March payrolls posted the weakest monthly gain in two years, net of prior-month revision only 62,000 jobs, and the unemployment rate rose to 4.5 percent. However, slowing in the economy has been so widely expected and so thoroughly built into long-term rates that the 10-year Treasury is still 4.65 percent, and mortgages about 6.25 percent.
The economy is now mushing along at stall speed, but for the bond market there’s all the difference in the world between flying — no matter how slowly — and not.
In news of latent strength, the twin surveys of purchasing managers (“ISM”) bounced up in March from the no-fly zone at “50,” manufacturing from 51 to 54.7, and service sector from a four-year low at 52.4 to 56. These surveys were confirmed by a surprising pop in factory orders, up 3.1 percent, but the bond market dismissed the gains as short-term improvements in a poor trend. New claims for unemployment insurance have fallen hard for two weeks in a row; new hires may be slipping, but layoffs are not yet a factor.
In the everybody-knows weak news … auto sales in March ran 3 percent below last year, falling; and pending home sales fell 10.5 percent from March last year. However, purchase mortgage applications are steady, right where they have been since early 2006.
The definitive report, the one that gave the bond market reason to put more weight on weak news than strong: the Commerce Dept’s measure of “personal consumption expenditure” (PCE) arrived flat for March, and after inflation consumption declined by 0.2 percent. If sustained, incompatible with flight. The PCE data had a good-news side: arguably the best measure of inflation, the PCE deflator in March was 2.1 percent year-over-year, almost inside the Fed’s presumed 2 percent bound. “Presumed” because Fed Chair Ben Bernanke, whether from policy choice or ineptitude in public during his first year, no longer has anything at all to say.
If inflation subsides neatly to the top of a comfort range, is it safe for the Fed to ease? Probably not. Paul Volcker was the first to use the “F” word in public description of Fed policy, in 1979, and Alan Greenspan did also in his next-to-last year. Bernanke doesn’t use any words, but Moody’s Effed out loud this week.
“Froth,” it said, had so overtaken underwriting for commercial mortgages that Moody’s began to downgrade billions in mortgage-backed bonds and set the bar higher for new ones. Froth is the head on a beer, the floating result of an exuberant stream, an aggregation of small bubbles. Froth in markets makes central banks nervous, for it is the cardinal symptom of too-easy credit. The world is in a time of asset inflation, not consumer price or wage-price spiral — has been since the late 1990s — and every financial market, commodity and property market around the world carries hefty prices (see: Dow). However, nobody knows for sure if this froth is the devilish work of nouveau finance, or an artifact of growing and perfectly healthy global wealth.
In the housing/mortgage meltdown, another week’s news supports the centerline position held here: housing will not resolve for years, but is a drag, not a killer.
Lewie Ranieri, 1983 co-inventor of the modern, derivatized mortgage world, has two interesting observations. First, of the awful subprime originations late 2005 through 2006, 50 percent of borrowers could have qualified for “A” paper. Contemptible behavior by desperate salesmen has concealed borrowers in better shape than feared, and withdrawal of trash credit is unlikely to collapse housing.
Second, the wizard indicated his own uncertainty at the risks embedded in multilayer synthetic finance, including its impediment to restructuring loans in default. Embarrassing days lie ahead for Wall Street’s mortgage machine — downgrades, defaults, spitbacks and lawyer moshpits. Bankers Life filed against Credit Suisse, saying mortgage bonds sold were not as offered (old, 2004 loans … just wait till the ’06 honey pot), and the credit insurer (Triad Guaranty) ain’t payin’. Still, more likely to be embarrassing than fatal.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at firstname.lastname@example.org.