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February 5, 1999
Double or nothing economics has rolled good news, bad news snake eyes in the markets, and mortgages are barely hanging on to the high sixes. Today's payroll report for January showed 245,000 new jobs, roughly double the consensus forecast. Orders for durable goods surged 1.9% in December, just about double expectations; and factory orders in general leaped 2.3%, a little more than double prior estimates. December personal consumption spending -- the essential component in a "sparkling" performance -- rose .8%, close to... double. There were exceptions. Construction spending in December tripled its advance estimate. Last, but maybe most important, the purchasing managers' index, considered a proxy for Asia-damaged manufacturing, down from 58% in July 1997 to 45% last month, suddenly recouped one third of its losses in a single month, triple the forecast gain.
All the cheerful expectation of a slowing economy and additional easing during 1999 has blown to smithereens. October 8 Today
Fed funds 5.00% 4.75 -.25
90-day T-bills 3.96 4.48 +.52
1-year T-bills 4.06 4.61 +.55
10-year T-notes 4.68 4.91 +.23
30-year T-bonds 5.16 5.36 +.20
The comparison is useful because October 8 followed the Fed's second of three eases last fall (the emergency one), and by then the largest part of the flight-to-quality had washed out of the Treasury market. Clients have a hard time with the concept, but Fed-easing is counter-productive when the markets perceive it as overdone. With the benefit of hindsight -- no criticism of Mr. Greenspan's perfection intended -- I bet the Fed wishes it had that last ease back, and maybe all three. A spike in rates is still unlikely, but we are very much exposed to an inflation surprise. The more remote the possibility, the more damage a surprise can do. These are lousy circumstances in which to bet on lower rates. When bad news is a spike, and good news is stability at a 35-year low, don't bet.
Next week, at the conclusion of the year-long, unprintable preoccupation with the unspeakable, market-watching will return to normal. The politicians will be back at work. All of those who think that Congress surely had something better to do with its time will be otherwise reminded, as these same... people will now be free to focus on Social Security, what to do with a few trillion dollars in budget surplus, and.... There's more, but that's enough.
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