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February 3, 1995
The first weak employment data in a year have helped the credit markets consolidate improvements in interest rates. Non-Farm Payrolls rose only 134,000 in January, and the Unemployment Rate rose .3% to 5.7%.
Any sign of slowing in the economy is good news for rates, but a single report does not make a series. The Purchasing Managers' Index rose a little in January to 57.9%, indicating strong growth, while new home sales, construction spending, and retail sales still held high.
In mid-December, we printed the following list of interest rates. Along with the list were two assertions which you often find (too often?) on this page. First, a "flat" yield curve -- rates about the same from two years to thirty -- portends lower long term rates. Second, a further rise in short term rates was likely, and would help long term rates to stabilize, or fall.
Those two notions were illustrated (perfectly, I might add) by market movements in the last month.
The Fed raised the Fed funds rate (the shortest of all maturities: overnight) a half percent on January 31. Look what has happened to other rates, from short to long:
December 14, 1994 February 3, 1995 Three-month T-bills: 5.93% 5.93%
Six-month T-bills: 6.66 6.32
One-year T-bills: 7.29 6.75
Two-year T-notes: 7.65 7.13
Five-year T-notes: 7.86 7.41
Ten-year T-notes: 7.82 7.50
30-year T-bonds: 7.85 7.63 Short term rates are higher, or unchanged, and long term rates have fallen. Including mortgages: 30-year conforming fixed rate loans are hovering between 9.125% and 9.25% at "zero and zero," the lowest since Labor Day.
Okay, nice move. However, from the perspective of the financial markets, anything that happened more than five minutes ago is Pre-Cambrian history. So, what's next?
It's likely that long term rates are past their highs of this cycle. Markets could test the tops again (8.15% on long Treasurys, 9.625% for 30-year mortgages), but to exceed them would require a most unlikely re-acceleration in the economy, and a timid Fed.
The Fed will continue to raise short rates until the economy cracks, which may take 18 months, or may have already happened. Mortgages could drift back down into the eights, but a big break down requires an economic breakdown.
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