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March 6, 1998
This morning's employment report was every bit as strong as many feared, but the fearful had already driven interest rates up, and markets are holding. T-bonds have traded above 6.00% all week long, and low fee mortgage packages as high as 7.375%.
The long-anticipated Asian slowdown is nowhere to be found. New home sales exploded by 10.3% in January, which means an explosive January for furniture, appliances -- every other thing that goes into a new house. Factory orders picked up .5%, and the purchasing managers' index rose to 53.3, wiping out the December slide altogether.
Narrow Escape
Non-farm payrolls gained 310,000 jobs in February, and the unemployment rate fell to a 25-year low at 4.6%. Sheer, unsustainable volume aside, wage growth is accelerating: up 4.1% in the last twelve months, and rising at a 6.4% clip in the last 90 days.
There is no smoking gun here, no defining event requiring the Fed to take action; but a few more months of economic growth at this pace, and the Fed will have to react. The bond market already has.
While the Fed funds rate is entering its 13th month at 5.50%, note the change in the yield curve:
January Lows Yesterday's Close Change
3-month T-bills 5.12 5.15 +.03
6-month T-bills 5.19 5.19 unch
1-year T-bills 5.20 5.40 +.20
5-year T-notes 5.33 5.73 +.40
10-year T-notes 5.46 5.84 +.38
30-year T-bonds 5.68 6.06 +.38
Short-term T-bills are holding, indicating no market forecast of an imminent tightening.
However, traders of the long stuff have thrown in the deflation towel. The funds-to-bonds spread has widened from a ridiculous .18% in January to .56% now, but at that, the spread is only half the normal distance.
A narrow spread means the Fed is either very tight, or the bond market very optimistic. So long as the economy is as strong as it evidently is, bonds and mortgages are on the optimistic side.
Long rates have risen a lot in two weeks, and are likely to rattle around just about here, even if there is more strong economic news. Lock at any opportunity lower than today's rates, and do not wait for a return to the January lows.
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