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February 4, 2005
To dodge one bullet in a week is gratifying; to dodge two in one week... Winston Churchill, after the battle of Omdurman in 1898: ""othing in life is so exhilarating as being shot at, and missed."
The Fed added another .25% to the Fed funds rate on Wednesday, to 2.50%; the accompanying statement gave every indication of more "measured" hikes to come, taking monetary policy still "accomodative" to neutral. The shot did no harm: the mortgage market stayed unchanged at 5.625%, and T-bonds at 4.18%.
The second shot, the January payroll data released first thing this mooring, was expected to show strength and hit bonds hard enough to finally drive mortgages toward 6.00%. Instead, net of a downward revision for December, payrolls grew by only 120,000, roughly half the forecast. The White House seized on the fall in the unemployment rate to 5.2% as good news, but it fell because more people who used to look for work no longer bother and have dropped out of the workforce. Legions who have found work are under-employed, as shown in the very slim, sub-inflation, point-two percent growth in wages, and a contraction in hours worked.
Relief at the weak job data took the 10-year T-note as low as 4.05% today, and mortgages down, now close to 5.50%.
Other data may show the beginning of a modest slowdown in the economy: the twin surveys by the purchasing managers nosed over, healthy, but not so strong; and sales of new home homes have put in their first back-to-back flat months in years (could be weather, there). Another indicator: gold fell like an anvil through support at $425 to $416 as inflation and dollar fears recede.
Many on The Street still swear that the Fed is headed to 4.00% by the end of this year, but I doubt it. Bill Gross, Chief Bond God at PIMCO (the writings at pimco.com are the best bond market commentary in the public realm) says the Fed will stop at 3.00%, and he expects the economy to slow this year.
This week we began to hear from clients alarmed at new monthly statements for their home equity lines of credit, suddenly showing 5.00%, 5.50%, 6.00% or more. HELOCs are tied to prime, and modern prime floats three points above the Fed funds rate, hence to 5.50% on Wednesday, up from 4.00% at record rock-bottom in 2003-2004, going to 6.00% at minimum by the Fed's May meeting. As of the 3rd quarter 2004 (the Fed's most recent Z.1 "flow of funds" statement), total HELOC balances outstanding had grown to $827 billion, expanding $40-$50 billion every 90 days.
To have the monthly costs of these babies rise by half -- often double the original teaser rates -- will choke spending by those with balances and crimp new extraction of home equity by those who haven't begun. 4.00% Fed funds would mean 7.00% prime, and some painful adjustments in floating-rate mortgages -- so painful to households that I don't think the Fed's "neutral" will be so high.
A note on news sources. The sharp and unforgiving political divide between right and left is making it increasingly hard to get good information, as media outlets playing favorites of each side degenerate into cheerleading.
This morning, a C"BC anchor interviewed a labor specialist who described the unpleasant weight of January payroll data. At the conclusion, the anchor gushed, ""ext month we'll look forward to an even better report!", as the expert's face shifted from puzzled to sick. C"BC presents useful content, but it rises from a weed patch of stock-market boobs and souls sold to the political altar, Mr. Kudlow atop the list, a perfect match for The Times' angry lefty, Paul Krugman. The best of C"BC: anything from dead-straight Steve Liesman.
Of course, I am completely unbiased, trying to make fun of everybody.
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