|
October 10, 2003
Mortgage rates stayed about the same, just below 6.00% in a quiet, thin-market week bracketed by Yom Kippur and Columbus Day. Markets will not be deeply traded until a slew of new information arrives next Wednesday-Friday.
This week's economic data were as slim as the markets, though a drop in new claims for unemployment insurance to the lowest level since February put a floor under interest rates and goosed the stock market to a new high.
Many people in the markets think that we will have to wait a while for resolution to the big rate-driving issues: economic strength and jobs.
Rates will wobble with each new report on the strength of the expansion, but it won't be until the turn of the year that the initial shock wave of fiscal and monetary stimulus has passed, and we can evaluate the fundamental strength (or lack thereof) in the economy. A big change in the job picture would have instantaneous effect, but I don't think we're going to get that. A decline in layoffs is underway, but there is no sign of self-sustaining hiring, as Fed governor Bernanke emphasized in a speech yesterday.
Until expansion and hiring come clear, two other forces will tug at interest rates: New-Age thinking in the bond market, and stock market trading.
New Age or senility, every passing day makes the Great Spike in interest rates and inflation, 1962 to 1982, look like a once-in-a-century anomaly, not a recurrent threat. No one can know how much of the Great Fade, 1983 to 2003, we might re-trace upward at the end of some overheated future expansion, but every day the answer to "How high is up?" is a lower, and lower, and lower expectation.
We are still subject to temporary frights, like July-August, mortgage-hedging volatility, and the business cycle, but it is hard to construe a mechanism for new, big inflation, above 4% or so, or bond yields far above 6.00%, or mortgages above 8.00% -- and even those would be short-lived. The gold bugs are loose, inflation-protected Treasurys are trendy, and panic-pushers have a dollar-flight campaign going, but better evidence says... relax. The Fed is trying like mad to get the inflation rate up from 1% to 2%, and thus far is getting nowhere; and energy prices have suffered sustained increases with no impact on the general price structure.
One of the most amazing indications of a change in interest-rate expectations came from mortgage land last week. The oldest adjustable-rate mortgage product is the monthly-adjustable COFI-indexed deal invented in California in 1981. Since roll-out, these things have always had a life-of-loan limit on upward movement; on October 1st, Washington Mutual Savings Bank reduced this cap (again, this time by 1.00%) to 8.95%. That rate is only a little more than half the start rate for these loans in 1982 (the peak index value reached 12.673 in June '82, plus another 2.50% or so "margin" to get to the payment rate).
Yeah, I know the reputation of S&Ls as rate-watchers (the worst anywhere, ever), but an 8.95% cap is a bet that the S&L cost of money for the next twenty years cannot possibly exceed 6.50% (pay rate minus average margin; twenty years because pre-payments shorten loan life, even in a rising-rate world). Right or wrong, that's one hell of a change in psychology.
Then, still speaking of wagers... there's the stock market. 3rd quarter earnings were way above analysts' expectations, and not because analysts sandbagged their forecasts -- it was a great quarter, and the 4th is on the same track.
However, nobody knows what's coming in '04. Short-sellers have been driven out by relentless gains, Nasdaq margin debt has reached 2000 levels, and evidence of re-bubble speculation abounds. The stock market is priced so high that everything has to fall its way; otherwise... that's our best shot at a mid-fives refi interval.
|
