|
May 15, 1998
In this waiting-week before the Fed meets, there was an ever-so-slight change in the trading pattern of the last six months: worsening conditions in Asia could not offset the damage done by a pair of inflation reports.
Ever since December, a bad day in Asia has pushed Asian money to safety in American Treasury bonds, which causes American rates to fall.
This week, Asia had its worst days since January. India's nuclear folly may have triggered the first proliferation spiral since the '70's, and at a minimum has added to economic instability in the region. Indonesia's streets speak for themselves, Korea's "banks" are headed for a new crisis, and Japan... nobody knows how bad, but bad.
How bad can bad be? Credit demand and upward pressure on interest rates are indications of strength, and falling rates indicate weakness. When rates -- especially on government bonds -- fall to negligible, near-zero levels, it's a sign of depression. Investors become so worried about bank defaults and worthless stock that they don't care if they earn interest; they just want to be sure they will get their money back.
This week, the yield on Japan's 10-year government bond fell to 1.32%. No typo: that's a one in front.
Grim there, but no bond rally here. 30-year Treasurys hovered around 6.00%, and mortgages remained in the middle of their range, about 7.25%.
Traditional warning signs of future inflation have been blinking red for so long, while inflation has fallen farther... and farther, that nobody believes in the damn little red lights. The resounding, authoritative, conclusive pronouncement from nearly every econopundit has been "We have nothing to worry about... the Fed won't do anything... until there is unmistakable evidence of inflation. Not indicators, not conditions favorable, evidence."
Okay, here you go. On Wednesday, the producer price index rose .2%, as did its core component; and on Thursday, the CPI also rose .2%, but its core ticked up .3%.
These are not big numbers, but that one-tenth in CPI core was broad-based (health care, real estate), and no fluke. Hopes for lower rates are based on even lower inflation than we have had; even a minor rise from 1-2% inflation to 2-3% will mean nobody will want to buy 5.50% bonds or 6.75% mortgages.
This modest inflation warning is probably not enough to cause the Fed to tighten next week -- and even if it did, it wouldn't do any special harm to mortgage rates. There's a world of difference between a Fed chasing an overlooked or established inflation problem, and a Fed trying to pre-empt a future problem.
A brave, pre-empting Fed is our best friend.
|
