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March 26, 2004
Rates are rising today, for the first time this month, in reaction to actual news and fear of next week's news. Mortgages have the potential quickly to depart March's sub-5.50% range in favor of the 6.00%-ish level of the prior four months.
The damage has been done by reports of a surprise though modest improvement in confidence among consumers, and that the Fed may be succeeding in its effort to increase the inflation rate (to "reflate") from too-low, sub-1.00% territory.
The University of Michigan's survey of consumer confidence rose to 95.8 in March from 94.4 in February. Expectations had been for a continuation of the decline that began in January, when in that single month, all the gains in late 2003 evaporated.
"Consumer confidence" is measured by asking respondents how they feel about the economy now and in the future, and some components of those feelings. Observers used to think that the confidence numbers had predictive value for future consumption spending and economic growth; however, a consensus of economic thinkers today believes that confidence is closely linked to the current job market, reflects some ephemeral feelings about the world (anxiety, or lack thereof), and doesn't predict much of anything.
The confidence numbers rose last fall with a very hot economy, 6% GDP growth in the second half of '03, and what looked like the beginnings of job growth. The confidence numbers tanked in January along with job growth. This new confidence reading for March indicates that next Friday's payroll data for March may be a hair stronger than the flat report for February; the only reason that mortgage and other long-term rates have been so low in March has been because of the lousy job data for February, and the hope that March's result would be lousier.
I'm reaching, now, but I think the terror barometer this week rose enough to suppress what would otherwise have been an even better confidence number. The combination of Israel's assassination of the Hamas founder, certain to spawn a counter-retaliation, with Richard Clarke's all-week-long evisceration of Bush administration security policy is... well... it had to have a negative impact.
Anyhow, the payroll data due next Friday, April 2, will set the range for mortgage rates for the next month, and it would be wise to expect higher.
Reflation. The Fed has been trying for almost two years to raise the inflation rate to a safe distance from the gravity well of deflation. And failed. Until now. Maybe.
The headline measures of inflation, the consumer and producer price indexes, are not worth watching, as they are overstated by insufficiently adjusted improvements in product quality and product substitution. The first-class measures are the "personal consumption GDP deflator", used to maintain a constant-dollar value for GDP, and the "personal consumption expenditure deflator" making the same adjustment for national income and spending accounts. Both the PC and PCE have been declining gradually into fractional-single digits despite the Fed's ministrations (encouraging a dollar fade, and the lowest short-term interest rates in a lifetime).
Surprise, surprise. The PC was thought to have stumbled ahead at a .7% pace in the 4th Quarter of 2003, but did not: the revised number is 1.2%. The PCE has been revised from a .8% annualized "gain" in January to 1.6% over the last ninety days.
The Fed's presumed reflation target is 2.00%. I can't imagine that the Fed would maintain its super-accommodative 1.00% cost of money, at least 1.50% below a neutral setting, while inflation rose all the way to its 2.00% target, and I suspect that the guess-date for the first .25% hike on the way back to neutral should be dragged back in from 2005. If the Fed gets more of its reflation wish than it wants, it's going to have to get to neutral rather quickly, jobs or no jobs, in an election year.
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