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May 4, 1990
A surprisingly weak employment report has broken bond market pessimism (this morning, anyway), and mortgage discounts are recovering.
Unemployment climbed .2% to 5.4% of the workforce, the highest figure in 19 months. April NonFarm Payroll gained only 64,000 despite the temporary injection of 80,000 census takers, meaning a net loss of permanent jobs.
New Home Sales caved .5% in March, Construction Spending slid 1.4%, and Factory Orders were down 3.8%. The only strong number was the inflationpuffed Personal Income report, up .8%. Leading Economic Indicators jumped .9%, but since a "reorganization" of the index a year ago, it hasn't lead anything except newscasters it's no longer a meaningful index.
Though the news recited above is weak, the Purchasing Manager's Index rose from 48.8% to 50.2%, its first trip above 50% in a year. This increase to an expansion level should warn everyone that mortgage rates are not going to return to single digits for months, if at all this year.
The economy is too resilient, and the Fed is too timid to chop at inflation in an election year.
As noted here for weeks, the immediate cause of the surge in interest rates is an excess supply of debt to be sold by the Treasury. Some of the excess is S&L bailout "working capital" (there's a sugarcoated sourball).
The normal flood is the financing of the budget deficit, and there is a load coming down the spillway next week the "quarterly refunding." Refunding implies refinancing something already present; not so. This is $30 billion in new cash. "Quarterly" is honest; we do this every three months.
The outcome of the refunding auction will tell us whether mortgage rates are going to hang in at 10.2550% or 10.5011.00% for the next few weeks.
The $30 billion will be auctioned in three parts next week: $10 billion in threeyear notes on Tuesday, $10 billion in tenyear notes on Wednesday, and $10 billion in 30year bonds on Thursday.
The success of the 30year is the most important to us. The auction results will be known late Thursday afternoon; if the bond market trades well late Thursday, and opens well on Friday, we are okay.
If bonds head south on Friday, be prepared to explain how easy it is to refinance, these days.
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