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May 31, 2002
International security worries continue to dominate the financial markets. Good economic news released this morning would have done real damage to long-term rates were it not for fear of an over-the-weekend, murderous surprise on the India-Pakistan border.
Mortgage rates are down near 6.75% again, right on the edge of immense demand for refinancing. Treasury rates performed well also, absorbing $27 billion in new 2-year notes, while the 10-year yield held 5.07% today.
The economic data really were pretty good. Both national measures of consumer confidence improved in May, a substantial moral victory in the face of a flat market for new jobs. April orders for factory goods jumped 1.2%, the fifth straight rise, and on top of a solid gain in March. Auto sales screeched ahead in April at an annualized 17.3 million-vehicle pace, as did sales of existing homes, which posted an amazing 7% single-month increase.
All that should have clobbered the bond market, and brought expectations of a Fed rate increase back from fall into early summer.
Instead, the State Department intervened this morning, advising all Americans to leave India, and authorizing voluntary departure of all non-essential diplomatic personnel. Britain gave the same advice to all its subjects in Pakistan and India.
Donald Rumsfeld is headed to the sub-continent on a last-ditch mission to instruct the adversaries to sit up straight in their chairs.
Aside from scare tactics like that (and offering America's elegant, Strangelovian models of casualty rates in nuclear exchanges), there doesn't seem to be much the US can do to dissuade the parties. Pakistan is in thrall of militant Islam, Musharraf no more able to control his radicals than Arafat can control Hamas. For India's part, for all the risk of nuclear war, what in a nuclear-armed and suicidal Pakistan will be less threatening tomorrow than today? Why not finish it?
When the US declared global war on terrorists afflicting us, other nations quickly felt free to make war against their terrorist adversaries. Israel first, now India; Russia when the time next comes in Chechnya; China....and on and on. Once a leader of civilization lifts the general suppression of war -- in a special case of course, fully justified -- the contagion spreads. If war seems a useful solution to one, damn us all, it is instantly attractive to others.
Bond market players are not called "ghouls" for nothing: just as traders ran financial calculus in the moments after 9/11, they are doing so now. Generally, the threat of war drives money to safety in bonds, which pushes down their rates together with mortgage rates. The fact of war usually hurts.
On the flip side, given an unexpected outbreak of peace, mortgage rates would suffer quickly next week, especially if the Supply Management data on Monday and employment survey on Friday show an improving economy.
On balance, take the ghoulish six-something while we have it. The things which would make rates lower... you really don't want.
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