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April 25, 2003
Mortgage rates edged lower this week, easily 5.75% for low-fee thirty-year deals, going down with the stock market, and the absence of any data suggesting an increase in economic activity.
The one bright spot is the housing market, as it has been throughout this three-year post-bubble episode. New home sales rose 7.3% in March, and sales of existing homes raced along at a 5.5-million-per-year pace. In decent news, but not a trend, orders for durable goods rose 2.0% in March.
The rest of the data describe an economy treading water, at best. Post-war consumer confidence did improve, but the 86 reading was no better than pre-war, and up only a little from the 77 floor. No wonder: new claims for unemployment insurance rose again, sustaining the new, post-9/11 high.
The Commerce Department this morning released its first estimate for 1st quarter GDP: a thin, 1.6% gain, versus 2.3% expectations. Weakest of all, capital spending by business contracted by 4.2% in the quarter.
The Fed's "beige book" on regional business conditions through mid-April made miserable reading: one district noted modest improvement, six were as weak as before, and five were weaker. Commercial loan volume has fallen 1% in each of the first three months of 2003, contracting in all but two months since January 2001.
Despite all of that, Fed governors Broaddus and Bernanke each spoke this week in terms of "3.5%-4.0%" GDP growth in the second half of the year, presumably reflecting the Chairman's views. This belief in a second half surge may turn out to be correct: if you predict such a thing constantly, and don't mind being wrong for three years in a row and counting, some year you'll be right. This jawbone from the Fed is providing some support to the markets, but is wearing thinner all the time.
The Fed seems to agree with the stock pushers, whose newest theory holds that we won't see the post-war economic rebound until data to be released in early June, as the April data due next week will still be suppressed by the war. That could be, I suppose, though even the stock market doesn't seem to believe it, as it has once again sagged away from 900-plus on the S&P, back toward a net loss for 2003.
The stock market is central to the mortgage rate future, as stocks are both an economic indicator and a determinant. If stocks rise strongly, households would see the first increases in retirement account values since 1999, surely a confidence booster. Unfortunately, the reverse would also be true.
There are some authentic signs of health from corporate America: earnings reports seem more legitimate, and it is refreshing to see a CEO summarily ejected for greedy behavior, as American Airlines' Mr. Carty was this week. However, it's hard to justify dreams of a "new bull market", given sky-high P/E ratios. And, just when you think all the gas is gone from the ol' bubble... consider Amazon.
Amazon lost only $10 million in the 1st quarter on a 28% increase in sales (free shipping was the booster), and this grand news pushed the stock price to $28. At that, the total value of the never-made-a-dime company is in excess of $10 billion.
Investors everywhere are desperate for yield, as all forms of cash now pay less than 1%. As a result, and in spite of credit risks, yields on corporate and junk bonds have been bid way down. Mortgage rates have been stuck at or slightly above 5.75% since Christmas while we have processed, closed and securitized the latest trillion-dollar wave of refinances. As that clutter moves out Wall Street's back door, the way will be clear for another little, .25% drop in rates, and another refi wave.
We don't need anything dramatic (SARS, North Korea...), or the Fed -- just another soggy month or two.
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