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May 3, 1996
In a triumph of Jurassic Park over the present, surprising strength in the January-March quarter has overwhelmed today's news of a weak job market in April.
In early morning trading, 30-year mortgages are struggling to hold on to 8.50% at "zero and zero."
It's seldom pleasant to be found wrong, but there are degrees of discomfort.
Under ordinary circumstances, when an opinion held with modest vigor turns out to be mistaken, the sensation is more embarrassment than pain. However, when opinion has drifted to absolute belief, client chips down, family nest egg on the lineŠ then error transcends mere pain.
And so it was in the bond market on Thursday.
Yesterday morning was supposed to be a ho-hummer, spent in sleepy review of 1st quarter '95 GDP, waiting for the big news today. The 1st quarter was supposed to have been a flirtation with recession, growth no higher than 1.5%.
Wrong. 2.8%, and "final sales," a better indicator than GDP as a whole, up 3.3% -- and that understated by a half percent or more by the GM strike and the frigid January. Real growth may have been closer to 4%.
Thirty-year bond yields fell to 5.97% in January, and a weak economy was going to take them lower. Dead wrong. 7.06% this morning. How could everybody be so wrong?
Belief in convenient propaganda is one way. Social engineers have been pushing the idea that wages aren't growing. Wrong. The statistics are murky, but somebody is buying 15 million new cars every year, and it's not just rich people.
The consumer was supposed to be tapped out, borrowed to the hilt. Wrong. Under suspicion here for some time, reports on consumer debt are now confirmed as absurd: they show total borrowing each month, and ignore principal payments.
Strong payroll reports in March and April had removed hopes for Fed easing; but tighten in an election year? Unthinkable. Also wrong. In January, the market showed its expectation of easing in a traditional way: the two-year Treasury yielded 4.95%, below the 5.25% Fed funds rate. Wrong. Today? The two-year is trading at 6.14%, an unpleasant forecast.
There is always a counter-argument. Interest rates have risen a lot in 60 days, and "should" be slowing the economy. April payrolls rose a negligible 2,000 jobs; March new home sales fell 7.6%; and the purchasing managers' index rose in April, but only to a break-even 50.1%.
Maybe the bond market is in some hysterical overreaction, just as wrong now as it was in January.
Don't bet on it. If we thought we were near recession while growing at 3%-plus, we don't yet have a clue in the world where we are now.
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