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May 30, 1997
It's been a short, holiday week, but there was news, and continuing conflict between news and hopes.
Every day since the Fed declined to tighten (on May 20), the hopeful have been quoted in the financial press claiming the economy is slowing down now, or will slow down soon, or will slow down later this year. Bonds and mortgages are trading accordingly: T-bonds crossed above 7.00% early in the week, but finished back at 6.95%; while mortgages drifted down towards 8.125% from 8.25%.
That there is no evidence for a pending slowdown hasn't bothered the markets in the slightest, and new evidence this week all supported the fear of an overheating economy.
Consumer confidence in May rose from 118.5 to 127.1 -- a 27-year high in the Conference Board survey. Irrational exuberance, indeed. Or maybe rational: the guts of the survey showed that the surge in confidence was due to a red hot market for jobs. In the single month of May, there was a 20% gain in respondents reporting that jobs were "abundant."
More. In March, 37 metropolitan areas reported unemployment rates below 3.0%. In April: 57.
Damn few to go.
Next Friday we'll get the monthly payroll, wage, and unemployment bombshell. One labor market economist has forecast a 250,000-job gain in payrolls (which would be big enough to have bond traders reaching for windowsills, but not on them), but added, "If there was anybody out there to hire, my number would double."
The 1st quarter GDP was revised from 5.6% growth to 5.8%. Optimists say the growth rate will fall to 2.0% in the second quarter, ending next month. You'd think by now there would be some solid signs of a two-thirds slowdown. Not.
Until there is some confirmation of this deep and miraculous slowdown, I'm suspicious that there may be another reason for bonds and mortgages to be holding up so well. Every serious professional money manager is worried about the stock market, and doesn't want to put any more money in at these prices.
Mutual fund managers have to put money into stocks as money pours into their funds -- $15.7 billion more in April. However, mutual mania does not include bonds: the aggregate dollars invested by the public in bond funds has not increased since the 1994 market crater.
Bonds are an institutional game, and mutual mania or not, the big money is institutional money: banks, insurance companies, pension funds, endowments, corporationsŠ.
I get the feeling that there is a huge wad of institutional dough chasing bonds as a better place to be than overpriced stocks, slowdown or no slowdown. So long as the institutions are buying, rates are fine, overheating or no overheating.
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