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May 26, 2000
A new swoon in the stock market together with some defensive bond-buying has helped mortgage rates, but the improvement should be considered temporary.
The equation remains the same: the economy must slow down... or else.
The Fed meets June 27-28, and there is something of a race going on between economic data pushing the Fed to tighten more, and quickly, and stock market weakness which might convince the Fed to hold off.
Meanwhile, stone silence at the Fed. The Chairman's speech this week: "Evolving Challenges for Bankers and Supervisors," a five-page snoozer on the intricacies of the Gramm-Leach-Bliley Act.
This week's data were strong: 1st quarter GDP rose 5.4%, and 1st quarter consumer spending was the biggest three-month rise in 15 years. Faint signs of a slowing economy were most likely misleading, as apparent weakness in April orders for durable goods and sales of existing homes were only pauses after extraordinary February and March results, revised this week to the stratosphere.
The stock market's influence on the Fed is confused in the mind of many a borrower.
Weakness in the market by itself, even a ten or twenty percent drop, would not cause the Fed to stop its tightening campaign, nor to support the market with easy money. The Fed would act to prevent a crash, as it did in 1987 and 1998, but in a gradual decline, even a big one, the market would be on its own.
The Fed would be delighted if stock market weakness slowed the economy, as a slower economy is the objective of the whole exercise.
However, despite some awful days and weeks, stock prices have done no worse than to flatten out. The Dow is the only major index which has fallen in the last 52 weeks (less than 2%), while the S&P 500 is up 7%, the Wilshire 5000 is up 6%, and the NASDAQ is up 34%. Modest losses in the last four months are not enough to slow the economy, and therefore not enough to cause the Fed to back off.
The Fed aside, bad days in the stock market are useful to borrowers as locking opportunities. Each scary drop drives cash into bonds and mortgages, which temporarily pushes down interest rates.
This is a very fragile stock market. On Wednesday, Costco's stock fell by 21%, $4.2 billion in market value, because it missed its earnings estimate by one cent -- 26 cents per share instead of 27. Its chairman: "It's a good thing we didn't miss by two cents, or we would be under ground."
There will be more chances ahead to use a down day in the stock market to pick off a below-trend rate.
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