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July 6, 1990
Mortgage discounts are up by three eighths or more this morning in response to surprise strength in labor statistics. The damage was done by a revision in the May report.
The June numbers were about as weak as expected: NonFarm Payroll up 40,000. The wheels fell off when the weak May 140,000job gain grew to a pinkofhealth 356,000. This is no mere revision, this is a job count from another country, or a different year, maybe?
Other data this week join the garbled jobs report in describing a stumbling economy that won't quite keel over into recession. Construction Spending fell .4%, Factory Orders rose 2.1%, and the Purchasing Manager's Index rose .4% to a modest 51.1%.
We continue to believe that rates will decline, and today's performance is just a pause.
One interest rate concern is the capital demand from a rebuilding Eastern Europe, particularly Germany. Bond market bears insist that competition with Europe will drive our rates higher. We doubt it, but the pace of change in Germany is so fast that predictions are flimsy. Note the following two news stories.
The Soviet Finance Minister, Mr. Pavlov, and the Chairman of the Soviet State Bank, Mr. Gerashchenko, have been in meetings with the Federal Reserve to learn about central banking, public finance, and government regulation.
The Fed no doubt feels flattered that somebody thinks the Fed knows what it's doing. However, given the Fed's penchant for secrecy, maybe the KGB should be the ones visiting, and maybe we could send the Fed to Moscow for a glasnost lesson.
Story number two you couldn't make up.
It seems that the 360,000 Russian soldiers in East Germany have for years been paid in East German marks, and had accumulated savings in that currency. As of July 1, there is no such thing as an East German mark.
It's not a good idea to fail to pay soldiers.
So, on July 4, an armed Soviet convoy pulled up to the new East Berlin Bundesbank office (which until recently had been Communist Party headquarters) and presented a check for several million deutschmarks (real, west marks). The convoy left loaded with cash. And the Russian soldiers' savings accounts were converted to deutschmarks.
There is no limit to the fiancial surprise potential from Europe right now.
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