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April 20, 1990
The first significant rise in mortgage rates since January was triggered by a surprise .5% jump in the Consumer Price Index, and a .7% leap in the core inflation rate.
March Industrial Production increased .7%, Capacity Utilization picked up .4% to 83.3%, but Housing Starts collapsed 9.3%, joined by Building Permits down 7.6%. Car Sales fell 11.2% in early April.
The Trade Deficit contracted to $6.49 billion in February, the best monthly result since 1983. We actually ran a trade surplus with Europe; most of our remaining deficit is due to intractable fairness problems with Japan. Though the inflation surprise was the trigger for this week's bond market panic, the bullet the market could not dodge is the fusillade of Treasury debt arriving in May.
Inflation is creeping toward a 5% annual rate, but that is a modest increase over the last three years' 44.5% rate. Inflation at this level is more frustrating (and temporary, if a recession appears) than dangerous.
Traditional danger signs of inflation are just not here: gold has fallen from $420/oz to $380/oz, oil closed under $17/bbl this week, the dollar remains strong (even if a pullback is on the way), inflation prospects in Europe (German unification) are far worse than domestic ones, our economy is stumbling along at 1% or so growth per year, and our trade position is better than anybody thought it would be (our exports of steel are actually growing).
There are two nearby bursts of Treasury debt sales: S&L bailout paper is being sold in huge volume not shown in the budget deficit, and the Treasury will auction $30 billion in notes and bonds early in May.
Pessimists in the bond market believe that Japanese financial institutions are under orders to reduce their purchases of American bonds in order to prop up the value of the yen. They believe further that much higher interest rates will be necessary for the Treasury to float its load of paper (in mortgage terms, rates perhaps three discount points higher than today's levels).
Optimists (like your author) believe that rates higher than those we have mean adios, economy. If the economy looks significantly weaker, investors foreign and domestic will rush to buy Treasury bonds (and mortgages) at these temporarily high yields.
Until the auctions, your clients are going to hear a lot more from the doom and gloom pushers than from the sunshine boys. It is in the interest of securities dealers to create as much negative panic as possible before the auctions. Be prepared to reassure your buyers.
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