Compressed verdict: mortgages are slightly higher than the 3.75 percent bottoms in the last two weeks, now close to 3.875 percent.
But nothing has really changed: the Fed and the global economy are in a unique pickle, the outside a mess, the U.S. economy plodding along. The Fed and U.S. divergence from the rest of the world is still widening. It’s stressing economies, volatile markets far more result than cause.
The first week of each month brings the largest load of new economic data, including snapshots of the prior month. This morning’s job data for January was on-trend, net of revisions and inherent error, although wages may finally be growing. Going from just under 2.5 percent growth to just above is not an emergency, but it’s at the heart of the Fed’s forecasting trouble.
The twin ISM reports were soft. Manufacturing continued in slight contraction, at 48.2 up from 48.0, while the service sector fell to the lowest level in two years, 53.5 down from 55.3 in December.
We also got trade statistics this morning, perhaps more important than domestic data. The total trade deficit stayed in bounds, but both imports and exports continued to contract, each now down 7 percent since the peak one year ago. That news is the perfect lead-in to the Fed and the outside world.
Bi-lateral trade makes both parties wealthier. The enormous increase in global trade in the last 30 years — half-again global GDP growth — has produced equally enormous corporate profits. That global increase traces to China, and the most extraordinary spurt in national growth ever seen. As everyone now knows, China’s growth has slowed to near standstill and global trade is shrinking with it.
China’s expansion was based on annual investments of 50 percent or more of GDP in infrastructure and production capacity (deflationary by itself). Two years ago China began to attempt “re-balancing,” and has failed at every turn. It’s easy to shut down some over-investment — China now is closing steel capacity equal to Japan’s entire production — but without an offsetting expansion in market economy, the whole show is barely stumbling forward.
As China retrenches, so must all who supplied her, and all who supplied her are less able to buy what she overproduces. Thus global trade is running in reverse. Toss in an oil over-supply shock, and a lot of the world is overextended. Many claim this is all just another debt bubble, but not so: the debt taken on to feed China’s appetite was reasonable at the time. But, exposed now, may nations in real trouble, the defensive reaction is to cut interest rates with the happy additional consequence of devalued currencies — which usually works unless all are trying at the same time.
Meanwhile, the U.S. central bank must deal with an economy at the outer limit of expansion (so it fears by traditional measures), and which historically has been proof against external slowdowns. In the all-time central-banking disconnect, the Fed proposes to tighten, and a lot, while the rest of the world eases.
The Fed has made its mistakes in its 103 years: sitting on its hands 1929-1932, far too easy during oil-price jumps in the 1970s, and missing the credit bubble.
The Fed is neither all-powerful, nor does it make its own charter. The principal reason the Fed missed the credit bubble: credit regulation was not its job, nor anyone else’s — Dodd-Frank has fixed that.
Nor is the Fed chartered by Congress to act as the world’s central bank. Its duty is at home. As often noted, the U.S. cannot be the world’s policeman, but nobody wants to live on a block with no cop. As integrated as the world is today, if nations and their central banks can’t act in concert, duty falls to the central bank of the largest economy.
Nuthin’ to it, right?
Fed Chair Janet Yellen knows. Much as I’ve yapped about evident disarray at the Fed, its time now to give them some slack. A little.
10-year T-note in the last week. Note the jump this AM on positive employment report, fading back to baseline since:
10-year T-note in the last two years. Still set up to try the all-time lows.
Fed-sensitive 2-year T-note in the last 12 months. The market is in complete disbelief of the Fed, a bad situation for both, especially the Fed.
The dollar has weakened, global markets also disbelieving the Fed. However, any threat to tighten combined withe the resilient U.S. economy will keep the dollar over-strong as the outside world is desperate to devalue.
Job growth since 2009 (and before the recession) has been other-worldly consistent. I think more so than the economic reality.
If wage gains become a trend, then the Fed will have to tighten, outside world or no.
Same for GDP growth. The Atlanta Fed tracker has been spooky accurate, but some transient data in early February may have caused the spike below. However, if the second half of 2015 turns out to have been a soft patch, growth accelerating now, the Fed will have to proceed, and a lot of damage will follow:
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
