All long-term rates this week rose a quarter-point from the end-of-September lows: the 10-year T-note’s jump from 4.54 percent to 4.81 percent has taken 30-year mortgage rates to 6.375 percent.
Incoming data are too healthy to support a further decline in rates, or even a return to September lows. The economy has decelerated, but bonds need the prospect of a deeper slowdown underway — slow but steady won’t get it done.
Rates rose in three jumps, the first over the holiday weekend, the second on Wednesday, and the last this morning.
Markets took the long weekend to digest the contrasts between last Friday’s weak payroll gain for September (yet fewer unemployed) and the huge upward revision in last year’s jobs. Some still argue that the weak September payrolls constitute a current trend change, but the revision means that labor markets are far tighter than thought, and therefore inflation-prone, confirmed by 4.6 percent unemployment, deep in the hot zone below 5 percent.
Slower growth in payrolls may not reflect an economic slowdown at all, instead a shortage of in-demand skilled workers, a shortage that can push wages up too fast for an economy already in inflation trouble. The Fed’s “beige book” describes the national job market as “taut.”
On Wednesday the Fed released the minutes of its Sept. 20 meeting. The minutes should not have surprised the market, but they did: there was no discussion at the meeting of a potential rate cut, nothing but worry about inflation and whether the Fed is tough enough. In particular, whether the economy will slow enough to knock core inflation back below 2 percent soon enough — before 2 percent-plus becomes embedded, the first stage in an upward spiral harder to stop with each turn upward.
The clincher this morning: net of distortions, September retail sales rose a solid point-eight percent. If the consumer is still in the game, any deceleration in the economy is on a very gentle slope.
The dipsy-doodle in the news and reaction involves time. In the short run, the bond market had gotten way ahead of itself by assuming a deeper/sooner economic slowdown, and priced in a Fed ease by the end of this year or soon after. The most severe rate damage this week has been to the Fed-sensitive 2-year T-note, which by today has removed all expectation of a near-term Fed ease.
However, in the long run … if the Fed intends to lean against the economy at least as hard as it is now doing, an economic slowdown is still on the table, as are risks for a deeper one. If the Fed has to lean harder, or for fear of inflation allow the economy to slow more deeply, then the chance of recession grows, and with it a chance for an even deeper decline in rates.
The forecast: near term, rates are still vulnerable on the upside. Nobody is going to bet a wad of money on deep/quick slowdown, not even the Home Bubble Balloonists, not so soon after losing the last wad on that bet. Our next shot to decline to the late-September lows won’t come until we get genuine verification of ongoing slowdown.
New and lousy housing numbers won’t do it because that expectation is already built in, and severe housing-spillover effects are now in doubt. Weak payroll numbers in early November won’t do it, either, because they’re now suspect. It will take weakness in several pieces of lesser data, reinforcing each other across economic sectors, and that’s a prescription for a delayed-reaction surprise.
Recessions follow the best inflation-fighting intentions: a Fed that hits too hard, or a Fed that waits too long for slowdown confirmation.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
