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June 15, 1990
Improvement in mortgage rates in the first four days of this week was wiped out in this morning's trading. Though the long term trend in rates continues to be down, the market needs weaker economic data and help from the Fed for mortgages to crack the 10% barrier.
The Retail Sales report for May was down .7%, the third decline in a row, and showed weakness across the whole economy. Interest rates were at their lows of the year in response to this news.
The twin inflation reports were both as expected, and good figures, but the bond market was clearly disappointed by the absence of a happy surprise. Producer Prices (wholesale level) rose .3% in May, and the Consumer Price Index rose .2%.
This morning's manufacturing reports were surprisingly robust: Industrial Production rose .6%, and Capacity Utilization rose .3% to 83.6%. Though we say the rate trend is down, How fast?
The Fed has kept a low profile all winter and spring, keeping Fed Funds steady at 8.25%. Mr. Greenspan's political artistry is on display, here: Fed Funds are no longer the normal tipoff to the Fed's manipulation of the economy.
Though the money supply is not the mechanical determinant of inflation and economic growth that some have claimed, changes in its various measures strip away the Fed's cherished smoke and mirrors:
90day Growth Rates
January June
M1 6.4% 4.1%
M2 7.4 3.9
M3 3.2 1.2
Monetary Base 11.8 5.9
The Fed had been too easy until January. Embarrassed about resulting inflation and collapsing bond prices, the Fed has been standing on the brakes since March. Considering newly zealous bank regulators, the Fed may be 'way too tight. The economy will slow further, and at some point this summer the Fed will back off.
However, for managing real estate deals, this is no longer the world's greatest time to gamble. As this week's rebound shows, we have had a very hard time staying under 10% for any length of time, and a 10% rate should be seen as a locking opportunity.
If the Fed should blow it, and the economy roll off the edge, we will have some warning.
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