Long-term rates have broken down this week (versus unanimous expectations for going up), now the lowest since the first week of December — and if they fall another inch might drop another quarter-percent or more, taking lowest-fee mortgages back into the threes.
I doubt it, but we’re on the threshold. First things first: what’s happening now, then what might happen.
What’s happening now: Overseas edition
There is a lot going on.
North Korean leader Kim Jong-un knocked off his half-brother with a banned neurotoxin.
Homeland Security Secretary John Kelly and Secretary of State Rex Tillerson this week went to Mexico on a repair mission. After meetings, the two of them were dumped in long underwear and bare feet thirty miles west of Nogales and told to find their own way north to Arizona, pronto.
On the reassuring side, the security team with Michael Flynn replaced by H.R. McMaster is now the best in memory — if allowed to operate.
Europe is coming apart (again, cue violins): The yield on German 10-year bonds has crashed from 0.45 percent to 0.19 percent in the last three weeks, French ones are 0.98 percent, Italian 2.21 percent, Portuguese 3.95 percent, and Greek 7.45 percent — all in the same euro currency. This disparity is an increasing bet on Eurozone disassembly, despite some pretty good economic data.
What’s happening now: U.S. edition
The big spike in U.S. yields in the week after election, from 1.78 percent to 2.30 percent, was in anticipation of substantial economic stimulus from the new administration.
Since, these proposals have gone nowhere — no progress on any economic initiative. Rates and stocks slid during Mr. Trump’s speech on Friday, its economic content the sort of wild over-promises common to weak real estate developers.
More destructive was another lengthy assault on the “fake news enemies of the people.” This administration is itself a fountain of fake news, more so than any since the fabled Five O’clock Follies in Saigon.
The Fed meets March 14 and 15, and although the meeting is “live,” a hike possible, markets have dismissed the chance.
That dismissal may be a mistake; I’m in the small group wondering why the Fed would not hike. Economic data have been running hot. The employment data due this Friday may be definitive for a hike, and it’s not a good idea to bet on a standstill Fed and lower mortgage rates until we see those cards.
Parts of the economic team are okay, Cohn the Czar, Mnuchin at Treasury thus far walking a very careful line.
Mick Mulvaney, the new Budget Director, was elected to the House in the 2010 Tea Party wave and has spent his time there trying to cut Social Security and Medicare and leading the government shut-down opposition to any deficit spending. He will soon present a budget expanding the deficit, slashing spending elsewhere to maintain purity, the net stimulus highly questionable.
Mnuchin insists that the administration’s policies will restore “sustained” GDP (gross domestic product) growth above 3 percent. Aside from disbelief by essentially everyone outside the administration, the Fed as currently staffed would raise the cost of money to prevent such overheating.
What could happen
We do have a precedent for one part of government standing on the gas pedal while another stomps on the brakes: early Reagan. Very early. Volcker on brakes.
The 1981 experiment with Art Laffer’s supply-side tax cuts (which in theory would produce faster growth and more revenue) was recognized even by Reaganauts one year later as disastrous foolishness and required repeated tax increases in that and the next two administrations to fix.
The top people in this administration are now in place. However, best I can determine, four months since the election, no senior official has met with Chair Janet Yellen. Someone with more clout than I may pry at phone records to see if anyone has even spoken to her.
Mnuchin says he plans to renew the frequent meetings customary between Treasury and Fed Chair, but not yet.
The central economic policy of the administration is in obvious conflict with Fed governors and its vast economic staff.
At some point the administration will have to go public with the disagreement and with the Fed to find some market reassurance. Volcker’s solution was to find shelter by “controlling the money supply” as reason for 18 percent mortgages and 22 percent prime rate, which made inflation-fighting sense to the public, but which not even he believed. Thus he got away with doing what the Fed needed to do.
This time we’re staring at three empty seats for seven Fed governors, and of the occupied four, both the Chair and Vice Chair will be gone in one year.
Will the administration back Yellen, even passively as the Fed hikes? Insist that growth will top 3 percent even with the Fed leaning against it (welcome to Saigon)? Or oppose the hikes and announce that she will be replaced?
One 140-character bleat demanding easy money, and Mr. Trump will learn the difference between puffing hotels and fighting the media, and messing with global financial markets.
The U.S. 10-year T-note in the last week.
The U.S. 10-year T-note in the last week. The Fed minutes were released on Thursday, neither bloodthirsty nor reassuring, and do not account for that drop or the deeper one today. Europe is the most likely “cause.”
The 10-year T note in the last year.
The 10-year in the last year. Easy to see the 2.30 percent edge for a long drop below.
The ultra-Fed-sensitive 2-year T-note in the last year
The ultra-Fed-sensitive 2-year T-note in the last year, not telegraphing any Fed change at all.
The Atlanta GDP tracker
The Atlanta GDP tracker supports an up-shifted economy.
The Economic Cycle Research Institute (ECRI) is on fire, and it has a great track record.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
