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May 28, 1999
Mortgage and bond rates held their highs all week long as there was no relaxation in the inflation/Fed scare. There were a few other things going bump in the night, and a rising anxiety level in the markets overall.
Bonds (5.80-5.90%, soon to test 6.00%) and mortgages (more likely to see 7.50% before 7.00%) suffered from fear of the future, specifically two reports due next week. On Tuesday the National Association of Purchasing Management will announce its findings for economic growth in May together with its prices-paid index, and on Friday the Labor Department will release May employment and wage statistics. If these reports confirm the .7% surge in April CPI, bonds will blow out the top. Contrary evidence that April CPI was a fluke will most likely leave the bond market as it is, fearful of a .25% Fed pre-emption at its June meeting. For rates to fall, markets need a clear demonstration that the economy is slowing down -- nothing else will do. It's not likely, but it's possible....
Here: the stock market as leadfoot-on-pedal is showing signs of terminal fatigue. No crash forecast, here, just end-of-cycle. Internet equities didn't fall all the way to earth this week, but losing of half of a 75% year-to-date run-up in four days will take the steam out of somebody's consumer spending. And in a benefit to society as a whole, it will be a week or two before we hear more about day trading as a totally rad way to print money. The damage was not limited to those caught up in their technical self-importance. The S&P 500, a reliable double-digit boom-box by this time of year, showed a pitiful, bond-like 4.24% year-to-date gain as of yesterday's close. More end-of-cycle: net outflows from mutual funds in May, and a $30 billion explosion in margin debt March-April. If the stock market were to settle in single digit territory, let alone suffer the long-mistaken-forecast correction, the option fairy would tap fewer consumers' shoulders, and most important, more Americans would remember the need to put money into savings, not just watch the money already there enjoy paper gain after paper gain.
And over there: Europe is in some difficulty. The euro fell to 1.04 versus the dollar this week, a painful performance versus its 1.16 opening in January. "A new world currency to rival the dollar, and one day supersede it...." The troubles: economies sagging under the weight of unreformed labor markets; broken budget deals, notably in Italy; and... Kosovo. No deal at all, there: NATO soon to be Serb-cleanser.
What? You expected a good-news slowdown?
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