed to ease (it needs nontechnical goreintheshoppingcart inflation numbers in order to stay tight), but the only benefit will be in short term rates.
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