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May 16, 1997
Mortgage rates and bond yields improved this week, down to 8.125% and 6.88% respectively; both the lowest since Christmas '96. The improvement is clearly due to market expectation that the Fed will not tighten next Tuesday.
Economic data showed a slight softening in April, and gave no sign whatever of price inflation. April retail sales fell .3%, industrial production held unchanged, and factory capacity utilization retreated to 83.4%, comfortably below the 85% danger zone. April producer prices fell for the fourth straight month, down .6% ("core" down only .1%), and consumer prices rose .1% (core up .3%).
The Federal funds rate (payable for use of money by banks for a single night) is the rate the Fed raises or lowers when it tightens or eases. That rate is known in the shorthand of Wall Street simply as the "funds" rate, and there is never the slightest confusion on the Street about whose funds "funds" are. They belong to theŠ gulpŠ Fed; Alan's money.
Market expectation of Fed moves is usually easy to detect by comparing the funds rate to the yield on short term Treasury bills. If T-bills are higher than the funds rate, the market expects the Fed to raise the funds rate; if lower, the market expects an easing move.
Thursday: Fed funds: 5.50%, 90-day T-bills: 5.24%. Bills below funds, therefore the Fed is going to ease.
WHAT!? Got me, people: that's what the market says. And it gets crazier than that. Compare yesterday to the aftermath of the Fed's first tightening move in two years (funds from 5.25% to 5.50% on March 25):
April Highs May 15 Change
6-month T-bills 5.61% 5.50 -.11
1-year T-bills 6.08 5.83 -.25
30-year T-bonds 7.18 6.88 -.30
The Fed tightens, has never in its modern history tightened (or eased) just once, and all market ratesŠ
fall. Not down just a little, as can happen after any overreaction; but fall so far that the market says the Fed made a mistake last time, and will soon reverse itself.
Talk about irrational exuberance. I hear the "economy's slowing by itself" propaganda, and I ain't buying.
There are overblown bubbles everywhere, starting with unemployment at four-point-nine. If you know an unemployed computer jockey, you know the only one. In the first 90 days of 1997, the GDP grew at a 5.6% pace. The Dow is back, been clear to 7300; the S&P 500 is up almost 10% for the year and is trading at 22 times earnings. Coca-Cola sells at 40, count'em, FORTY times earnings. That's a lot of soda pop.
Sez here the Fed hikes funds a quarter, to 5.75% on Tuesday, and overconfident markets have a tough day.
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