After a one-week pause, the rise in long-term rates that began over the holidays has resumed and is likely to continue. Mortgages are departing 6.125 percent for 6.25 percent, taken by the 10-year T-note’s easy cruise through support levels to 4.77 percent.
The cause: nothing fancy, nothing to do with Iraq, just good economic news and a little grease from $51/barrel oil.
In this morning’s news, December retail sales were far better than the weak hopes in the bond market: up .9 percent, strong in all sectors except warm-weather-suppressed clothing sales, and that performance followed a strong November. GDP forecasters are scrambling for revisions: the 4th quarter will come in above 3 percent instead of the 2 percent or less that had been so widely assumed.
Other reports were minor affairs, but all point to a better economy. Mortgage purchase applications have done well since October — maybe a warm-weather boost, maybe they’ll be squelched by rising mortgage rates, but late fall was a happy change from the previous yearlong, straight-line decline. Claims for unemployment insurance are falling, near-term and extended; the minor slowdown in the economy last fall did nothing to loosen a tight labor market.
On that point … since Federal Reserve Chairman Ben Bernanke has abandoned his career as a public speaker, the guy to listen to instead is Vice-Chair Donald Kohn. This week he gave a nod to the potential for housing to resume its slide, but his key phrases provide a clear forecast: ” … A sustained pace of expansion that, necessarily, is less rapid than that from mid-2003 to mid-2006. … Problematic would be a pickup in the growth of nominal hourly labor compensation that was passed through to prices.”
“Necessarily” less rapid means that if the economy fails to obey the growth-capacity speed limit near 3 percent, the Fed will shoot out its tires. Rising wages are OK so long as they chew into corporate profits (heaven knows there is room), but a labor market this tight is a hazard, constrained only by global wage competition.
Expectations for near-recession and Fed ease have been badly misplaced. Growth is splendid worldwide, falling energy prices acting as a tax cut in the developed world, and central banks everywhere are leaning into it. The inverted yield curve, usually a reliable indicator of slowdown, this time appears to be an artifact of health.
This week’s Iraq developments had no effect on the financial markets. Concern would show up in oil and gold, at least, but did not.
I hope that this preoccupation persists. Certainly, when on a moneymaking binge the markets are capable of ignoring anything. The breathalyzer: when premiums for risk disappear, the party is really rolling, just as now.
However, Iraq risk is rising. President Bush’s speech this week was odd in several respects, these applying to markets: not a syllable on how to pay for the venture, this year’s appropriation to be $150 billion, taking total cost to about a half-trillion, plus another $100 billion to restore equipment and deferrals. No mention that the five brigades quickly headed to Iraq leave us with no strategic reserve. The rest of our forces are either in Afghanistan or in rehab, and the National Guard is useful only for support.
He did mention: potential, nonspecific retaliation against Iran and Syria (that following appointment of an air-assault-specialist admiral to lead Central Command in its two existing ground wars). The Wall Street Journal today editorialized, “We wouldn’t rule out incursions into either country.”
Markets have obviously adjusted to the long, slow grinder. I don’t know at what point a wider war, or a longer one, or a withdrawal and attendant instability, or a constitutional crisis will get the unpleasant attention of the markets, but I cannot imagine that one of these developments will fail to do so.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
