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May 25, 2001
Mortgage rates rose briskly late Thursday, threatening to break the 7.50% level as the bond market reacted badly to remarks by Fed Governor Lawrence Meyer. A reassuring speech later in the day by Chairman Alan Greenspan and lousy news for the economy failed to reverse the higher rates.
I take the rate rise under advisement until Tuesday, as trading desks are all but empty before Memorial Day weekend (on Hampton beaches, the pale 95-pound weaklings arrive in Ferraris and kick sand on the big, tan guys).
Meyer, speaking in Scotland, seemed to predict a return to 3.5-4.0% economic growth and said that inflation "remains above the rate" he finds acceptable.
Mr. Greenspan's evening remarks to the Economic Club of New York were the reverse of Meyer's apparent emphasis:
"The period of sub-par economic growth is not yet over, and we are not free of the risk that economic weakness will be greater than currently anticipated... but we also need to be aware that our front-loaded policy actions this year should be providing substantial support for a strengthening economy later this year."
In Fedology, first things first: we're not out of the woods yet. Dramatic cuts in the Fed funds rate may have us out of the woods later in the year, and we don't yet know... but we don't know. The Chairman confirmed that this sub-par episode has been -- is still -- led by business weakness:
"Consumer spending has been soft but... not unduly so. The demand for capital equipment is more problematic... the pressures on profit margins and cash flows have been unrelenting... earnings estimates have been revised down one percent per week since February."
Not exactly terrific news for the stock market, there. Then, the recovery path:
"At some point, inventory liquidation will come to an end, and its termination will boost production and promote recovery. While such a scenario is likely to develop at some point... there are, nonetheless, considerable uncertainties about its timing and magnitude."
New economic data today emphasized the Chairman's concern, as the inventory liquidation continues (orders for durable goods fell 5% in April), and the housing market is showing cracks for the first time in this cycle.
Most important to our market, the Chairman indicated some puzzlement at the recent rise in long term rates: he dismissed the risk of inflation (repeating his faith in continuing gains in productivity), and the sum of his remarks indicated no reason for long term investors to fear a quick return to rapid economic growth.
If next week's economic data are anything like as weak as today's, I'd expect mortgage rates to retreat to the lower sevens.
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