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May 28, 1993
Mortgage rates are headed back down after two weeks of trying the top of the March to May range.
Markets paid no attention to Clinton's budget passing the House. Squeaking by on a 219-213 vote, (with 38 "nay" Democrats), the budget will not pass the Senate in current form. Nobody knows what the final budget will look like.
The few statistics released this week were lousy for the economy, but potentially quite good for interest rates.
Durable Goods Orders were unchanged from a shaky March, while Existing Home Sales grew a meager 2.7%. Both measures of Consumer Confidence (the Conference Board and the University of Michigan surveys) showed pronounced declines, continuing the weakening trend since January.
The weakest of the news was a piece of revised history: the January-March Gross Domestic Product gained only .9%, only half the original "strength" reported.
At a single stroke, this revision changes everybody's assumptions for the economy, for inflation, and for the Fed.
The last three months of 1992 showed annual growth approaching 5%. High inflation numbers in March and April coupled with near 2% GDP growth early in 1993 had everybody scared.
Now, as the economy has slowed to almost no growth at all, the higher inflation can be dismissed as an aberration; probably no more than a delayed reaction from unsustainable growth in late 1992.
In leaks both intentional and accidental, the Fed's bias changed last week from further ease to tightening. After today's GDP report, the Fed isn't about to tighten. Only a continuation of bad inflation numbers could get them to squeeze a no-growth economy.
We are always supposed to worry about the inflationary consequences of a weak dollar, but the weak dollar this spring seems more to do with a greedy Japan than an inflating dollar.
Gold prices may be sounding an alarm, up $50 per ounce in a month, but we don't think so. Cash still pays only about 2.5%, and owners of cash are downright desperate to find a better yield. For example, the stock market has been bid to a 1987-style extreme.
There's a good case to be made that low-yielding cash will chase the price of anything that goes up in price, reinforcing any upward move, fundamentally sound or not. Therefore, gold prices are higher because they went up.
Next Friday brings May jobs data. Profound weakness would give us the next chance for another big drop in mortgage rates.
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