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July 29, 1994
News of slowing growth, a fortuitous investment by anonymous Saudis, and bond traders caught leaning the wrong way conspired to produce mortgage rates as low as any since June.
The April-June Gross Domestic Product gained a deceptively large 3.7%, while the 1.3% surge in June Durable Goods Orders was authentic. In fresher and weaker data, July Consumer Confidence slid off its peak, as did the index of Help Wanted Advertising (no joke: the advertising index is an excellent indicator of economic activity).
Today's GDP news is being mis-reported in the popular press as a sign of fast and healthy economic growth (CBS, NPR, and a puzzled group at CNBC). Aside from media garble, the fast-growth interpretation will be pushed by certain members of a particular political party and residents of a pale-colored home in Washington, DC.
If it were true that the economy had picked up steam, I flat promise that the news from the bond market today would involve something like "Rate Explosion Crushes Stocks, Mortgages!"
Instead, rates are down all across the spectrum, and most tellingly, in T-bills. 90-day bills, an excellent indicator of the Fed's next move, yielded 4.53% on Thursday evening, and this morning are all the way down to 4.38%. A yield so close the 4.25% carried by Fed funds says that today's news has removed any immediate chance for Fed tightening.
What is going on, here? 3.7% growth is fast, right? Anything close to 4% and the Fed was going to shoot, no questions Š right?
Well Š yes, but it depends. There are odd aspects to GDP arithmetic. The Gross Domestic Product is the sum of all the goods and services produced in the U.S. over a certain period of time. The GDP is supposed to measure the economy as a whole, and it does. Sort of.
GDP describes production, but sales are a sub-report, a footnote, called "final sales." Nothing fancy, just the merchant's equation: beginning inventory plus production less ending inventory equals sales.
There is the surprise. From April through June, final sales rose only 1.5%. If GDP is up big, and sales are down, something has to give in the equation, and it did: ending inventories had the biggest rise since the beginning of the recession in 1990.
Quadruple bond whammy. Slow sales mean little chance of an overheating economy (one), and if inventories of unsold goods are piling up, nobody is going to raise prices (two). Traders were caught "short," expecting higher rates, and had to buy to cover losing bets (three) on the same day that a Saudi bought one billion dollars in 10-year T-notes (four).
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