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May 5, 1995
It was only Wednesday that commentators intoned, "High mortgage rates have driven new homes sales 20% below last year's numbers."
Two hours later, a bond rally began, which in the 70 hours since has reduced mortgage rates almost a half percent. Thirty year loans at "zero and zero" can be had as low as 8.125%. Yeee-hah!
What the hell happened?
Well, somebody out in Colorado last week wrote a newsletter saying that whenever a market stays in a tight, tiny little range for three months, the next move tends to be explosive. Fortunately, the author did not disclose his private fear that the move seemed likely to be up, not down. Nobody's perfect.
Contributing causes were the Purchasing Managers' Index showing a near break-even economy, vehicle sales down to a two-year low, leading indicators down .5% in another two-year record, initial claims for unemployment insurance to a trend-blowing one-year high, and inventories of unsold new homes up to the pre-recession highs of 1990.
The crusher arrived this morning. As recently as Wednesday, economists had forecast an April rise of at least 200,000 non-farm jobs. At 6:30 this morning, the report scrolled across screens: "payrolls down 9,000, unemployment up .3% to 5.8%." Presumably the May figure will include some labor market economists.
What the hell happens now?
Everything changes. Not only does a re-acceleration in the economy seem remote, but the soft landing boys in the tower have some explaining to do to the crash landing worrywarts in the fire trucks.
The stock market, happy since December because of the bond rally, has finally discovered that bonds are rallying because the economy looks lousy, and if the economy is lousy enough, what is the Dow doing at 4,400? If the bad news keeps up, it won't be at 4,400 for long: the last two days of rates down, Dow down is the first such pattern in maybe five years.
Fed tightening is out of the question.
Which leads to some other questions. What happens if these much lower mortgage rates (down a percent and a half since Christmas) ignite the housing market? And, at about the same time, the Fed is pressured into easing prematurely? It is an election year next year, after all, and Fed chairman re-appointment roulette is about to start.
Ah, well. Only a sadist would suggest that excessive worry about economic weakness, translated into too-low rates, would cause an inflationary rebound.
However, only a masochist would refuse the rates we have now, and wait for the return of the magnificent sevens.
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