Mortgage Market Updates

The immediate credit market response to a wave of new economic data is as-was, lowest fee mortgages 6.50%, 10-year T-note just under 4.00%.

However, last week marks very significant change: economic decline here and in Europe is now beyond argument, and the decline is fighting inflation for the Fed and ECB, neither of which needs to raise its rate further.

Evidence. The twin surveys by supply managers (“ISM”) in late June showed manufacturing at breakeven (50.2), and a surprising slide in the service sector (to 48.2 from 51.7). Friday’s much-anticipated payroll report had a loss of 59,000 jobs in June, and about that many lost in revisions of prior months. The ominous number, new claims for unemployment insurance, broke upward to 404,000 last week, the first time above 400K since the Katrina spike, and a recession level.

The stock market is obviously processing tough news, led by auto sales: sales collapsed 18.3% from June ’07 to June ’08. Chrysler off 35.9% and Ford minus 27.8% could be dismissed as punishment for bad management. Toyota off 21.4%? Toyota?

Ireland, Portugal, and Denmark have already posted negative GDP quarters this year. The June supply-manager survey in Spain cratered to 40.6, and the UK sank to 45.8 from 49.5; manufacturing is contracting now in France, Italy, and Austria. Germany’s export machine is the only forward motion in the Eurozone.

We will hear less from the crowd yapping for central-bank rate hikes, although they will seize on every temporary economic uptick, and on each inevitable but lagging rise in inflation. As their cry for policy error fades, politicians will fill the gap.

President Nicolas Sarkozy of France, an able and tough man, this week demanded that the ECB ease: “You can double, triple interest rates and that will not bring a decrease in the price of a barrel of Brent.”

Wrong! The world is in a commodity price shock because supply cannot expand as fast as demand in an overheated global economy. If the high prices of the commodities themselves fail to break demand, and to brake inflation, then it is the duty of the world’s central banks to break aggregate demand. Inducing recession is the only mechanism that will bring down the cost of a barrel of Brent. And it will.

Mr. Obama mentioned last week that economic stimulus may be needed, and “then the Fed could fight inflation.” This cognitive dissonance has ancient beginnings, recently deviling Ronald Reagan. The massive Reagan tax cuts in 1981 collided with Mr. Volcker’s recession, which made the inflation fight harder and longer than necessary. (The Supply Side fable lives on in some minds, but not in reality.)

The worst public-policy prescription: Congress and the Administration flooring the gas pedal at the same moment the Fed is on the brake. The result forces the Fed to put a second foot on. Aid the worst-hurt families (food-stamp equivalent for winter heating, extended unemployment benefits...), but allow the economy to slow. No more stimulus.

For Independence Day we have one hopeful estimate of future events unfolding in sequence. Ambrose Bierce warned against misuse of syllogism (“If one man can dig a post hole in 60 seconds, then surely 60 men can dig the hole in one second”), however, things are lining up nicely.

As Europe follows us into the tank, and then Asia, commodity prices will break, and credit losses will spread there, too. The great dollar outwash will reverse as foreign interest rates begin to fall, and cash will head here for safety. As commodities and the dollar reverse, so will inflation, first here, relaxing the grip on the American throat. Then the Fed will begin a gradual tightening process, new regulation on credit-creation in place, and we can get on with a lovely global recovery on sound footing.

Nothing troublesome ahead but another Asian overheating someday, and in the meantime figuring out what we’ll use for energy.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2008, all rights reserved.