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August 21, 1992
Mortgage rates fell to new lows this morning, and popped right back up again by noon.
As claimed in this space for some time, election year politics are having little impact on the bond market. The Bush acceptance speech was ordinary, nowhere near as good as the one Peggy Noonan wrote for him four years ago, and the money markets treated it as a nonevent.
If Mr. Clinton were suddenly to indicate displeasure with Mr. Greenspan, to advocate dramatic monetary ease, or appear to be hostage to the freespenders in his party, then we might have something. Not now.
The only economic data catching much attention this week was a 2.8% decline in July housing starts. However, other, more technical data suggest that the economy may be improving, and call in to question the unanimous forecast for lower interest rates.
The expectation for lower perhaps dramatically so long term interest rates is predicated on the following four assumptions: GDP growth under 2% for another year or more, a weak labor market keeping wage pressure down, weak money supply growth (whether because of a tight Fed or weak banks), and weak demand for American exports because the world economy is shaky.
All four elements conspire to keep inflation low, which is the prerequisite for low rates. Any sign of deceleration in the economy will drive mortgage rates into the sevens and long bond yields in to the sixes.
Last winter we thought the economy would be doing better than it is now, so you really don't have to pay attention to the following "however."
However, a shadow here, a lifting cloud there, rain fading to drizzle in another place make the flat economy assumptions less solid than ten days ago.
Item: Our old Thursday standby, initial jobless claims, is all garbled up by temporary auto layoffs, but looks like the base weekly figure is moving down to the 300,000 range from 400,000 plus.
Item: The June trade figures showed a wider deficit, which got all the ink, but also described a huge increase to record highs in both exports and imports. That means a better economy here, there and everywhere.
Item: It's no trend, but both M2 and M3 jumped big.
Item: Bank failures are running at a third of the forecast for 1992, and it's not because of cooked books.
There is probably nothing to these items, but you might want to watch FNN early on the Friday morning before Labor Day when employemnt stats for August are released.
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