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May 10, 1996
Good news on inflation has capped mortgages near 8.50% at "zero and zero," but equally good news on economic growth has dimmed prospects for any big improvement in rates.
The producer price index rose .4%, driven by the pop in gasoline prices, but the "core" rate (excluding energy and food prices) rose only .1% -- both numbers much better than feared.
There are two dominant hypotheses working in the bond market today. Group one holds that the surge in interest rates this year is already slowing or shortly will slow the economy, while group two maintains that a wage-price inflation spiral is underway, and bonds are doomed.
In the mad scramble for fresh data, reports which ordinarily don't get much attention are getting a lot. Two of these did damage to the case for group one this week.
Every Thursday morning, the Labor Department reports on the number of people filing new claims for unemployment insurance each week. While these figures have the appearance of precision, and should forecast the "first Friday" payroll extravaganza, claims are constantly distorted (strikes, long or short or holiday weeks, weatherŠ.).
Therefore, data from a single Thursday shouldn't be taken too seriously. However, the moving average of claims is a pretty good indication of labor market conditions. Yesterday, a nice little bond rally was stopped cold by a fifth straight claims number under the long term average.
Fewer claims mean fewer layoffs, which mean a tighter job market, which means wages might rise, which means inflation is on the way, which means the end of life on planet bond.
The second report is as subjective as the first seems to be precise. While subjective, it tends to be dead-on accurate, and is fresh, describing April.
There are twelve regional Federal Reserve Banks. (If you have any money, look on the left side of a bill for a capital letter surrounded by the seal of the issuing regional bank.) Once each month, the regional banks send chatty notes off to the Big Fed, which compiles them into the impressive-sounding "Beige Book."
The thing reads like "Beaver Cleaver Visits The Banking Channel."
Boston, "upbeat, solid gains;" Dallas, "activity picked up;" San Francisco, "expanding at a brisk pace."
Interest rates may slow the economy later on, but it sure didn't happen in April. Worse, lending credence to the inflation fears of group two: Atlanta, "scattered wage pressure;" Chicago, "some labor shortages;" St. Louis, "cost pressures from tight labor market."
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