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April 5, 1991
Mortgage rates are back down near their lows of the year in response to data showing continuing job losses.
In a release this morning, March NonFarm Payrolls contracted by 206,000 jobs, and February payrolls were revised down an additional 100,000. The Unemployment rate jumped .3% in March to 6.8%.
Factory Orders slid another .5%, the fourth straight drop in this index, while Construction spending seems to have bottomed, down only .1%.
The Purchasing Managers' Index rebounded to 40% in March from 38.5%. Any index value below 44% is recession territory, but the improvement in March suggests that the worst of the recession is over.
The Fed is under severe political pressure to ease credit again. However, even if it does shovel out some more money, it is not likely to help mortgage rates.
Towards the end of any recession, long term investors begin to worry about the aftereffects of the Fed's antirecession policies. The Fed has to ease to help the economy out of recession, but always runs a nasty risk of overdoing the easing.
If the economy begins a natural recovery, and the Fed has created too much money, the oversupply makes nice fuel for an inflation bonfire.
Glib Congresspersons always want to know why the Fed doesn't get it right on the nose. Two big reasons. Easy or tight credit from the Fed hits the economy somewhere between immediately and never. Second, the Fed finds out when policy actually hit only a couple of months after it has happened.
For example, jobs data is geting a lot of attention now because it is "fresh" data each month. Today we got a look at the economy in March, and it's only the first week of April. But most data is months old before the Fed gets it.
The Fed's best indicator is the behaviour of long term bonds the inflation canary in the Wall Street coal mine. If the Fed is overdoing the easing, long bonds have a bad day; if the easing seems a reasonable response to a bad economy, long bonds have a good day.
30 year bonds yielded 8.00% in February. When the Fed eased again in March, yields shot up to 8.30% (bad day: investors wanted a higher return to offset future inflation risk). Bond yields have not yet dropped back to where they were the last time the Fed intervened.
The bond market is still suspicious, and the money supply has exploded at an 8% annual rate since January. We continue to believe that the next big move in mortgage rates will be up no matter what the Fed does.
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