Payroll report arrives next week
Most of a bond-market fright has passed, and long-term rates are back to the low end of a range that has held since last July: low-fee mortgages are 5.625 percent and the 10-year T-note is 4.13 percent.
Long Treasurys had traded 4.22 percent in anticipation of all the things that could go wrong next week. On Wednesday the Fed will hike another quarter-point to 2.5 percent, but hints at its future intentions in the companion statement are the scary part. Next Friday will bring news of January payrolls, each month's single most-powerful bond-market-moving datum, each defying all attempts at forecast. Then there's the Iraq election, the State of the Union and congressional reaction – in sum, enough to make sensible traders get under their desks and stay there.
Offsetting all that this morning: 4th quarter '04 GDP rose only 3.1 percent, almost a point under forecast (the United States bought foreign production, not its own). Also in the report: the best measure of inflation, the core personal consumption expenditure deflator, rose at a 1.6 percent annual rate (just about perfect); and 2004 wages gained a sorry 2.4 percent, the worst performance since Q2 '99 and hardly an inflation threat.
The linkage between politics (foreign and domestic) and economics runs through the financial markets. Nobody has a good explanation for the lock-up in that linkage in the face of so many things that cannot remain as they are. (Exception: the consistent and predictive thinking at www.hoisingtonmgt.com.)
The Congressional Budget Office says the federal deficit will increase to $427 billion this year. John Snow, Treasury Secretary and dead-pan court jester, in a line worthy of Henny Youngman: "We are not under-taxed." Horsefeathers: tax receipts are the lowest since WWII. The bond market did not even flicker at the deficit increase; maybe saw it coming, but it is coming.