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May 3, 2002
Mortgage rates are a hair lower than last week, and are under increasing downward pressure from news that the economic recovery downshifted in April. Freddie Mac's early-week survey finding of 6.78% inclusive of a .7% "origination" fee, released yesterday, missed the slightly better market at week's end.
In the first week of each month, government and private economists release more meaningful economic data than in the rest of the month combined. The first-week reports are also the closest to real time, describing conditions in the immediately preceding month.
In this week's load, for April, every report was weaker than expected -- and economists hadn't expected much to begin with.
The twin ISMs (from the Institute of Supply Management, "ISM" pronounced "izm," just like the suffix for "commun" and "conservat") showed the manufacturing sector sliding to 53.9 from 55.6 (and expectations for 55.0), and the service sector to 55.3 from 57.3 (and 57.0 forecast). These results are still above the break-even, dead-flat 50.0 level, but momentum is a big deal in Fed-and bond-watching, and the April ISMs describe deceleration.
The monthly whopper is the Labor Department's employment report: April managed a meager 43,000-job increase, while the March figure was revised from a 58,000-job gain to a loss of 21,000. Unemployment jumped to 6%, as more new job-hunters looked for work than found it. Wages grew by only point-one percent -- hardly a portent of inflation.
These reports do not indicate a double-dip-to-recession, but there is nothing in the economy suggesting the Fed should tighten. Each week, another darling of the New Economy blows to kingdom come: this week, WorldCom, $1.71 per share in pre-bankruptcy trading; its bonds falling from 90 cents on the dollar to 40. Twenty-eight billion dollars in face value... 60% lost in 20 days.
More of this, and some of the people who worried in March that the Fed was too slow to raise its rate will begin to itch and scratch... maybe the Fed isn't done easing.
How low can mortgage rates go? I mangled the final sentence in last week's issue... try again: there are about two trillion dollars' worth of mortgages poised to refinance if rates fall as little as .25% below today's. That's too much demand for the bond market to absorb quickly -- possibly in less than a year's trading.
If the recovery stays in a flat-to-decelerating pattern, here's a forecast model: mortgages will skip along -- like a stone thrown across a pond -- just at the edge of this black hole of demand, gradually working off the 30s near 7.50%, the 15s near 7.00%, and any ARMs. The lowest-fee loans might go to 6.75% one day, 6.625% the next... too many borrowers lock rates at once, blow up the bond market, 6.875%... a week later 6.625%... 6.50% for two hours, back to 7.00%....
If the economy rebounds, forget all that. If the recovery peters out altogether, look for chaos, like the second week of November '01: one morning at 6.25%, the next at 7.25%.
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