Mortgage rates are still in the same narrow band they’ve been in since the holidays: 6.125 percent, plus or minus a debate about closing costs, but no points and no origination fee.

This narrow range should not be confused with stability.

In the last two days, concerns about Iran have overwhelmed everything; but, before laying out the market implications of that one, everything else first.

At the top of the list of standard economics is the standoff between the bet on economic slowdown and the one that all is well.

Mortgage rates are still in the same narrow band they’ve been in since the holidays: 6.125 percent, plus or minus a debate about closing costs, but no points and no origination fee.

This narrow range should not be confused with stability.

In the last two days, concerns about Iran have overwhelmed everything; but, before laying out the market implications of that one, everything else first.

At the top of the list of standard economics is the standoff between the bet on economic slowdown and the one that all is well. In late December, bond yields fell in growing belief that a slowdown was inevitable, the Fed was not merely going to stop its campaign but would have to reverse, and the only question for 2006 would be how steep the slowdown. Everybody else — economists, stock-market heroes, small-business execs — disagrees.

The bond (and hence, mortgage) market is stuck, waiting for data to show who is right. On the good-news side, December industrial production rose .6 percent, on target, and capacity in use rose to 80.7 percent, the best figure since 2000. New claims for unemployment insurance fell a surprise 36,000 to 271,000, also the best number since 2000. The slowdown side expects an abrupt cooling in the housing market, and the newest data supports a cool-off: December housing starts fell twice as far as the already-weak forecast, down 8.9 percent, and new permits fell 4.4 percent.

On net, the week’s good-news-bad-news data were a standoff.

The next economic item adding to the appearance of stability is the trading-desk toe-tapping, knuckle-drumming, pencil-rolling, spitball-shooting wait for Ben Bernanke. The Fed’s next meeting is his deal, and nobody wants to place a big bet in advance of his first post-meeting statement, to be released after lunch on Feb 1. The Friday following brings a ton of January data, and then more anxious waiting: no sooner does Bernanke take the chair than he has to show up in Congress on Feb. 15 to describe monetary policy for the coming year.

Be on the lookout for perverse outcomes! If Bernanke signals inflation concern, the economy running unsustainably hot, more rate-hikes to come — that’s the bond market’s dream of Christmas, because it increases the chance of a tough-side Fed error, a recession in which bond owners would make a ton of money. On the other hand, if Bernanke gives us a benign lot of stuff — inflation OK, no more rate hikes — the bond market will lose its hope of Fed-overdoing and recession, and move to it’s standard opinion of Fed chiefs: timid until proven otherwise.

Iran. How can you tell that a geopolitical flyer like that has taken charge of markets?

There isn’t any new economic data today. However, oil has spiked above $66, some buying clearly self-protective in case of supply interruption. A game of boycott chicken is at hand: whether the West took action to choke Iran’s oil exports, or Iran cut off the West in counter-‘cott response to sanctions, the world would be short about 3.5myn/bbl/day. Hello, three-digit oil.

How close could such an event be? Pretty good quality information today has Iran pulling financial assets out of Europe, to prevent their being frozen by sanctions. Fridays tend to see action like this, as nobody wants to be exposed over a weekend. Part of gold’s pop above $550 is Iran-related. The Dow is in a 150-point crater today, partly earnings worries, mostly Iran and oil.

The last tip-off is the trade that is not happening. Any geopolitical crisis pushes money to safety in bonds…except one. We have managed to tolerate sixty-buck oil without going into inflation; a hundred bucks plus, and there is no stopping it. Frightened money today went to plain, old, cash.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.

***

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