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November 1, 2002
Mortgage rates briefly returned to September lows this week, but gave up some of the gain today, finishing just above 6.00%.
Crosscurrents of new information reached flood stage. Poor economic news at mid-week led to bond ghouls' hopes for worse reports today; instead, the new ones were merely lousy. The Fed will probably reduce its rate by .25% on Wednesday, which might be good for bonds, but then again might not be. For the first time in seven years, the bond market has to cope with large, new borrowings by the Treasury, $40 billion next week alone. Nobody cares about the election (bond traders, that is), and everybody cares about war... soon.
The net result: for the moment, the credit markets are addled. Discombobulated. Every single thing in the data says the economy is stalling, which is a nice time to buy bonds, even at these yields, but not a great time (a great time would be during an economic cliff-dive, which this isn't). Willing buyers of bonds are easily swamped by too many sellers, and refinancing homeowners are selling in recurrent waves.
The data, in order of appearance: Tuesday's consumer confidence report for October knocked the stool out from under the optimists, and put a Fed easing in the sure-thing category. The 93.7 lack-of-confidence reading for September was expected to slip to 90 in a fifth-straight decline, and instead collapsed to 79.4, a nine-year low, and one of the largest single-month drops on record.
These confidence measures have little specific predictive power for consumer spending or economic growth, but there are a lot of insecure citizens out there. The suspicion here: confidence is fading because consumers know that their employers' businesses are shaky. Too many businesses have held high levels of operations and employment only in hopes of a general economic turnaround; that turn has been missing in action for two years, and is nowhere in sight.
Third quarter GDP gained 3.1%, pretty good on its face, but a point lower than expectations, and a very hollow pumpkin. Hollow? About half the total gain came from auto production, but the producers are going broke in ruinous competition. How do you suppose the confidence level is holding among employees of the Big Three?
The Labor Department today announced the loss of only 5,000 jobs in October (the big, wished-it-was-worse disappointment in the bond pit), and the ISM's manufacturing survey for October fell again, to 48.5 from 49.5. The rest of the economy may not double-dip into recession, but manufacturing already has.
The Fed.
Our heroes haven't done a thing for a year; the cost of overnight, bank-to-bank money has been 1.75% since last December. During 2002, consumers forgot the life's lesson of the year before: Fed rate cuts hurt mortgages as often as they help! In 2001, the Fed gradually cut its rate from 6.50% to 1.75%, and mortgage rates ended the year where they began, near 7.00%.
The "why" is perfectly straightforward, but makes no common sense to civilians. When it looks like the economy is going to sink, bond investors buy bonds and drive down long-term rates; when the Fed eases, trying to rescue the economy, investors presume the Fed will succeed, and begin to dump their holdings.
A Fed ease next Wednesday could have that perverse effect, actually causing mortgage rates to rise. However, two factors could drive things the other way: first, Fed easing has been ineffective for two solid years; second, another ease would emphasize to all that the Fed is running out of ammunition.
A quarter-point cut from 1.75%, and the Fed would have only six such bullets left..., six until it's as empty as the Bank of Japan.
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