The credit markets are this morning in a precise replay of the first week of October: surprising strength in the job market has overnight blown mortgages from the 6.125 percent low back to 6.375 percent.
“Precise” is a big word, but it fits. For the second month in a row, the Department of Labor has appeared in its Clarabelle suit; last month with squirting lapel flower and honker, today with one of those neat Halloween pranks involving a paper sack filled with something unmentionable and set on fire on your front porch.
Last month’s squirt was the huge upward revision to payrolls over the last year; this morning … mercy: August payroll gains were revised up by one-third, and September by triple. In a total surprise, unemployment fell to 4.4 percent.
The whole world of bond trading, which was pleasantly dreaming of a hard economic landing, is stamping madly at that paper sack, trying to put out the fire, the contents all over their best Guccis. Two lessons: don’t trust adults dressed-up as Clarabelle, and … timing is everything.
The bond market is always desperate for definitive information, especially near points of inflection. The “payroll number” is an obsession each month because it is fresh, from the immediately prior month, and because of the job-inflation link. The rage at Clarabelle for blowing the numbers again is misplaced, and the fault of the markets: trying to pin down the change in payrolls within a hundred thousand or so is a fool’s errand, and the fool is the observer. There are 130 million Americans on payrolls, and four million change jobs each month; the error range is over 100,000.
The part of the report that is reliable: the unemployment rate — at 4.4 percent, a sign of economic strength and inflation risk. The bond world’s real problem: they were wrong (me, too, by the way). Just as at the end of September, in the last two weeks more and more people bet on a harder than softer economic landing. Wrong.
Timing: wrong for now only, and not without reason. Nearly all of the other data this week were weak. The purchasing managers’ manufacturing index was way off expectation, down to 51.2, at the edge of economic stall; factory orders were weaker by one-third of forecast; and new claims for unemployment insurance, the leading indicator, rose to a four-month high. Despite a three-quarter-percent decrease in mortgage rates since August, purchase mortgage applications are continuing a straight-line decline, now down one-third in 16 months.
Productivity in the third quarter did not advance at all, and the year-over-year gain has been the poorest in nine years. Seen one way, declining unemployment and productivity are a sure sign of inflation; another way … lagging indicators going into a slowdown. Whichever: the Fed is a long way from an ease.
One way-out-of-the-box thought: global wage competition may mean that unemployment can go lower than anyone thinks, inflation declining, productivity be damned. Housing weakness will dampen economic growth but gain support from very low long-term rates. Maybe the economy doesn’t land at all. For the moment, that looks like the weird but high probability forecast, which also calls for more of the last two months’ mortgage-rate oscillation in the low sixes.
Comedy break. The National Association of Realtors seems to have corked its malaprop economist, David Lereah, but today unleashed its marketing horsepower, running full-page newspaper ads with a 48-point headline: “It’s a great time to buy or sell a home.“
Fellas, ummm … one or the other, most places, maybe? As a past member, would you mind making the best of us look like the hard-working, skilled and analytical professionals we are, instead of a bunch of gabby and grabby hucksters?
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.