MORTGAGE CREDIT NEWS BY LOUIS S BARNES- November 22, 2019

Markets have left for Thanksgiving earlier than usual. The 10-year T-note in the last week moved down from 1.83 percent to 1.77 percent, not enough to move mortgages from the cusp of 4.00 percent. The 2-year T-note, ultra-sensitive to Fed action has traded near 1.60 percent since early October.

There are hints in this motionless performance both from the Fed and the European Central Bank.

The top of the Fed’s overnight cost of money is now 1.75 percent. The market signal: both the 2-year and 10-year Treasury notes are trading at or under the Fed’s cost of money. Why would investors accept long-term returns the same as parking money in super-flexible cash?

Two reasons. First, the outside world is afraid of itself and has been buying U.S. Treasury’s for safety, and because U.S. yields are high -- even Italy pays a half-percent less than our Treasury for 10 years. Second, for long-term rates to be the same as cash... that’s a forecast that cash will not be paying so much for long, a forecast that the Fed’s next move will be to cut.

Ever since the Fed’s communication error one year ago right now, its rapid retreat to “patient,” a “mid-course correction” of one cut which became three -- all of that time the Fed has been chasing the bond market down, not leading. The disturbing “yield-curve inversion” of spring and summer has been fixed by the Fed cutting the cost of money fast enough to get under long Treasury’s.

None of this is the Fed’s fault. It attempted to “normalize” the cost of money but had no way to know where normal lay without trying; it fixed communications instantly; and has been repeatedly blind-sided by a trade war waged clumsily by both sides.

One more Fed signal: the minutes of the October meeting as the previous one open with a two-page discussion of what to do if the Fed has to return to zero percent, but zero does not revive the economy. That continuing discussion inside the Fed is not academic, it is laying plans which are likely to be necessary.

Enter the ECB, Mario Draghi replaced by Christine Lagarde, who noted this week that the rate of growth in world trade in the last year has fallen in half. Europe is the leading indicator for the world because it is more trade-dependent than the U.S., and will be the answer to the key question: will trade and manufacturing weakness spread to the service sector and wider economy? China of course is the real leading indicator, but its economy is obscured by jiggered statistics.

What is the level of concern at the Fed and ECB? They ae prepared to shout “Fire!” when necessary to galvanize action by other engines of government, but in this case there is no one at whom to shout. Nobody home anywhere. The U.S. federal government is AWOL for several reasons, and the only government in Europe which matters has always gotten poor grades for “playing well with others.” Germany must spend and borrow or the others will sink again, which everyone there knows. In addition, strange because of Europe’s belief in togetherness, policy makers in and near the ECB sound like Fed-haters here, and are rejecting Draghi’s latest plan for stimulus, renewed QE.
All of this will take time to unfold, but the basic forces are untouched by public action: IT compression of prices and wages, trade friction, and the aging of populations impervious to remedy.

Then, it is customary at this time of year to recite thankfulness.

I am working on that.

Family of course. Friends and neighbors and local community. And, um....
Reach for it. Not necessarily leaping with joy and shouting thanks, but my Okie Mom used these country lines. “Now, Louie, look at the doughnut and not the hole. And while you’re at it, don’t make up your mind about somebody until you’ve walked a mile in his moccasins.”

Muffling the giving of thanks at this moment, or strangling it altogether are divides among us which seem too wide to bridge. It always seems that way if we stare at the divide instead of asking why the divide. Good marketers know always to ask their customers, not assume their preferences. Perhaps the looniest of all business meetings involves a sales team angry at customers because they didn’t buy what they were supposed to.

The greatest threat to the global economy is trade friction with China, and reciprocal demonization of peoples who don’t understand each other. I give thanks this week to China for its restraint in Hong Kong. The university campus there could easily have become a new Tiananmen but was not, and despite intentional provocation which would have gotten a lethal response from most governments.

The Hong Kong resistance to Party control lies on the bright line of cultural difference: China has always been about imperial authority and top-down control of the populace. In the West (Hong Kong a temporary outpost), and America the extreme and possibly unsustainable outlier, we celebrate and protect the individual. The application of muscle to move that bright line one way or the other will not work. Get the temperature down, suppress righteousness, and talk about the divide and its points of friction... that’s worthy of thanks.

And in America a “political divide” which is wider than politics. To one side of the country, impeaching Mr. Trump for the Kyiv Kaper resembles sending Al Capone to Alcatraz for tax evasion. To the other side, Mr. Trump is one of us, to be protected from the others, and in turn is the Excalibur, the sword protecting his own. Each wing is so far from what used to be the main stream of political culture that neither can see the water. Each side with its own legal system, economics, and basic ideas of right and wrong.

It is pointless to expect to change the mind of the other by evidence or argument, no matter how sensible. Nor by anger, insult, or shunning. We are too far apart. So, drop all of that and explore what it is about the other side that is so upsetting and threatening. Some is inevitable, but some friction is accidental, and can be repaired by avoiding tender spots, or just a shift in tone of voice.

Just a thought. Happy Thanksgiving!

The U.S. 10-year T-note in the last three years. To have hopes for a new decline, or even stay where we are, the market must soon break the ascending tops and bottoms since the Sep-Oct bottoms close to all-time lows:

The Atlanta Fed GDP tracker last updated one week ago, and will not again until after next week’s holiday. Its deep downshift since October is a big deal:

The ECRI has the opposite picture, a sudden improvement in its forecast. Much as I respect the ECRI, I suspect it is distorted by Fed easing and the reversal of the yield curve inversion: