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June 13, 1997
Soft retail sales and wholesale prices have triggered an extraordinary bond rally, and taken the stock market along for the ride. Mortgages have reached the Thanksgiving low, roughly 7.875% at "zero and zero."
These retail sales figures are the first legitimate sign of a slowing economy, which was only a hopeful theory at trading desks until now. May sales were expected to rise by .4%, and instead declined .1%; April sales were revised from down .3% to down .9%, and March from unchanged to down .3%. Slowdown skeptics, like me, point out that despite three slower months, retail sales are still way ahead of any month in 1996, and a 4.8% unemployment rate is likely to boost consumer spending, not slow it.
Wholesale prices (the "producer price index") fell .3% in May, their fifth consecutive decline (last five-in-a-row: 1945). The decline in wholesale prices has been caused by falling commodity prices.
Oil prices have fallen to $18.50/bbl, down a third from the $28/bbl 12-month high. This is the normal season for skinning vacationers at the pump, but not this year: Iraq is back on line, and the world is soggy with crude. Gold is still under $345/oz. Steelmakers tried to jack up prices 3% this spring, but instead steel is falling back below year ago prices. Wheat is $4.48/bu versus $6.32/bu last year.
Skeptics say it's nice to have commodity prices under control, but nobody was worried about commodity prices in the first place. Worries center on a too-tight job market and the potential for wage inflation. Workers are so scarce in some places that state agencies are running ads: spreads placed by Michigan and Ohio tout unfilled jobs, high wages, and a great quality of life. Two out of three ain't bad.
Investors fooling around with roughly five trillion dollars invested in American Treasurys believe, positively, absolutely, without any shadow of doubt, that the Fed will not tighten for at least the next 90 days, and is a fair bet to do something it has never done before: admit error, and reverse a .25% tightening done only 90 days ago.
Here's the market:
March, Before Fed Rise Today Change
Fed Funds 5.25% 5.50% +.25
90-day T-bills 5.38 4.94 -.44 (!)
180-day T-bills 5.51 5.31 -.20
1-year T-bills 5.80 5.59 -.21
30-year T-bond 6.97 6.72 -.25
If the Fed's asleep, it's safe to buy bonds. Five trillion bucks can't be wrong.
Right?
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