Mortgage rates have held last week’s improvement near 6.625 percent, taken and held by the 10-year T-note’s retreat from 5.2 percent to 5.05 percent. The bond market is in a standoff, uncertain about everything except inflation at or over a dangerous edge, and waiting for next Friday’s job data.
A long weekend is a good time to sort the things we know from the things we don’t. The financial chattering class is fond of announcing theories and hopes as fact, and these wannabe thunderbolts are especially confusing in an on-the-cusp situation.
The first category for sorting: the housing market. As a national matter, the market is indeed slowing. The newest data were muddled by heavy revisions of prior periods, but it is clear that the slowdown is at a shallow slope. The “housing market” is an aggregation of zillions of micro-markets; some are in distress, some are booming, but in the aggregate it is a gentle cool-off.
Yet, all commentary (Fed and otherwise) says that a housing slowdown will be the key element in an economic slowdown. If housing slows enough, of course the economy will slow; but I don’t think that anyone can know the effect of the modest slowing underway — if any (except on the over-eager, the unlucky, and builders, Realtors and lenders).
The Fed and most private observers expect an economic slowdown close ahead or in progress, whether from housing, energy costs, credit exhaustion, or the cumulative effect of two years of Fed rate hikes. This widespread forecast collides with the current data — the actual real-time information — which describes an economy with superb business conditions, still accelerating at roughly a 3.5 percent annual pace, and plenty hot enough to push inflation over the edge.
Federal Reserve Chair Ben Bernanke has every chip in his dwindling honeymoon pile bet on this slowdown, and that inflation is really OK. He sent a letter to Congress this week, again asserting that “inflation is well contained”; it may be contained, but there is not a soul in the markets who thinks it is “well” contained. It’s not just his honeymoon that is diminished; each time he sits in a chair to speak, he looks smaller and grayer and more vague — less lord of the manor than butler. This poor guy needs a win; he needs an I-told-you-so even worse than Dubya does.
Commodities have broken from speculative peaks, but prices stiffened this week. Oil never broke at all. If oil were to drop to $45, life ahead would be easy; but, if you want to measure the degree of uncertainty out there, ask anyone who has worked near the oil patch, are we going to see $45 before $100? Then watch your victim stare upward for divine guidance, and scuff dust.
Another line of alarmism is the one that says the dollar will soon be wallpaper and American interest rates will soar because the world will dump our bonds. The reality: the dollar has fallen from 118 yen/dollar to 111, and $1.20/euro to $1.29, both apparently by concerted G-7 effort, and the decline could not have been more orderly. Economies in Europe and Japan already appear to be slowing, as their exports are not as competitive.
A parallel dollar-panic line is the threat of rate increases in Japan and Europe. There is no question that central banks are withdrawing liquidity, and that potential rate increases would put pressure on American rates, but nobody knows if those economies can withstand the stress — especially if the fabled slowdown arrives here, and we can’t buy their exports.
Stick with the basics. If the economy slows, we may have seen the rate top for the year. If it doesn’t, and inflation moves over the edge, then the Fed will have to hike until the economy does slow, or the bond market will do the lifting for the timid.
All roads lead to slowdown; some easy, some not, yet none at hand.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.