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April 5, 1996
Once again, a jobs report has disturbed the bond market, and taken long term rates to new highs for 1996.
But not by much. 30-year T-bonds spent the last month trading between 6.55% and 6.75%; at the worst of this morning, yields hit 6.84%. 30-year mortgages are holding near 8.25% at "zero and zero," a level reached several times since the March 8 payroll surprise.
Sitting here at the top of a straight line, six week, full one percent rise in rates, optimism doesn't exactly seem the soul of prudence. However; no guts, no medals.
There is something peculiar about the unrelieved gloom in the bond market.
First, the economic data are not all that strong. Stronger maybe than in December, but there is no sign of acceleration, nor runaway, self-reinforcing gain in momentum. Comparisons to early 1995 are useful.
Today's payroll numbers included revisions of January and February, and a reasonable guess at strike-distorted March. If you average all three months together, payrolls are growing at about the same 200,000 monthly clip as in early 1995. The '95 economy was stronger overall than now, and job growth disappeared altogether in April and May '95.
The Fed's key rate, the Fed funds rate, was at 6.00% a year ago; today's 5.25% is hardly "easy."
Monday's release of the March purchasing managers' index showed a bottom bounce to 46.9% from 45.2%, still well short of growth territory (50% in this reliable index), and even shorter of the March, 1995 reading at 53%.
A year ago, mortgage rates had begun their decline from the nines, but at 8.75% were not a whole lot higher than now. Those rates nearly pushed a stronger economy into recession.
What's different now?
Got me. Spot oil is persistently over $22/bbl, but the one year futures contract is $17.95. There are some commodity concerns, but gold is steady at $395/oz. Even if commodity prices do spike, wages are 70% of costs in our economy and wages aren't leading inflation anywhere.
All right, it's weird. What to do about it? What to tell a client?
First, whenever you see a mortgage rate with a seven in front of it, TAKE IT.
Second, "eight" is not high by any historical measure. No whining, please.
Last, guesswork. This economy does not seem strong enough to sustain the damage done by the bond market panic, and I suspect the economy and the housing market (nationally, not here) are already slowing. However, any slowdown won't show in the data for another month, and April will be an anxious time for those playing a similar hunch.
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