Fed likely to continue hiking cost of money
All long-term rates fell again late last week. The benchmark 10-year T-note has broken below 4.2 percent, and an "origination fee" will buy a 5.5 percent 30-year fixed-rate mortgage.
Bond traders are placing recession bets. Not (yet) in expectation of a classic recession in which GDP growth would decline, but a "growth recession" in which GDP growth might slip to 1 percent or 2 percent annual, and the unemployment rate begins to increase. The rationale for a recession bet is this win-win equation: either high energy prices and a tightening Fed have already tipped over the economy, or a worsening inflation problem will force a tighter Fed and tip-over at a later date.
Evidence. Last week's breakthrough bond rally started with news of a steep drop in March orders for durable goods, and gained steam on Thursday's news that first-quarter GDP had grown only 3.1 percent. That's fabulous by European or Japanese standards, but not enough to support U.S. job growth. Internal aspects of the report were worse: "final demand" (purchases by business, government, and individuals) rose only 1.9 percent. The excess of 3.1 percent production over 1.9 percent demand is sitting on shelves and floors as unsold inventory, a disincentive to production in this quarter.
Second, the personal consumption expenditure deflator ("PCE"), used to convert nominal GDP to after-inflation, jumped to an annual 2.2 percent gain. The PCE is Federal Reserve Chairman Alan Greenspan's favorite, and the acceptable band for its movement is 1.5 percent-2 percent; if PCE is in a jailbreak, the Fed is coming no matter what collateral damage its inflation-fighting may (will) do to the rest of the economy.
Read the entire Lou Barnes article at Inman News