|
October 31, 2003
Markets trade on the future, not the past. Yesterday's news of 7.2% GDP growth in the 3rd quarter -- the best 90 days in nineteen years -- didn't change a thing in the markets: mortgages are the same, just under 6.00%; the 10-year T-note is still wandering near 4.25%; and stocks had a dinky, technical rebound from a sell-off.
Markets have known since August that the 3rd quarter would be explosive, and long ago built the event into prices. GDP yammering by thrilled-to-death politicians, stock pushers, and supply-side economists will mask the real situation: the 3rd quarter ended a month ago, and is off every trader's screen, replaced by a widely divergent view of what comes next.
In a sentence, are we entering a period of strong and self-sustained growth, or was July-September another false start, like the 1st and 3rd quarters of 2002?
The first read comes next week with data from October, the Friday report on jobs overwhelming the others. Everybody expects a deceleration from 3rd quarter speed; the centerline GDP expectation for the rest of this year and well into 2004 is a 4%-annual pace, including the best holiday sales in years. Agreement ends there.
Employment forecasts are all over the place, the optimists certain that we will see 200,000/month payroll increases by Christmas. Nobody has a firm handle on corporate earnings going into 2004. You get a lot of people talking about a "global recovery" underway, but that forecast is based on future-expectations surveys, not current performance trends.
Quantifying the "jump-start" effects of the Fed's monetary ease and the tax cuts has every sensible observer nervous. Are they transient, already fading? Even the optimists seem to understand that the ease-and-cut boost is done, and can't be renewed. Has the ease-and-cut succeeded in accidentally perfect timing and extent? Or -- Halloween heebie-jeebies in the bond market -- have they succeeded too well?
Only in the screwball world of bonds could you get that last bit. Bond types are so annoyed with the Fed that they won't take good news when they get it: the Fed's post-meeting statement on Tuesday was as helpful to bonds as it could have been. The Fed said that the job market was no better than "stabilizing"; that spending was "firming", but "business pricing power and... consumer prices remain muted." Further, "upside and downside risks to sustainable growth... are roughly equal" (a thought the optimists might consider), "undesirably low" inflation remains the "predominant concern", and rate ease can last "for a considerable period."
What did you want? A new recession?
The bond market suspects a fake.
The bond market knows that sooner or later the Fed will have to shift from worry about disinflation to worry about inflation. Until that shift occurs, the Fed wants long-term rates to stay low. When that shift occurs, a lot of bond people are going to lose a lot of money. Traders suspect that Mr. Greenspan -- his eyebrows blown off in the communications lab -- continues to use the same bond-favorable language for fear that any hint of a disinflation/inflation shift would cause a run-up in long rates, and abort the recovery.
Having endured a small foreshock from this someday-shift in policy in July, would the Fed prefer a process of incremental hints to the bond market that the real deal is coming... progressively modifying "considerable" to inconsiderable, and inflict serial shocks? Or would the Fed like to conceal the approaching end... need to conceal, for recovery preservation? History says the revelation will be progressive, but in recent experience the Chairman has lost his feel for the audience.
Mr. Greenspan will speak to Congress on Wednesday, in the middle of the October data, in the week before the Treasury must sell another $60 billion in bonds.
|
