From the Fed’s pause last week through Tuesday, long-term rates rose every day, the bond market demonstrably upset that the Fed had flinched from the inflation fight.

Two inflation reports later, mortgage rates are lower than they were before the pause, and Federal Reserve Chairman Ben Bernanke is the wisest man alive.

I suspect that both reactions were overdone, but the show was somethin’ special.

The Producer Price Index, heavy with physical goods, rose overall only .1 percent in July (versus .4 percent forecast), and the core rate actually declined .3 percent, the biggest drop in three years. Yeah, distorted by giveaway discounts for autos, and yeah, prices of services are not included, but there was no sign of a worsening problem.

Then consumer prices…not as pretty, overall up .4 percent, about where we’ve been, but the core rate rose only .2 percent, breaking the frightening, two-month string of .3 percent gains, and also breaking the inflation-is-ramping-up psychology.

New economic data contributed to the interest-rate decline. Housing is headed into the tank, albeit at a steady glide slope, not a dive: July starts of new homes fell 2.5 percent, that after a 5.7 percent slide in June; and new building permits fell 6.5 percent. Since nose-over early last fall, starts are down 13 percent, and builders report more and more contract cancellations, and offer deeper incentives to get the ones they have.

The non-housing economy is still doing well: industrial production picked up .4 percent, a little off expectation, but fine; and the fraction of capacity in use did not rise as forecast, but held steady at a strong 82.4 percent.

Commodities retreated, further easing inflation fears: oil broke under $70 this morning, remarkable after the BP shutdown in Alaska. Credit went to the cease-fire in Lebanon, but anyone who thinks tensions in that part of the world have eased is on his/her fourth Martini. Wholesale gasoline has dropped under two bucks repeatedly, which means three-buck gas at the pump is headed down soon, and a lot. Natural gas has stayed six-something persistently, less than half last winter, and its fat futures price will need a bad Gulf hurricane soon to stay bloated.

Sequence is important, here. Credit-sensitive housing is slowing, but measures of distress barely register on the scale. RealtyTrac comes up with a 35 percent increase in foreclosures since last year, but the new numbers are still historically very low. The leading indicator, loan delinquency, has hardly budged. Certainly, the stimulus from housing is fading, but there is not yet braking pressure from the sector.

The consumer is the second sector on which the bond-market recession-hopers hang their hats. Consumers are badly stressed by energy prices, and wages not keeping up with inflation, sure, but there’s no sign of distress — the big pull-back from retail spending that you’d expect to see on the way into recession.

The business sector is doing very well, indeed. The next recession shoe to drop would ordinarily be overextended corporations, deep in debt. We do not have that condition at all; if the consumer faints, then the business world would slow, but they’re not overextended. The leading cause of consumer fainting is usually layoffs and a hiring stop by a fading business sector, but we have none of that. Yet.

If the consumer is to fade any time soon, housing will have to do the deed, perhaps as neighborhoods turn into forests of for-sale signs, and even the non-sellers become cautious.

All of that is speculative. This is certain: the bond market has priced in significant Fed easing next year, and it’s WAY early for that. The 10-year T-note is 4.85 percent, nearly a half-point under the Fed. If we get sub-6.5 percent mortgage deals, think hard about refinancing that ARM that has 18 months to go at 4.25 percent. Now, not then.

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

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