Mortgage Credit News - May 30, 2008

After six weeks in a narrow range, a little not-so-bad economic news blew long-term rates to the highs of 2008: the 10-year Treasury to 4.13% (the first time above 4% since New Years), and low-fee mortgages to 6.375%. Both of those yields are better this morning, but we will not see five-something mortgages again without a new round of bad economic reports.

The psychology-reversing news came in two pieces. The rout started on Wednesday with the report of April orders for durable goods: down .5%, overall, but ex-transportation (airplanes and autos) up 2.5%, and “non-defense capital goods” plus 4.5%. Yesterday’s coup de grace: 1st quarter GDP was revised to plus .9% from .6%.

If these two reports seem less than spectacular signs of resurrection, you are well on your way to a degree in economics. These are lousy figures describing an economy with hardly any forward momentum. However, they are not recession numbers. For three-something Treasurys and five-something mortgages to look good to investors, recession fear must return.

The bond market is a binary place: the economy is either going to hell and it’s a great time to buy bonds, or the economy is okay and everybody who bought a bond is a greasy spot in the road. Despite widespread market forecasts of the latter (futures markets have the Fed tightening by fall), data describe an undecided economy: April personal income and spending each in negligible .2% gains, and at that inclusive of the first rebate checks. Brand new consumer confidence surveys are unchanged at the worst levels in 28 years. Note that stocks this week have not joined the all-okay party. Note further that close-cousin Canada’s GDP, despite resource-production boost, went negative .3% in the 1st quarter.

The credit crunch is still doing its work. Financing for car buyers is disappearing: subprime Americredit alone is contracting at a 340,000-vehicle annual pace. Last year two million autos were bought with proceeds of home equity lines of credit; half of that would be an optimistic estimate for this year.

The most extraordinary aspect of this not-quite recession spring: that the labor market has held together. The Fed has forecast a rising unemployment rate since last fall, to approach 6% this year, yet it sits still at 5.0%. The “why’ is very clear, now: the global economy is pulling us along.

In recent cycles forecasting the US economy by itself has not been all that hard -- the dozen big slowdowns in the last half-century have had useful similarities. However, the explosion in global commerce since 2000 has neither precedent nor parallel. Global forecasting today is a spectator sport -- neither science, nor art, nor darts, most data spun beyond meaning by investment salespeople.

Here’s a try at an ex-US centerline. The UK has all of our weaknesses and worse inflation; watch its recession develop and maybe see our future. The euro-zone has more internal variance than the difference between Detroit and Seattle: Germany, super-skilled at foreign trade, is still robust, only retail sales nosing over. The weak euro sisters, derisively dubbed “Club Med” (Italy, Spain...), are headed for as much trouble as the UK. The Continent’s 3.6% inflation, rising, may force the ECB to tighten into a slowdown.

Japan is in mothballs, population declining now, what little growth there dependent on pull-through of exports of components to Asia on their way to elsewhere.

“BRIC.” Brazil-Russia-India-China. Brazil is having a nice run, but is no global locomotive. Russia... here in the US we filet and fry oil executives; ex-Gazprom CEO Dimitry Anatolyevich Medvedev is president-elect. Kleptocracy, not engine.
India and China: locomotives. India’s GDP just “slowed” to 8.8%,

China “dipping” below 11%. Inflation rates in both have doubled since January. As they go, we will go, and will go oil.