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April 2, 1993
The April Fool left a banana peel for today's bond market, and eager traders hit the pratfall with 9.0 for style.
The jobs data were just where the rates-are-going-lower crowd expected: Non-Farm Payrolls fell by 22,000 in March. Making fools of nearly everybody, rates shot back to February highs by noon.
Other data show a clear deceleration in the economy in late winter. The March Purchasing Managers' Index slipped to 53.4 from 55.8, Consumer Confidence fell again, down to 62.6, and Initial Jobless Claims surged to 380,000.
There were some small gains in February statistics: New Home Sales (up 4.6%), Personal Income (up .2%), Leading Indicators (up .5%), and Factory Orders (up 1.4%).
Everybody's got an explanation for today's perverse bond market behaviour. None are satisfactory.
The leading theory for the "cause" of today's little air pocket is the return of the inflation heebeejeebies, evidence as follows.
The CRB (the best index of commodity prices) is up to 214 from a low of 198 in January. Gold has risen above $340 an ounce, and silver is back over $4 per ounce. Oil prices are not rising fast, but aren't falling back under $20/bbl, either.
There is a powerful association between a weakening dollar versus foreign currencies and inflation (imported goods are automatically more expensive, and domestic manufacturers raise prices accordingly). It's a little mysterious, but the dollar is weak everywhere -- even in Europe, where interest rates are falling quickly.
Next week we get the twin CPI and PPI inflation reports for March, and the market will pay sharp attention. So should anyone with an unlocked mortgage in process.
Having recited the evidence for inflation fears, we don't find them particularly compelling. It's possible that the old enemy is back, but not at all likely in a job market as weak as this.
The working theory here for rates as the year wears on is extreme uncertainty, and therefore volatility, but no big change in trend. Rates stay down, but bounce off the peel from time to time..
Mr. Clinton has injected a great deal of change into that nice, sleepy, predictable gridlock. The tax and spending increases work at cross purposes and with different time lags, and there are waves of new policies to come.
The best explanation for today's rate rise is the ultimate in fundamentals: more bond sellers than buyers.
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