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September 3, 1999
A not-as-strong-as-feared payroll report has ignited one of the great "relief rallies" of all time. In a single swoop this morning, T-bonds have fallen from last night's 6.13% to 6.02%, mortgages from 8.25% to a hair under 8.00%. A relief rally is the exhilarating result of having one's execution postponed, but not a guarantee of permanent safety. This payroll report should not be confused with "weaker than expected". It's just not as bad as it could have been: non-farm payrolls rose only 142,000 jobs, not the 215,000 feared; and wages grew $.02/hour, slower than the scary $.06/hour in July. That was it... the total extent of the "good" news that's supposed to keep the Fed from pulling the switch on October 5. The rest of the data do not support the reprieve.
The supposedly weaker payroll data included a record-tying drop in the unemployment rate to 4.2%, and a revision upward in July payrolls to a 338,000-job gain. There is no trend down: the three-month average gain is holding above the 200,000 (fright) level. The August Purchasing Managers' index put in another good gain, at 54.2%; and its "prices paid" index jumped from 54.1% in July to 59.8% in August -- a four-year high. Factory orders leaped 2.1%, triple the June figure. New home sales in July sailed along at record levels, oblivious to the one percent rise in mortgage rates since January. In August, "same store" retail sales jumped 5.1%, and auto sales exceeded the already high expectations of every major manufacturer except Nissan-Renault. The only slower report from the summer: a .5% slip in construction spending, with industry reports citing "labor shortages" as the cause.
What's a borrower to do? The interest rate swings since July have been very wide, but within boundaries -- a "trading range" has developed. T-bonds have been as low as the 5.80s and as high as the 6.20s, whenever reaching either extreme quickly heading off toward the other. In low-fee mortgage terms, the well-defined range has been 7.875% to 8.25%. This range can be played for the rest of September: lock instantly whenever the market reaches the low end; consider waiting a day or two at the high end. The range should hold until Governor Greenspan decides whether to grant a temporary stay of execution on October 5 or to tell the warden to proceed. Whether it's October, or later, if the economy doesn't slow down, the lights in the Big House are going to dim.
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