|
April 1, 1994
Surprise, surprise (and no April Fool's Day joke), Non-Farm Payrolls expanded -- exploded -- by 456,000 new jobs in March.
Interest rates are sharply higher today. Last Friday, the yield on 30-year Treasury bond hit 7.00%; this morning it reached 7.28% (from 7.11% only yesterday).
Also this morning, Freddie Mac is reporting "mortgage rates rising to a 14-month high at 8.04%." Amazing what a week will do: your clients will be stunned to hear 8.50% and 8.75% on Monday. Expect to hear "nine" sometime soon.
How can good news about jobs do so much damage to interest rates? Well, record-low interest rates came from three elements, all in effect at the same time: a weak economy, no jobs, and low inflation.
The economy got better last Fall. Hot, in fact. Interest rates rose a little, but there was still no job growth. If there is no hiring, there is no wage growth, and therefore no inflation. However, big demand for labor means wage growth, and excessive wage growth is the source of inflation.
These Non-Farm Payroll numbers are often revised later. Maybe a month from now the Labor Department will tell us they counted Texas twice, and the inflation fear will subside. Maybe interest rates are over-reacting because so much of the financial world is closed today.
More likely the following.
The hot economy last Fall did carry over into 1994 after all, and was just delayed a bit by bad weather.
Under normal circumstances, the Fed would tighten further within days. Today's report tends to confirm fears that the Fed's moves to tighten credit have been too late and too little. However, circumstances are not normal: the stock market bubble broke last week, and the Fed never wants to tighten when markets are already panicky.
The last time Non-Farm Payrolls gained 456,000 jobs in a single month, it was 1987, and the Fed tightened accordingly. You may recall that the stock market ran into a little air pocket soon thereafter. Mr. Greenspan was in his first year as Fed Chairman, and probably remembers 1987 pretty well. He would not like to repeat the experience.
If the Fed must sit like a voyeur at a car accident, the bond market will take measures into its own hands.
There has been a theory building for a half-dozen years that so many bonds have been sold that their owners are now in charge of the economy. If these investor-owners sense inflation nearby, they sell. Lots of selling, and interest rates rise: this time, faster than the Fed can raise them.
A dozen years ago, there were only about $700 billion worth of tradable Treasurys outstanding. Today, it's about three-and-a-half trillion, and the owners are selling.
|
