More news on the same front: REH
March 8, 2003 Rates Keep Sliding Toward the 1950's By JONATHAN FUERBRINGER Interest rates are nearing their lowest levels in decades, surprising economists who predicted that rates would start rising this year. In the mortgage market, the average rate on a 30-year fixed loan fell to 5.67 percent this week, according to Freddie Mac, the lowest since at least the early 1960's. The average on a 15-year mortgage fell to 5.01 percent, and many lenders are now offering rates below 5 percent on such loans. The yield on the Treasury's benchmark 10-year note was at 3.65 percent, just a few ticks away from the 44-year low of 3.57 percent reached in October. The yield on the two-year note was 1.40 percent, the lowest since the 1950's. Yesterday, after the government announced a surprising loss of 308,000 jobs in February, economists began talking of rates falling even further as the economy's pace slackens. "All this points to a slowdown in the second quarter," said Louis Crandall, chief economist at Wrightson ICAP. The signal of economic weakness also drove some analysts, including Mr. Crandall, to switch views and predict that Federal Reserve policy makers would cut rates when they meet in a week and a half. The Fed's benchmark rate is already at a four-decade low of 1.25 percent. "We think the Fed is doing the same thing we are doing, cutting their economic forecast," said James E. Glassman, senior United States economist at J. P. Morgan, where the growth prediction for the first half of this year has dropped to 1.5 percent from 3 percent in the last two weeks. "So we think they will cut rates at their next meeting." Merrill Lynch also said it now expected a Fed rate cut on March 18. The decline in rates is not what many forecasters had predicted for 2003. They were not expecting interest rates to shoot sharply higher, but they did forecast an upward tilt that would cool the bull market in bonds. Fixed-income securities have outperformed the stock market for the last three years. But forecasters did not anticipate the continued weakness in the labor market or the crimp in consumer spending from the jump in crude oil prices to almost $38 a barrel. Nor did they foresee how much of a drag the threat of a war with Iraq and the nuclear arms standoff with North Korea would be on economic growth or how geopolitical uncertainty would cause investors to continue seeking shelter in the Treasury market. The drop in mortgage rates, though, is a bright spot. Consumers who are refinancing mortgages, reducing their monthly payments and sometimes drawing equity out of their homes have been able to continue spending, an important support for the economy at a time when business investment has been weak. "Low interest rates are truly a powerful stimulant for the housing market and the economy as a whole," said Frank E. Nothaft, chief economist at Freddie Mac. But he acknowledged that "a couple of months ago I would not have said they would have gotten this low." Mr. Nothaft said that his data on mortgage rates went back to 1963 and that this week's 30-year mortgage rate of 5.67 percent was the lowest since then. He says, however, that mortgage rates were still lower a few years earlier. His parents, he said, got a 25-year mortgage with a rate of 4.75 percent in 1958. Mr. Glassman of J. P. Morgan said, "We've got the feeling that we are on the cusp of a new mortgage refinancing wave." The mortgage refinancing index compiled by the Mortgage Bankers Association rose this week to its fourth-highest ever. The record high was reached the week ended Oct. 4. But Mr. Glassman added that the economic booster shot from lower interest rates could be less than expected. That is because the steep decline in rates is taking away income from people, many of them elderly, who depend on interest income. "It is not clear that the country as a whole benefits," he said. Alan Greenspan, the chairman of the Federal Reserve, has counted on the consumer spending stimulated by mortgage refinancing and home sales to get the economy through what he has often called a "soft patch." But the drop in mortgage rates to 40-year lows comes in the same week that Mr. Greenspan said that the withdrawal of equity from homes "is likely to appreciably simmer down in 2003, possibly notably lessening support to household purchases of goods and services." Although several economists have switched their view on the likelihood of a Fed rate cut, the overall probability is still not that high, based on the futures contract on the federal funds rate, the benchmark for the Fed. The April contract is reflecting just a 38 percent chance of a rate cut by then. "People don't appreciate that 60 days from now things will be radically different, one way or another," said Robert J. Barbera, chief economist at ITG/Hoenig. "I would think, therefore, that the Fed would want to watch and wait with the rest of us." Mr. Crandall of Wrightson ICAP argued that Fed policy makers would make a quarter-point cut, to 1 percent, "on a precautionary basis." He said that Fed policy makers had made it clear that they think that the cost of allowing the economy to slow further is so great that a bit of a rate cut as insurance is likely. In the Treasury market, the yield on the 10-year note fell to 3.58 percent after the release of the February employment report showing the sharp decline in nonfarm payroll jobs. But as the stock market managed to shrug off an early loss, yields moved higher. Rumors, later denied, of the capture of two sons of Osama bin Laden also helped send yields higher. By late in the day, the price of the 10-year note was up 232, to 1012932, while the yield, which moves in the opposite direction, was unchanged at 3.65 percent, down from 3.69 percent a week ago. Copyright 2003 The New York Times Company | Privacy Policy ----- Original Message ----- From: Ed Weick To: futurework Cc: Ernie Cox Sent: Saturday, March 08, 2003 10:52 AM Subject: [Futurework] It's the economy, stupid! Is there a rabbit in the hat? If so, is it real? Ed Weick Jobs flee U.S. in wake of war fears, bad weather Bruce Little, Globe and Mail, March 8, 2003 In a crushing combination, weather and war jitters teamed up to eliminate more U.S. jobs in February than were lost after the September, 2001, terrorist attacks, kindling fresh speculation that the U.S. Federal Reserve Board will cut interest rates again soon. Employers slashed 308,000 jobs from their payrolls in February -- the biggest decline in 15 months -- and nudged the unemployment rate up to 5.8 per cent from 5.7 per cent in January. In a pattern that became familiar during 2002, but flipped briefly in January, the dreadful showing in the United States found its mirror image in Canada. When Mr. Bush took office in 2001, the budget office predicted cumulative 10-year surpluses of up to $5.6-trillion, but most of those disappeared in tax cuts and higher spending. Yesterday's twin reports were not happy news for a President who will face his campaign for re-election next year. In recent polls, U.S. voters, traditionally more influenced by the economy than foreign policy, have signalled their disquiet about Mr. Bush's performance. The President's father, George H. W. Bush, hugely popular after the first Persian Gulf war, lost the 1992 election to Bill Clinton because of slow economic recovery from a recession. That was when Clinton strategist James Carville famously coined the phrase: "It's the economy, stupid." The latest plunge in U.S. employment -- which can only raise fears of even bigger deficits -- stunned analysts who were expecting a small increase in the number of jobs. Harsh weather and the call-up of armed-forces reservists contributed to the slide, but the looming war in Iraq -- now regarded as a sure thing after Mr. Bush's news conference on Thursday night -- appears to have played a role, too. "Like deer caught in the headlights, American businesses continue to postpone hiring decisions until the uncertainty surrounding the Iraq issue is resolved," Bank of Montreal economist Sal Guatieri said. Economist Avery Shenfeld of CIBC World Markets Inc. said special factors cannot hide the "fragility of the past year's expansion." "Sure, the weather was bad, but the worst storm actually hit after the survey week for these data. Sure, war fears have kept hiring in check, but some of the losses -- such as those in manufacturing -- are merely an extension of a trend dating back several months." Reservists had some impact, he added. But "the rest of the blame lies on a recovery that has failed to gather sufficient momentum, and a global economy that has kept pricing power in check, leaving businesses trying to restore profits on the back of cutbacks in hiring and spending." The job report focused new attention on the Fed, which will meet in 10 days to decide whether to keep its target federal funds rate at 1.25 per cent -- a four-decade low -- or reduce it further. For the time being, financial market trading indicates that investors think there is only a 50-per-cent chance that the Fed will move on March 18, economist St�fane Marion of National Bank Financial Inc. said. But the chance of a rate cut at its May 6 meeting vaulted to 80 per cent from 50 per cent after yesterday's job report, he added. Economist Pierre Ellis of Decision Economics Inc. in New York called the payrolls figure "catastrophically weak." "Barring some fluke element to it, which does not seem apparent, the Fed is going to have to think very seriously about cutting interest rates," Mr. Ellis said. "This kind of job loss translates into potential serious damage to consumer spending. A decline in consumer spending would put the economy into double-dip recession very quickly." Although there have been a few positive signs recently that the U.S. economy is getting through its slowdown without too much damage, some high-profile data released recently have been dreadful. The Institute for Supply Management's monthly readings indicate that business activity slowed in January and February, especially in U.S. factories where a revival that was budding in late 2002 appeared to be slipping away. Consumer confidence plunged in February for a third consecutive month as war fears, weak job growth and rising fuel prices sapped the optimism of Americans. Those declines and "the general background of rising uncertainty" suggest that the Fed will cut its key rate by 0.25 percentage points to 1 per cent on March 18, economist Paul Ashworth of London-based Capital Economics Ltd. said yesterday. "We continue to believe that interest rates will end the year at no higher than 0.5 per cent." Royal Bank of Canada joined those expecting the Fed to cut at its next meeting. Bank economist Allan Seychuk said that little in yesterday's data suggests consumers can keep spending, especially because demand for autos and housing is almost exhausted after months of surprising strength. _______________________________________________ Futurework mailing list [EMAIL PROTECTED] http://scribe.uwaterloo.ca/mailman/listinfo/futurework
