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October 27, 2006
One week ago, the credit markets were worried by signs of housing bottom, economic strength, inflation risk, and the possibility that the Fed might have to hit us again. All reversed now: the 10-year T-note is down from 4.84% to 4.68%, mortgages following, from a high pushing 6.50% to dipping under 6.25%.
Stay centered here: we’ll get the first data from October at the end of next week, and until then I’ll be suspicious that this rate decline has room to run.
The Fed’s mid-week statement was the catalyst for sentiment change: after a recitation of economic and inflation dampers, the key line “...Some inflation risks remain.” Not significant risks, just “some.” The Fed isn’t considering an ease, but isn’t going to tighten, either.
Caution: the risk of rising inflation has abated, but the core rate is way above the target range. The background debate at the Fed, revealed in deep memoranda on Monday: can inflation decline to the safety range with economic growth in the 2.5-3% range, or will deeper slowing be required; and is the non-inflationary economic speed limit lower than thought?
Thursday’s housing news added to the sentiment switch. The same guys who shouted through September that the blown Housing Bubble would blast the economy then flipped to worst-is-over for two weeks, and are now back to blast. Their red flag: a 9.7% drop in the median price of homes sold.
Be careful out there: the home-price decline came from a change in the mix of sales and says nothing about the value of an individual home anywhere. Stick with the midline of housing: the slowdown has not bottomed, and it’s not in a downward price spiral, either. As a national matter, housing is entering a long-term flat patch, one not so much damaging the economy as not adding stimulus. So far.
Today we got the last leg of the bond rally on news that 3rd quarter GDP had grown only 1.6%. Growth that slow has bond optimists/economic ghouls pleased at the thought of rising unemployment, the key element for inflation reduction and Fed rate cuts.
Pull on those reins for just a sec: consumer spending in the GDP report rose 3.1%, better than the prior quarter, and the weakness in GDP was overstated by statistical footsie involving the trade deficit and inventories. Orders for core capital goods rose a solid 1.1% in September, 11% year-over-year.
If the economy has slipped onto a new slope of slowdown, we’ll see it in the payroll and unemployment data due next Friday. Surveys show a very cranky nation, 65% saying the economy is lousy, but I think the explanation is acute competition with foreign labor. Businesses are thriving, profits huge, but the money isn’t percolating to the work force. The unemployment rate is all the way down at 4.6%, jobs plentiful, but households feel they are on a hand-to-mouth edge.
One way to interpret that on-edge sensation: fragility. Housing is gone as a stimulus, and if anything goes wrong with the consumer, that’s all she wrote. At the moment, Perfesser Bernanke’s ongoing rate pause (to which I was opposed) looks like genius.
Many are asking if the election will have market impact. Not in the slightest. Every bond trader holds all politicians in equal contempt. Two other news items won’t move markets, but are worth the historical perspective.
90% of households in Vietnam today have TV sets, and the national fad is... game shows. Second, Saddam Hussein from his jail cell begged all Iraqis to stop killing each other.
Ahhhh... the virtues of patience are easy to miss, and not just at the Fed.
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