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August 22, 1997
There were no economic data worth reporting this week, but there was newsŠ.
And the markets didn't like any of it. Bonds have gotten clobbered for three straight days, and yields are back to the highs of two weeks ago, at this moment 6.67%. Mortgage prices have risen accordingly, and are just barely holding on to the sevens in low fee packages.
Stock market types will recite all sorts of gobbledygook on tonight's TV shows to explain the Dow's unraveling to the 7700's, but cause and effect are clear. The peak in stock prices coincided with the exuberant, irrational, 6.29% low in bond yields on July 31, and as bonds have faded, so have stocks.
The most damaging news was the UPS "settlement". "Surrender" is a better description. The terms of the deal were indistinguishable from the union demands before the strike, and will add about a billion dollars to UPS' labor costs in the next five years.
Worse, the Teamsters' easy victory will embolden other unions: Amtrack went out on strike 48 hours after UPS caved in. (The President intervened in that one, on the theory that Amtrack is an essential service -- a theory which will astound many "Halftrack" consumers and captives. Travel by horseback is faster, more reliable, and safer).
All the good inflation news, endlessly trumpeted in the markets, depends on labor costs staying under control. The nifty news in commodity prices -- seven straight declines in the producer price index this year -- is irrelevant in an economy where 75% of all costs are labor costs.
The Fed met on Tuesday, and while it did not bite, it did deliver a delayed bark.
The minutes of its July meeting were released this week, and contained the following language: the governors remained "decidedly tilted" to the upside, and voted unanimously to maintain a "bias toward restraint".
"Restraint" in Fed-speak means to restrain the economy with tighter money and higher rates, and to have a "bias" toward restraint is to be set on hair trigger, restraining restraint. Complacent markets shouldn't have been surprised, but were.
Swooning stock market or not, if wage pressure seems out of control, the Fed will tap the trigger another .25%.
It's been an ugly July, but there is no sign of an interest rate explosion or stock market crater. Bond and mortgage rates are smack in the middle of an 18-month trading range, and the S&P is still up 20% in 1997.
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