MORTGAGE CREDIT NEWS BY LOUIS S BARNES- 11/2/2018
The bond market and Fed pay more attention to the monthly employment data than all other indicators put together because jobs and wages tend to determine inflation. These reports arrive on the first Friday of each month, today, and the strong results in this report have had strong effect.
There are long stretches of time when the Fed is not in play. And then there are intervals when events activate the Fed, forcing it to alter the free course of the economy. Now! The Fed works to prevent recessions from becoming depressions, and tries to extend expansions by slowing them down -- which annoys the stock market and presidents.
The Fed began to raise the cost of money three years ago, but that patient, low-risk operation is now in the most delicate phase. The economy must slow to a sustainable level; if it does not do so on its own, how far and how fast must the Fed hike, and with what risk?
Anticipation of future hikes last month pushed the 10-year T-note out of its eight-month range up to 3.23%, and lowest-fee mortgages above 5.00%. That move de-gassed the stock market, down 2,400 Dow points. Fed conversations during October revealed support for a pause by the Fed mid-year next year near 3.00% from the current 2.25%, and pause hope has helped stocks to recover about half of their losses.
Today, tilt back toward an open-ended Fed. 250,000 new jobs in October, and at 3.1% year-over-year the biggest increase in wages since the recession.
But, wait a minute. Harry Truman wished for a one-armed economist so he wouldn’t have to listen to “On the one hand, and then the other....” These monthly job numbers are wildly approximate, 286,000 in August but only 118,000 in September, close to the Fed’s long-term tolerance. An increase in wages is better than a drop, but after inflation we’re talking a one-percent increase. The most broad measure of incomes is the employment cost index, inclusive of benefits, and the 3rd quarter gain was only 0.8% and not accelerating.
Yesterday gave us the manufacturing ISM from the October survey of purchasing managers. Be careful with this one: at 57.7 it was a point or two below forecast and an 18-month low, and new orders, production, and employment all off two-to-four points. But 57.7 is in the area of cyclical highs going back 30 years and too hot for the Fed.
Cling to this happy thought: despite a big job number, the 10-year today could not reach its October high. The bond and mortgage markets have priced-in the next three Fed hikes. Interest rates are likely to stay close to where they are until something happens.
The election thingy. It would take a blue tsunami capturing the Senate to change the calculus. The 2016 election produced stocks-up-rates-up, and a blue sweep likely the reverse, but CNN’s John King and his magic maps say uh-uh.
Related to the election, Mueller’s shoes. He has properly disappeared in the months before the election, but may have explosive footwear to drop afterwards.
An economic fizzle would likely take some time, but one accelerant figures to diminish soon: the burst of deficit spending has maximum impact as it hits and has no lasting effect. The tax legislation gave a lot of money to people who already had a lot, but has done nothing for net incomes of normal people, investment, productivity, or growth-based tax revenue.
The economy is fundamentally sound, although not fundamentally hot. We have none of the excesses typical of late-stage expansion, especially not in housing or banking. If the economy does slow toward 1.5%-2.0% GDP growth it is not likely to drop into a new and deep fracture.
If the administration pushes tariffs, they could destabilize somebody else’s economy, and then ours. However, the result of all the trade talk so far is just that. Years of yelling about NAFTA got it renamed (USCMA), but nothing else except enraged neighbors. Nothing has come of threats to Europe. We have legitimate grievances with China (theft, non-tariff barriers to US business), but if action against China has similar result to pressure on North Korea we’ll have big announcements of change followed by the status quo.
Brexit is worrisome but still looks as though it will be resolved. Italy is back from the brink, the ECB promising to keep its cost of money at minus-.4% through next summer, and nothing punitive from Brussels about Italy’s budget. Merkel’s end will be slow, but will end an era, and Macron’s rapid political failure means a leaderless Europe ahead.
China is the weak spot. Maybe it will invent a new form of society, but its Orwellian effort to control everything, including minds for the benefit of the dead-handed Party is likely to fail as it has everywhere else. To continue its economic transformation it must allow market effects, but that would mean intolerable instability -- which it will get anyway.
The whole outside world is economically much slower than the US, and we are more likely to revert than they are to rise. If they slide, we will, too.
Ugly stuff? The Saudis will be a lot less trouble and pump a lot more oil, prices down. Iran? Slipping by unnoticed, China has joined the new oil sanctions on Iran. Iranian nukes are not good for anybody. Even Czar Vladimir has been quiet.
So we’ll hang on each new piece of economic data as it arrives, every day asking if the economy will slow by itself or the Fed has to do it, with attendant risks of over-doing.
Besides, among the zillion old sayings on Wall Street, it’s never what you’re looking for that gets you.
The US 10-year T-note is likely in the early stages of a months-long stay in a new range which looks just like the old one, choppy but steady:
For emphasis, the 2-year T-note going back five years. 2s are by far the best Fed-predictor. Fed tightening cycles are relentless, although occasionally the Fed hikes and then plateaus for years (1994-1998). This one is likely to continue until the economy slows, and a lot:
The Atlanta Fed’s first estimate of 4th Quarter GDP is softer, sub-3.0%, and constructed inclusive of today’s big job numbers:
The ECRI (Economic Cycle Research Institute, as opposed to others with the same initials) has forecast the US economy since the 1960s and has had only one mistaken call of a cyclical turn. And it still thinks it was right in 2011 about a new recession, had the Fed not intervened with more QE. This chart is dated by one week, but has entered an unmistakable downturn -- the last bar is hard to see but the lowest reading since the near-hit recessions of ’11 and ‘15. Goody!
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