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May 26, 1995
Weak data pushed mortgage rates to a new low, but not quite through the 8.00% barrier. A great many marbles are riding on next Friday's employment report: if it confirms last month's job weakness, it's hello, sevens, on the spot.
April durable goods orders collapsed 4.0% in the largest single drop since December, 1991 -- a fade which announced a recession. Lower mortgage rates were supposed to be helping a housing recovery: in a staggering surprise, existing home sales fell 6.4% in April.
There is an over-the-table-edge quality to these data.
The consensus has been that the economy would slow sooner or later. However, "soon" was supposed to be Fall, and "later" sometime after the Presidential election.
It turns out that "soon" happened about 60 days ago.
Though it's 'way too early to predict a recession, the bond market has a near-recession forecast built into rates.
December '94 May 25 Close
Fed funds (an overnight,one day maturity, last raised in January):
5.50% 6.00% Three month T-bills 5.93 5.80
Six month T-bills 6.66 5.87
One year T-bills 7.29 5.86
Two year T-notes 7.65 5.97
Five year T-notes 7.86 6.18
Ten year T-notes 7.82 6.38
Thirty year T-bonds 7.85 6.73
When a yield curve is flat from one year out to thirty, and the thirty year rate is slightly under 5-10 year rates, it's a full volume signal that long term rates are about to decline. It never misses, and didn't in December.
At the other, short end of the yield curve, when rates out to two years are under the Fed's rate, it's a screaming signal that the economy is near recession, and the Fed is about to ease. Never misses, and there's the problem.
Problem? What now? All last year we insisted that a tight Fed was the best thing possible for long term rates. The reverse is just as true. If the Fed is forced to ease prematurely, or too much, short rates will dutifully follow, and perverse bonds and mortgage rates will rise.
Hope that the Fed holds its ground as long as possible, even at the price of recession. If so, expect years of sub-eight mortgages, even sub-seven, evenŠ high fives.
Meanwhile, a balanced budget made it through the Senate 57-42 without a tax cut (voted down, 69-31), Mr. Clinton's planless predicament is deepening; and the Europeans have announced that if the US and Japan reach a trade agreement, the Europeans will sue everybody. Terrific week.
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