- We may get a pause at these levels, even improve a bit more, but the overall move up is not over.
- All economies have speed limits. Push tax cuts or spending, and any excess growth just adds to inflation. To raise the speed limit, raise productivity and/or immigration.
The interest-rate fever has broken for the moment. The 10-year T-note touched a two-year high yesterday at 2.45 percent, mortgages 4.25 percent. Both improved a bit today despite news which should have pushed them higher: good November jobs, ISM (Institute of Supply Management) manufacturing index to an 18-month high, and an improbable OPEC deal and oil $50+.
We may get a pause at these levels, even improve a bit more, but the overall move up is not over. We might be rescued by a new mess in Europe or China or Japan, but there is no predicting or waiting for those.
Why the spike?
Why did the bond market blow up on the day after the election? It’s possible to argue (weakly) that the move was already underway and the election triggered the next step.
But, a straight-line 10-year run from 1.85 percent to 2.45 percent…? That’s the election.
And the Fed. Embedded in this bond wreck is a sudden repricing of the Fed’s intentions. Again, it’s possible to argue (weakly) that the bond market had defied the Fed for four years, and got caught.
However, we now have a better set of fingerprints, both from the market and Trump: The election did this, and has more to do.
The first fingerprint, dramatic in the charts below: the 2-year T-note has also blown up. 2s are the best Fed weathervane. If you’re trading 2s and get wrong the trend in the overnight cost of money, you won’t be trading 2s for long. “Domino’s” on the roof of your car. On election-eve, 2s traded 0.80 percent; yesterday, 1.15 percent.
What will happen next?
Pre-election, many thought the Fed would tighten gradually, but that foreign buyers and a dim global economy would hold long-term bonds down — “yield curve flattening,” the spread between 2s and 10s narrowing.
Not. The whole curve has jumped, and steepened, a forecast of both a faster-farther Fed and inflation.
Treasury Secretary-designate Steve Mnuchin — “Munchkin,” now and forevermore — is another Goldman escapee, who ran their mortgage-backed securities desk. His entire focus is pushing growth to “3 percent-4 percent.” And he’s going to privatize Fannie and Freddie.
All economies have speed limits. Add labor-force growth to productivity, and you get the rate of non-inflationary GDP growth. In our case roughly 1 percent, plus 1 percent equals 2 percent.
Push tax cuts or spending, and any excess growth just adds to inflation. To raise the speed limit, raise productivity and/or immigration.
Raising productivity is a long and hard mission involving education and carefully targeted investment in a world drowning in excess investment. Immigration? With these guys in charge?
If the new administration intends to push growth at double capacity, the Fed must react, come faster-farther. That theory matches market fingerprints.
The cruel aspect: these stimulus plans are unlikely to boost growth much. Regulatory relief will be nice, but not “USA Unchained.”
Lower corporate tax rates and repatriation of old earnings will not goose investment unless there are profitable opportunities — and those prospects have been so poor that companies have borrowed oodles of cash just to buy-back their own stock.
Banks will not gush loans just because Dodd-Frank gets clipped. Banks will be more profitable, but lending requires borrowers with reason to borrow. Wing-nut financial theologies like privatizing Fannie will hurt. Voucherizing Obamacare will frighten households, as will the threat to Medicare.
Poor prospects for stimulus or not, the Fed will have to pre-empt the potential hazard from the binge. Brace for tweets threatening Yellen.
All of that said, Trump has one asset which might break all of the rules for the better. Action! Do things. The presidency has been inert since Clinton’s first term, twenty long years, and The Donald will hit the ground in a whirlwind like none since the two Roosevelts and Reagan.
He already has: the Carrier jobs deal is technically a waste, just a subsidy of the “saved” jobs by consumers and Indiana, foolishness the same whether pushed by Democrats and unions or the Tea Pots. Far better: retraining and outplacement, which adds to productivity.
But the theater! Carrier was a tremendous inspiration for the nation. Sometimes theater beats bean-counting. No matter how crazy he is, action feeds good spirits.
The 2-year T-note in the last 90 days
The 2-year T-note in the last 90 days. Something in the election forced instant re-pricing of the Fed’s intentions.
The 10-year T-note, five years back.
The 10-year T-note, five years back. There is no substantial technical “chart support” here except the double-top at the end of 2013. We are at risk for another half-percent increase, and soon.
The Chicago Fed’s national index
Of course, “it’s the economy, stupid.” The Chicago Fed’s national index has been slipping for two years.
The Atlanta Fed’s spooky-reliable GDP tracker is all over the place in the 4th quarter.
The Atlanta Fed’s spooky-reliable GDP tracker is all over the place in the 4th quarter. Growth may already be up-trending, 2.5 percent+, which would require quicker Fed action even without Trump stimulus.
The ECRI weekly leading index
The ECRI (Economic Cycle Research Institute) until its first-ever false-recession call in 2011 had been the most-reliable indicator for 45 years. I am suspicious of its red-hot value now.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
