Long-term rates have confirmed their over-the-holidays rise, but are taking strong economic news very well, mortgages holding at 6.125 percent.
December payrolls grew by a healthy 167,000 jobs, way above consensus forecast, and wages rose .5 percent in the month, nearly double the forecast. The December purchasing managers’ manufacturing index rose above break-even to 51.4, out of its November trough, and the service sector held a strong 57.1.
Christmas sales were on the shaky side, but most of the weakness can be charged off to warm-weather damage to clothing sales.
Oil cracked $55/bbl early this morning, warm weather in play there, too. I suspect also at work is a delayed reaction to the price spike now 18 months old. It takes time for a spike to suppress demand and encourage supply, especially with a structural increase in consumption coming from China (ramping up at least a half-million barrels per day per year), but if you double prices, you’re going to get a downward price correction beyond the ability of OPEC to manage the market.
As oil goes, so goes wagering on inflation: gold is down 20 bucks today to $607, and with it the whole commodity complex. Cost-driven inflation shouldn’t worry anybody.
The biggest story of the week was the Fed’s release of minutes from its Dec. 12 meeting.
Fed Chairman Ben Bernanke-era communications are as different as can be from his predecessor, Alan Greenspan, who was a superb speaker and author, gave the nation a public voice of economic management and wisdom, but believed that the Fed’s policy thinking should be secret — elements leaked rarely and for effect.
Bernanke isn’t any good on his feet, and his previously clear and entertaining writing style has deserted him in office. However, he promised to run an open Fed, and he is — the most open in modern times. No grandstanding: the understated open door sits in his post-meeting minutes.
During Greenspan’s administration the minutes were a waste of time, just a bunch of bankers kicking the economic can around. Bernanke’s minutes are still pages and pages of that stuff, but he has begun to insert a crucial item: the forecast by the Fed staff. Less than a month after each meeting, Bernanke shares the actual inside forecast upon which the Fed made its decision: “The rate of increase in real GDP was expected to pick up gradually as the drag from the contraction in residential construction diminished, returning towards the end of 2007 to a rate close to the staff’s estimate of potential output growth.” —www.federalreserve.gov, page five of the minutes (put the other eight in the bird cage).
Forget a rate cut. And, any mention of growth approaching its “potential” means a Fed more likely to raise the cost of money than to cut it.
The ripples into the financial markets are not yet wave height, but getting there.
Surprising news of economic health should be good for stocks, but they are sinking, having bet too much on a rate cut. No cut, and the dollar suddenly looks better versus other currencies, based on interest-rate differential: the euro is down to $1.30 from $1.33, and the yen down from 115/buck almost to 119.
Bonds were certainly hoping for a rate cut, too, and are up-side vulnerable. However, the Fed’s worry about labor market inflation is late-year, and that threat is limited by globalization drag on U.S. wages. Bonds are strongly protected by another global force: the immense volume of cash needing a safe place to park, largely indifferent to yield. This inverted curve (10-year T-note .57 percent under the Fed) doesn’t forecast economic weakness, just cheap mortgage money.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
