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June 7, 1991
A completely unexpected gain of 59,000 NonFarm Payroll jobs in a report this morning has caused an abrupt rise in mortgage rates. Guesses had run to a loss of 175,000 jobs. The Unemployment rate rose to 6.9%, technically inflated by summertime job hunters.
The Purchasing Managers' Index showed a strong rebound, clear out of recession territory. The May Index jumped to 45.2% from 42.1% about as big a onemonth recovery as this report ever shows.
On Wednesday, Fed Chairman Alan Greenspan injected some excitement into the whatkindofrecovery discussion. At the time he wielded his syringe, he was in Japan, while his bond market patient was in New York.
Long needles are always exciting. Particularly so, as this time the patient misunderstood its point of aim. Greenspan's shot was originally reported as "STRONGER THAN EXPECTED RECOVERY!"
The patient fainted.
A little later, the full text had the economy "passing through a period of stability," and "The probabilities of a strongerthanexpected recovery Š are rising slightly." Just slightly. Whew.
Still, any mention of "recovery" by a Fed Chairman is grounds for nervousness. It's a signal that the Fed has already eased for the last time in this cycle, and the next move however many months hence will be to tighten.
The last interest rate optimists are in a minority camp that says this time, it doesn't matter how strong or weak the recovery is. These people say that inflation is under control, maybe better control than any time in 15 years.
The daily focus in the bond market on the strength or weakness of the economy is really about inflation. Inflation is the arch ememy of bond investors, and there is a long term relationship between hot economies and hot inflation. We watch the economy because its trends are easier to spot than those of inflation but inflation is always the shell with the pea under it.
There is a chance that inflation will not return to the 45% level of the last few years, even if we have a healthy recovery. If the CPI stays down in 24% territory, mortgage rates can stay in the nines, or even fall.
This inflation hope is about the only thing holding the bond market together. Given recovery news, and Greenspan's needling, any inflation uptick will take mortgages back over 10% before midsummer.
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