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October 3, 2003
Mortgage rates are rising today, decisively out of a Tuesday-Thursday trough at 5.625%, and may well surge above 6.00% by Monday.
Rates crossed under 6.00% three weeks ago on the dawning perception that economic expansion is not accelerating; then we reached this week's low on a cluster of data suggesting the expansion is fragile and could stall altogether. Today we are back to six-ish and vulnerable to mid-sixes on early-morning news that the economy has at last added some jobs.
The shaky cluster: the purchasing managers' index fell to 53.7 in September from 54.7 in August, fainting at the 55 mark as it did twice in 2002. Consumer confidence also fell in September, down from August's 81.7 to 76.8, the lowest reading since March, during the wait for the start of the Iraq war.
In this morning's report on jobs, non-farm payrolls rose by 57,000 versus expectations for a small decline, and the August loss was revised to less than half the original 93,000 reported. Modifying stock market joy (and bond market gloom) at the first net increase in payrolls in eight months: the non-farm series tends to be weaker than reality in the first half of each year, and stronger in the fall. Further joy limitations: there is no change in the pattern of new and continuing claims for unemployment insurance, and the consumer confidence and purchasing managers' polling for September show continuing deterioration in the job market.
Never mind the details: the first-Friday-of-the-month non-farm payroll report has been the definitive bond market datum for twenty years.
I am confident of only two things for rates this fall. First, there is no way to know if immense fiscal and monetary stimulus will prevail over an equally immense post-bubble excess of labor and productive capacity. We are feeling the full effect of that stimulus now, which causes the economy to look stronger than its current self-generating strength; but we won't know if the stimulus has had durable effect until early next year.
Second, expect more interest-rate volatility than you've ever seen. Stock market types tend to tell clients that a straight-down move and resulting loss of shirt were due to "volatility"; I mean true, up-down-up-down, short-cycle volatility. Since June, mortgage rates went from 5.25% to 6.625% in one 45-day swoop, staggered a bit, dropped to 5.625% in only 30 days, and are now an even-money bet to complete the return trip to the mid-sixes by mid-October.
Irresolvable economic uncertainty is one driver, but the turbocharger is the desperate hedging effort by the holders of $5-trillion worth of mortgages and related servicing, all of whom must activate the same strategies at the same moment -- and did this morning.
I get the feeling in conversations with clients that anxiety about the federal deficit and Iraq is rising, and is enough to be an economic impediment. No matter how solid my reassurance that the nation is a perpetuity that can and should carry debt, unlike parents who will age and whose incomes will one day cease, the 'Boomers especially are uneasy about a half-trillion-dollar-per-year credit-card prop to consumption.
Iraq is tougher. Most folks have stopped talking. When the subject comes up, there are fewer words than clenched jaws. The bulk of the country went along on faith, and still does: there isn't any way out, and we have to finish. However, as evidence grows that Hussein's Iraq was a flat-broke bluff, a terrible hazard to Iraqis but not to much else, I think I see in the eyes of friends... embarrassment.
It shows in the confidence numbers, and in Mr. Bush's sinking polls. Resolution is going to be painful in the national mind, and a distraction from making money.
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