|
April 1, 2005
A wild, weird, and no-foolin' trading day today (appropriate for our 17th anniversary and its oh-so-appropriate date). All that less-curious readers need to know: mortgages are unchanged near 6.125%.
News hounds may or may not be reassured to learn that the financial markets are in a highly unstable overall situation which has led to some rate stability.
At dawn today the Labor Department announced that March payrolls had added only 110,000 jobs, less than half a forecast which itself had been tepid. Slim payrolls confirmed two weeks of suspiciously rising claims for unemployment insurance from a near-healthy, 300,000-and-falling range back up to 350,000, and the weak-economy combination triggered an immediate bond rally.
Mention of "inflation pressures" by the Fed last week had created fear of a faster-moving and higher-going Fed. But, if employment is sagging, the Fed may be only a few .25% hikes from a placid neutral under 4.00%. Mortgages went down close to 6.00%, poised for a dive back into the fives if the economy is really slipping.
A wait-a-minute re-think began soon after. The "household survey" of employment has for years described a much better job market, and did again in March, although the Fed says categorically that the big-company "non-farm payroll" survey is the accurate one. Maybe... this time the payrolls survey is wrong. Maybe... this March, payrolls have some cockeyed seasonal adjustment that looks weak but isn't. Maybe... if I buy bonds now I'll get clobbered in next month's revision.
The bond rally faded, and then more news reversed the whole thing. The purchasing managers' twin indices showed strength: manufacturing at 55 off its peak but healthy, the service-sector at 63 way above forecast. That did it: the payroll number was an outlier, a fluke. The economy is still cooking, the Fed is still coming hard, and dump any bonds you bought this morning.
Then, more news, and things got weird. Oil took out $57/bbl, going up, in the background a Goldman Sachs analysis talking about an oil "super-spike" above $100/bbl. Just as the inflation threat from high oil began to re-panic the bond market, the stock market came unglued. The sight of stock traders elbowing through women and children to get to the lifeboats is gratifying to bond traders; the bond ghouls stopped their panic when they saw somebody else in a worse one.
Stocks crashed through some important technical support levels, down year-to-date in '05, pushed over the precipice by oil and then more news: Ford's sales sank 5% in March, led down by high-profit but guzzling trucks and SUVs. GM and Ford as junk companies cutting production, forcing suppliers into layoffs and bankruptcy, is a vision pleasant in the bond market. Bonds began their second rally of the day, back to just about where they started, short rates showing reduced Fed fear.
Near the close of trading, exhausted observers have two theories. The first is plain, old stagflation: GDP growth will begin to slip, inflation will rise and force the Fed to go higher and faster than it wants. The last stagflation, in the 70s, produced the worst stock market since the '30s and required double-digit interest rates and unemployment to begin to remove entrenched inflation.
Theory two is the better one: the Fed knows that it mismanaged the 70s inflation problem, and the markets know they were slow to react last time, too; in this energy spike, both the Fed and the bond market are out in front of inflation. So, this time the energy-cost damage will be limited to suppressed GDP, reduced corporate earnings, and modestly negative growth in real wages. Inflation, unemployment, and long-term rates will stay under control.
In the end, the markets got it about right today: stocks in trouble, bonds and mortgages not so bad, the Fed still coming, but not racing to catch up.
|
