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September 18, 1998
Mortgages rates were steady this week, holding a narrow 6.75-6.875% range on the 30-year, low-fee deals. The American economy is in good shape, still. Industrial production rebounded a solid 1.6% in August, up from the GM-strike trough. The best line describing the economy overall: "Despite the still very solid economy as of now, there are really the first signs of erosion at the edges" -- A. Greenspan.
Which leads to... will the Fed ease at its meeting on the 29th? If so, what impact on mortgages? A gloomy Greenspan speech a week ago, Mr. Clinton's "The industrial world's chief priority today, plainly, is to spur growth" on Monday, together with Mr. Greenspan's "Deflationary forces are continuing to emerge...clearly moving in our direction.... There is no evidence...which suggests that the process...has stabilized" on Tuesday combine to suggest an immediate easing move, probably the first in a series. The only contrary factor was a Bundesbank denial of any plans for coordinated easing by other central banks. Markets make their own predictions, and the best indicator of the market's anticipation of Fed action is the relationship between the Fed funds rate and 90-day T-bills. 90-day T-bills 10-year T-notes 30-year T-bonds
Last Friday 4.83 4.76 5.16
Today 4.59 4.76 5.16
The Fed funds rate is 5.50% (has been for 18 months). The abrupt, one-week .24% drop in T-bills could be dismissed as more panicked buying of US Treasurys, but the stable long end says not. The T-bill market expects -- right or wrong -- a big cut in Fed funds on the 29th, maybe .50%, double Mr. Greenspan's usual incremental nibbles, to be followed soon by more cuts. Mr. Greenspan's use of "erosion" and "moving this way" are distinctly new phrases. His job is to be out in front of events, to anticipate; because his tools -- rates and monetary policy -- take months to have effect. He sounds as though the risks of re-inflating the stock market balloon and inflation are now outweighed by fear of global slowdown. Okay, he eases. Only a quarter point, but throws in another quarter every 60 days; goes to a half per ease if he thinks he's behind the slowdown curve. Mortgages? Bonds and mortgages usually bottom in yield just at the moment the Fed reverses from tough to easy. Why? If the Fed sets out to stimulate the economy, presumably it will succeed; bonds are a good buy going into a slowdown, not coming out. If the Fed begins a successive easing process, look for a seesaw yield curve: short rates falling, long rates steadying or at risk to rise.
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