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July 9, 1999
Last week's prediction came true "...the market will stagger around from report to report...", but was a cheap shot: there weren't any reports this week. So, unchanged staggering it was: bonds sixish, low-fee mortgages 7.75%. Very hot staggering, too. When it's 100 degrees in New York City, Con Ed has a blackout and the air conditioning won't work, the attitude at trading desks is... too hot to trade. News could flash on screens: "GREENSPAN FOUND NAKED, DANCING ON FED ROOF", and the market wouldn't move an inch.
While there weren't any big reports this week there were several little ones which combined to paint an uneasy picture. (The next big news will be Mr. Greenspan's testimony to Congress on July 22 -- if they can talk him down from the roof.) The first: retail sales. For distortion-free measurement the industry relies on a gadget known a "same-store sales", defined as year-over-year changes in sales for stores open for at least one year. (A real estate comparison: measuring appreciation by changes in resale prices of the same houses, as opposed to market averages.) For those who believe they see an economic slowdown ahead, and do not fear the Fed, get this: same store sales rose at a 6.5% pace in June, and the year-to-date pace is the strongest since the index was invented in 1988. Consumer spending may be goosed by the stock market, rising home values, or other, undetected exuberance, but the immediate mechanism is credit. Consumer credit in May grew at the fastest pace since January, a 10.6% annual rate, a little more than double the forecast. The bond market has dealt successfully with mere economic heat for most of the 1990s. However, this week's last news item suggests that bonds will soon have to deal with consequences of rapid growth. The first of those consequences is turning up in a bad spot: the oil patch. Oil's plunge to $10/bbl last fall produced record-low interest rates, and I hope that the reverse is not true. Oil this week crested $20/bbl, and most analysts believe we'll see $25/bbl before year-end. This recent surge will take about two months to arrive at the gas pump and in the CPI, just as February's jump from $12/bbl to $16/bbl caused the .7% rocket in April CPI. With at least one more oil pop built in to the CPI this year, the overall CPI is likely to come in at 2.5%+ for the year. Now, 2.5% is not enough to put Alan back on the roof, but if you add a 4% "real rate" premium to a 2.5% CPI, you get a predicted/desired bond yield of 6.5%, a solid half percent above current rates. I'm too timid to make that prediction (predicting the dates of scheduled economic reports is more reliable), but in the face of this news, I don't for the life of me see how rates are going down any time soon.
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