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July 28, 2006
Mortgage rates fell all week long, at mid-week on sinking housing data and a slower Fed survey, the final drop early this morning on news that 2nd quarter GDP slipped to 2.5% growth -- that versus forecasts in the 3.5% range.
30-year low-fee mortgages are approaching 6.50% after four months just under the 7% barrier, now following the 10-year T-note’s run below 5.00% today.
This slowdown looks real. It’s possible to quibble with incoming data, and there’s a big load of July stuff next week, but the discussions will have to do with the slope and extent of slowdown, not its fact. The pattern in place is as classic as they come.
Slowdowns don’t come in one piece. In the last 60 years they have unfolded in a four-part sequence: the first to slow are housing, the stock market, and other credit-sensitive sectors; the consumer in stage two; then the stage-three fade in the corporate world as consumption falls out from under expansion plans; and last the stage-four job-market cave-in, which ultimately causes inflation to abate.
The Fed’s “beige book” this week marks our current status as entering the stage-two consumer slowdown, and leads to a reasonable forecast for the rest of this cycle.
This one is very different from the ’99-’02 slowdown, that one the most anomalous in the last 60 years. The Fed hiked from 4.75% to 6.50% in ’00, but did little damage to the credit-sensitive group. Had it stayed that tight for another year, it would have clobbered housing (as it is doing now), but the twin bubbles -- stock and technology business -- blew up from their own internal excess. The Fed switched to rescue mode in January ’01, the job market hurt but housing entering its first-ever early-recession boom.
The prior cycle, ’93-’95 was the most like this one. The Fed was easy all through 1993, completing the recovery from the ’91 recession. As the Fed tightened long and hard all through ’94, the economy followed the four-stage cycle above, and the Fed backed off in ’95 to an exceedingly soft landing and renewed expansion. The bond market hasn’t cared for Perfesser Bernanke and his diminutive stature as a figure of public leadership (on the last, of course, he follows the toughest-ever act). If the Perfesser lands this economic bird softly, the bond market is going to learn to respect him even if it doesn’t care for him.
Betting in the market has switched this week to certainty that the Fed is done. Might go to 5.50% on August 8 or September 20, but if so, so much the sooner the Fed will reverse. The soft landing is periled by the oil-price boost to inflation, the extraordinary strength of corporate balance sheets, and the likely durability of the stock market because of earnings and cash hoards used in stock buy-backs. Since those sectors are resistant to Fed pressure, the slowdown is overweighted on consumers and housing, and that is the over-doing risk ahead.
Given the slowdown, there is reason to hope for decline in mortgage rates, but hopes should be kept modest. In the ’99-’00 cycle, the 10-year T-note ran all the way up to 6.66% before its collapse to 3.33% in ‘03; in the ’93-’95 slowdown, the 10-year sprinted all the way to 7.96% (the Fed’s top only .75% above today’s!). This time, near the Fed’s peak, the 10-year has not made it past 5.25%, which very much limits the decline ahead. It’s hard to fall far off a low hill.
The big risk out there is not the US economic cycle or the Fed. The big risk is the absence of any working arrangement for global security among the great powers, and a persistent tendency in American policy last seen at the Little Big Horn.
The biggest economic deal on earth: new IMF stats say that in the last five years, global trade has doubled. Doubled. This engine of growth and wealth must be protected, and for the time being it is on its own.
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