Psssst. Don’t tell anybody, but low-fee 30-year mortgage deals reached 5.5 percent yesterday for the first time since last summer. Freddie Mac’s early-week survey missed the decline, and won’t discover the “news” until next week’s survey, when the low-rate opportunity may be in the rear-view mirror.
Mortgage prices move in real time with The Street, not in survey time.
This week’s economic data should have pushed rates up, not down – yet another indication that the economy and financial markets are in atypical condition. Retail sales in December gained .9 percent, and a cumulative 6.7 percent over December ’02. Industrial production picked up a slender .1 percent, as did overall capacity utilization, now up to 75.8 percent, safely out of the collapse zone under 75 percent. The Fed’s “beige book” was optimistic in nine of 12 districts, and subsidiary studies in New York and Philadelphia for early January showed off-the-chart strength.
Long-term rates are still enjoying the benefit of last Friday’s awful employment report, though interpretive quarrels rage on. Some claim the flat payrolls in December were “bad data,” sure to be revised next month (rookie traders always try out that argument on the seniors, who invariably reply, “Lost your butt, huh?”). The job market is better than the payroll number indicated, but primarily in an absence of layoffs, not new hiring, and especially not high-wage hiring.
New claims for unemployment insurance fell again, down to 343,000 last week, 100K off numbers a year ago. Today’s surge in the University of Michigan consumer confidence survey for early January, from months near 90 suddenly to 103.2, undoubtedly reflects reduced fear of layoffs. It’s also way short of the 120-plus reading typical of a truly healthy economy.
Employment turnover is so fast in the American economy (about a million jobs each week, voluntary and involuntary) that it’s hard to pin down what’s happening; however, two aggregate numbers are consistent with the low-wage-only hiring pattern. First, the rate of “labor underutilization” (adding back to the workforce demoralized dropouts and those who want more work than they have) puts unemployment near 10 percent. The second: although the office market has begun to bottom, absorption of office space has fallen in nine of the last 11 quarters, and office rents have fallen in all 11. High-wage jobs are in offices.
The Slimfast economy: monetary and fiscal stimulus has the economy racing, but few are gettin’ rich. Core inflation fell (again) in December. The weak dollar is hurting Europe’s exports (Germany’s economy shrank by .1 percent last year), and its central bank may soon cut its Fed-funds equivalent. All are reasons to buy bonds.
Yet, everybody knows that hot growth for long enough will produce inflation – the Fed is trying to raise the inflation rate. Hence, schizophrenic physics in the bond market. At a near-50-year low in bond yields, it’s tough to visualize picking up a trading pop on a further decline in bond yields, and easy to imagine personal unemployment resulting from owning too many bonds at the inevitably arriving wrong moment. So, yields are buoyant, but tethered to earth by the 1 percent Fed funds rate, and the temptation to borrow short, buy long, and pocket the 3-point spread. The tether is unstable: “carry traders” all have itchy selling fingers.
This week’s drop in long-term rates had another helping hand: a new speech by the prolific Fed governor and Chairman-candidate, Ben Bernanke. His paper, “Conducting Monetary Policy at Very Low Short-Term Rates,” might have been titled, “When Out of Ammo, Talk Them To Death.” His key policy recommendation: “…(1) providing assurance to financial investors that short rates will be lower in the future than they currently expect….”
That’s the plan, maybe all year long. Dips like this can recur, but don’t miss ’em.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.
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