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September 27, 2002
Mortgage rates reached a new, two-generation low in the gloom and disgust following the Fed's meeting on Tuesday, but refinance volume and not-bad economic data pushed rates back up, near 6.125% by Wednesday afternoon.
(Freddie Mac's newest all-time-record-low survey finding at "5.99% plus .6% fee" suffered from time lag, as always... true Tuesday, but a Jurassic artifact when released on Thursday, and printed in newspapers everywhere today).
The mid-week turnaround in rates has stopped (aided by today's newly sagging stock market), but is instructive: the bond and mortgage markets are terribly vulnerable to any genuinely good economic news.
It all seems so easy, to consumers and their bankers alike: every 90 days, mortgage rates stair-step down another quarter of a percent. There's no upside risk, and the only uncertainty is the exact date of arrival of the new low, surely followed by the next half-trillion-dollar wave of new loan applications. Ho-hum.
It's not that easy. The housing market may not be a bubble, but the mortgage business is: the more overconfident a market, the greater its exposure.
The following economic developments drove the 10-year T-note from 3.61% to 3.83%, and mortgages into a comparable, near-quarter-point rise: orders for durable goods did not fall as much as expected (falling from a level not yet as high as May 2001). The stock market rallied for two straight days (though the Dow failed to make it back over 8,000, and the Nasdaq looks like the American Nikkei). 24,000 fewer people filed new claims for unemployment insurance last week (409,000 did, the fifth straight week above 400,000). GE is going to make its earnings forecast (though three out of four publicly traded companies will not).
That was it. That blizzard of "good" news popped bonds and mortgages up a quarter-percent. If we got some really good news... how high would rates go? Over a weekend, we could jump a half-percent, easy.
Will we get that good news? Sez here, not. The bulk of the economics profession expects 3.5%-4% GDP growth in the July-September quarter, a rebound from the 1.3% in the 2nd quarter, and then a slip off to 2.5%-3% in the 4th quarter -- though many forecasters think the economy will accelerate in the 4th, and into next year.
The bond and stock markets are howling barnyard epithets back at the prognosticators. Autos, housing, and consumers in general are at capacity... what new sector of the economy is going to pull the whole thing ahead, faster?
At that question, you get a lot of mumbling from the forecasters.
And from the Fed. On Tuesday, the Fed left its rate unchanged, though the post-meeting announcement contained a litany of impending trouble. It also contained news that two members of the controlling Federal Open Market Committee had dissented, voting to cut the Fed funds rate immediately. The last dissent (one vote) in an FOMC ballot was cast in 1995. Historically, three or more dissenters in a meeting precipitates the resignation of the Chairman (that's what happened to Mr. Greenspan's predecessor, Paul Volcker).
Alan Greenspan, 76, is one of the great public servants of our time. As little as a year ago, a rumor of his ill-health or resignation would have badly damaged the markets. This year -- in the eyes of the markets -- he has been off his game, defensive, possibly mistaken, and unable to reassure professionals. His knighthood, bestowed by Queen Elizabeth yesterday, was greeted by derisive cracks about "Sir Alan" in the markets.
Whether the comfortable era of the Greenspan cocoon has concluded, or the Fed is powerless now, no matter who sits in the Chair... doesn't much matter.
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