Long-term rates have run up again, now to levels of last fall: Mortgages are close to 4.25 percent, the 10-year T-note cresting Wednesday just under 2.5 percent. Today, 2.36 percent.
Possibly fatal stubbornness, but I think most of this uplurch is a correction from overreaction last winter, not the threshold of a sustained swoop-up. That may come, but it will require sustained economic data at least as strong as this spring’s revival.
Beginning midfall last year, Europe appeared headed into deflation. The European Central Bank (ECB) would embark on quantitative easing (QE), but its effectiveness was very much in doubt. Oil crashed, removing all fear of inflation, and a lot of us discounted its stimulus potential.
QE in one form or another spread everywhere outside the U.S., producing a dollar rocket, which at minimum created buyers for U.S. financial markets (stocks up, rates down), stimulated all of the export-based economies overseas (that would be all of them), and undercut the U.S. The icing: the weird U.S. winter slowdown.
All of that has now either reversed or stabilized. Rates up.
Maybe, maybe, maybe at last a genuine turn in the world economy, which will self-reinforce. But the odds are that the great charge of the central bank cavalry has only bought more time, and the deflationary pressures are all still in place, especially overseas — and above all, hypercompetition compressing wages.
In the last two weeks, both the International Monetary Fund (IMF) and World Bank have downgraded their forecasts for global growth, the latter to just 2.7 percent for this year.
This certainly would not be the first time the U.S. did better than the rest, even the locomotive for the others. But the divergence among central banks is without precedent — all-out printing over there, and tightening beginning here.
The U.S. is by far the world’s most adaptable economy. That, our greatest strength, can be cruel to our people, more so than political structures overseas can survive.
Europe is having an impossible time calibrating its several labor forces to one currency. China is trying to change its engine without slowing the car, fearful that any downturn will expose the Party as the fraud that it is. The emerging markets are all in similar soup.
U.S. data has picked up — I think it’s more than just a rebound from another odd winter. The National Federation of Independent Businesses survey of small business is an especially important indicator, and it has nearly normalized.
There are flickers of rising incomes especially at the low end, although compressed incomes for the lower two-thirds of our people are our principal headwind. Defying our fabled flexibility: the runaway cost of health care, acting as an anti-productivity tax, and the same for higher education.
Still, the Fed has to come up from zero. Clue: The IMF is so worried about the effect of liftoff on the dollar, and its effects on the weak “emergings,” that it asked the Fed to hold off until next year. The huge dollar rise last winter versus all of the others (or their devaluation versus us — all is relative) was in response to the fact of QE overseas but anticipation of Fed liftoff.
QE elsewhere is not going to change much. But nobody knows the moment of Fed liftoff or the slope of increase beyond. Shoot, the Fed doesn’t know.
This liftoff process is going to last a long time, and we should expect big volatility in things like mortgage rates. Not just up, but up and down and up. Liftoff is a given, but the future slope of increases is not. Since the Fed is data-dependent — all of its forecasting models worse than useless, misleading — then so are we.
The world is going to stay in a low-rate era so long as competitive pressures cap inflation. In many places, central banks may have to QE-lean against deflation open-ended. However, mortgage rates can ricochet rapidly in the post-bust range, 3.5 percent to 5.5 percent.
Even a careful, “crawling” Fed pace (Vice Chair Fischer’s word) of increase in short-term rates will beget wild anticipation in long rates. One month thinking the Fed is coming hard (mortgages up), the next thinking it’s overdone (back down).
As we come out of a place we’ve never been before to a new place we’ve never been before, the bond market will have no bearings. We’re looking at a moving, but busted, compass.
The 10-year T-note in the last year, an obvious bottom in April after an hysterical one in February. Add 1.8 percent to get 30-fixed no-point mortgages. I do not expect any big retreat from here — not without some very bad news somewhere.
The 10-year back to Jan. 1, 2007, just before the credit bubble blew. There is a ton of resistance between here and 3 percent (mortgages just below 5 percent), and of course, the fundamental support that housing will crack at anything much above there. However, there is dwindling chart support for a return to the dead-rock-bottom of 2012-2013.
Small business is the guts of our economy, both actual performance and indicator. Hardly on fire, but in the last few months, it’s out of the deep hole.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
