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July 16, 1999
If you got a slightly better mortgage deal this week, down around 7.625%, turn to face south, kneel, and give thanks to Argentina.
The candidates in Argentina's presidential election got a little carried away, competing with each other to see who could most loudly damn the world financial markets. On Monday, Eduardo Duhalde said he planned to appeal to the Pope to enforce a one-year moratorium on debt payments. This slightest -- wacky -- whiff of default threw the Argentine stock market into an 8.9% single-day dive. Argentina has a terrible recession underway, heavy debts, and is having a hard time maintaining the currency discipline of a "dollar peg", especially as the dollar keeps going higher and higher. The episode is a reminder that the world economy may be doing better, but markets continue to be easily panicked. The immediate beneficiary of these panics is anyone who needs to borrow money in the States. Investors race to American bonds for safety, which drags down interest rates here -- including mortgage rates. A footnote to the world economy "doing better": consistent reports from Asia say that things are so much better (stable for a whole six months, now) that reform efforts are being dropped in all the places that need reform the most. For example, among Indonesia, Thailand, Malaysia, Philippines, and Korea, Thailand is the only one to have established a functioning bankruptcy court.
Favorable U.S. inflation data held the Argentina dip in place despite anxiety about Mr. Greenspan's testimony to Congress next Thursday. Another .25% rise in the Fed funds rate is built in to mortgage and bond yields, but the fear in the credit markets all spring long has been what the Fed might do after that. Is the fed going to nibble a little, reversing last fall's emergency eases? Or does Mr. Greenspan have a tougher pre-emption in mind? This week's numbers were so good that the serious treatment seems unlikely -- so good that at the slightest sign of a slowdown in the overall economy, the EIGHT scare for mortgages will be over for the year. Producer prices fell .1% in June (the ex-food and -energy core rate dropped .2%), and CPI was unchanged (core up .1%) for two months in a row for the first time since 1992. Oil is still trading around twenty bucks, and there is another oil-driven pig in the CPI python, but no overall price trouble at all. Retail sales flattened, rising only .1% in June; but are still running at an extraordinary pace.
Next week: Greenspan de-coded.
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