More positive U.S. data and relaxation of European frights have combined for higher interest rates and support for Wall Street’s warm-fuzzy machine.

One week ago, downgraded credit in Europe and another failure in Greek debt negotiations had taken the 10-year Treasury note to 1.85 percent and big-equity refinancings a hair below 4 percent. Today, nothing is resolved in Europe but nothing is falling, either, so 10-year Treasurys are back to 2.02 percent and even a 20 percent-down, low-fee mortgage is near 4.25 percent. Adios, refis.

The mortgage spread to 10-year Treasurys, at 2.25 percent, is very wide, now opened in part by the new-mortgage surcharge inflicted by Congress and the White House to pay for part of the payroll tax cut.

Which the public is largely unaware of, because mainstream media can’t be bothered to cover the madness, and the Fed every day is trying to close the spread.

The most striking U.S. data is the decline in weekly claims for unemployment insurance, which seem decisively to have dropped below 400,000 (352,000 last week) where we had been stuck for most of 2011.

"Fewer layoffs" is not hiring, but it is good news. Regional Federal Reserve banks report upticks in manufacturing. Inflation is receding from its commodity push last year, to an overall zero change in the December Consumer Price Index.

Then, a data-interpretation argument — this time housing. The consensus is very optimistic that housing is past its bottom and that 2012 will mark the beginnings of recovery for construction and resales. I wish … oh, how I wish. The optimists assert pent-up demand, household formation, lower listed inventory, and faith. "Hallelujah," brothers and sisters.

The always-suspect National Association of Realtors has reported a 5 percent gain in sales of existing homes in December. But December was unseasonably balmy and dry, and economic data is adjusted for season, not weather. NAR also reported that one-third of contracts failed, with its members correctly blaming mortgage underwriting and appraisals.

There is some legitimacy to hopes for new construction, because builders are agile in shifting location and price point and some places really are short of housing (North Dakota). However, new delinquencies are not improving, there is no work-off of distressed inventory, and all major measures of prices resumed their declines early last fall.

The household-formation argument is based on recent historical pattern, but a hard look contradicts: We have a 1930s-style decline in birth rate, and for good or ill a sharp drop in illegal immigration. Pent-up demand is offset by pent-up caution about prices.

The void in political leadership continues, and among economic thinkers of all stripes the widening, hysterical scatter of "What to do if you were king?"

Heaven help moderates: Democrats were thrilled this week by Republican presidential candidate Mitt Romney’s exposure as wealthy (who knew?) and paying completely legal taxes, if low in some parts.

This guy tithes, with 10 percent of his considerable income going to his church. "Lefty" Democrats think that tithing is taking 10 percent of somebody else’s income, and "righty" Republicans are in a 16th-century argument about what a church is, and whose is acceptable.

Economic policy has two centers of confusion:
1. Stimulus vs. austerity; and
2. The central banks.

Ordinarily sensible people chant: short-term stimulus, then austerity. Pardon: When is then? Less sensible people demand spending on infrastructure. Maybe we could avoid Japan’s bridges to nowhere, but even nifty new bridges to somewhere add what multiplier to economic growth?

California’s planned bullet-train project connecting Northern California to Southern California is the most questionable public investment since the failed housing projects at Pruitt-Igoe.

The central banks … I hear more and more center-thinkers drifting toward the Libertarian posse. A good guide for 10 years has been the quarterly, but the newest issue demands "a five-year moratorium on all new Fed actions." A bright, studious investment manager and friend (better nameless) refers to Fed "meddling."

As we enjoy better U.S. data, and no new recession, please understand that the Federal Reserve and European Central Bank are holding open our living space against crushing deflationary pressures. And until accidental healing, or somebody finds the support to do useful things, the issue is in doubt and central banks are playing for time.

The big questions for spring: Is the decline in inventory a good sign for prices, or a sign of demoralization? And what happens when distressed inventory is released to market?

Charts courtesy of

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