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July 23, 1993
Four tough bond market days have removed all the July gains in mortgage prices -- just as the national news media discovered Monday's lowest lows.
Nothing in new economic data caused the abrupt rise in rates: June Housing Starts were flat, and New Building Permits fell 1.3%.
The most likely "cause" for a quarter percent jump in mortgage rates is market anticipation of the Treasury's next borrowing fiesta.
In the week of August 9, the government will hit the bond market for $40 billion in new cash. Rates often rise before these week-long festivals, and equally often fall afterwards.
It is reassuring to think that a rise in rates is a natural, temporary, market supply event, which will shortly unravel itself.
However, there was a soft thud this week just loud enough to disturb overconfident snoozing. The bump was the sound of a one liner from Alan Greenspan.
The good Chairman's testimony before Congress always requires a little decoding. He can't just walk into Congress and say "Well, the economy is still growing, so the Fed is going to focus entirely on that terrible, dangerous 3% inflation rate. If we have a new recession, that's the price you have to pay for bad habits."
For good politics, the Chairman must always indicate good growth ahead for the economy. If he fails to do so, the Fed has no basis for its perpetual fight against inflation.
The bump in the night was the Chairman's prediction for three percent economic growth this year.
You could pick up the unanimous "WHAT?!" from the bond market without a telephone. Until the Chairman spoke, no one more than ten yards away from Bill Clinton thought the economy would grow that much this year. Bonds bombed accordingly.
First quarter growth was a mere point seven percent. Was the Chairman deploying political cover in his optimistic prediction, or saying true sooth?
Next Thursday brings the report on April-June economic growth. The Chairman has access to more economic information than any other person on the planet, and does not make firm predictions unless he has already seen the cards.
If the economy is really going to grow at three percent, mortgage rates have indeed bottomed, and the yield curve will correct by rises in short term rates -- soon.
We are still in the "What?!" camp, suspicious of the Chairman's motives. He is the same guy who denied both recession and credit crunch in order to pursue the Fed's endless war on inflation.
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