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September 3, 2004
Financial Frances made landfall in New York at 8:30 this morning.
Right, wrong, or subsequently to be revised, high winds from the Labor Department brought word of new jobs added to payrolls. Not a lot of them -- 144,000 in August, and another 59,000 found washed up on the beach from June and July -- but enough to lift interest rates.
Mortgages are rising toward 6.00%; the 10-year T-note is trading at 4.29%, decisively out of its 4.08%-4.18% gloomy-pleasure range; and the more dramatic 3.30%-to-3.50% move in the 5-year indicates unanimous expectation of another .25% from the Fed at its meeting in three weeks. That move, from 1.50% in the overnight cost of money to 1.75%, had been considered hostage to today's job data.
The damage from the payroll news would have been worse had all other indicators not been weak -- weak here in the US, and among trading partners.
In early summer Mr. Greenspan insisted that a sudden economic slowing after a sparkling spring was merely a "soft patch," a gathering of breath before resumed vigorous expansion; he observed further that all long-running expansions include intermissions. Four months later, there isn't anyone left in the financial markets who believes in his benign description of a more persistent slowdown (aside from the always-hopeful pushers of stocks).
The Fed's post-meeting statement on September 21 is likely to continue the everything-is-okay line -- the Fed can't tighten a quarter-point while simultaneously acknowledging a weakening economy. And, the quarter coming is not the last: the Chairman refuses to tell us where "neutral" lies, or even a range in which it may lie, but it is certainly north of 2.00%. Thus, the Fed's statement will also lay the groundwork for tightening to come in November, immediately after the election, and December and February.
The Chairman obviously feels that the risk of leaving the cost of money too low -- too "accomodative," in Fedspeak -- outweighs the chance that a higher cost of money will abort the economic expansion, and also the chance that he will look ridiculous, tightening into a slowing economy. His "soft patch" is already an object of derision among the bond market neyah neyahs.
In the domestic data, the twin reports from the purchasing managers' association both declined for August (manufacturing from 62.0 to 59.0, service sector from 64.8 to 58.2); both still show growth, but the slowing trend in these brand-new numbers is pronounced. Both measures of consumer confidence are also in sustained declines, tracking job-market conditions (jobs "harder to find" rising from 13.5% to 15.4%, "plentiful" falling from 19.5% to 16.2%).
Retail sales fell in August for the third-straight month; as measured by same-store sales, the downtrend really began in April. Wal-Mart's August was the worst in three-and-a-half years, that shortfall magnified by the tax-cut supercharged August '03 compared to this one. A production pull-back at GM and Ford (and hence at all their suppliers) won't help anything this fall.
Europe is decelerating as well: Germany's unemployment rate increased for the seventh-straight month. Japan got a big boost from exports at the end of last year and the beginning of this one, especially China-related sales, but Japan's domestic economy is still just as stuck as ever; China is trying to slow down, and may overdo the effort, and Korea already feels that pinch.
The picture is synchronized deceleration, not stall or pre-recession. The pattern is so pervasive that it looks like long-term rates will stay below this year's springtime highs into next year, even if Mr. Greenspan persists in his obsession with neutrality.
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