Commentary: Don't be fooled.
The Commerce Department reported this morning that they have taken a second-look at the fourth-quarter 2010 economic data - and determined the economy only grew at a 2.8% annualized pace -- rather than the 3.2% pace the data wonks suggested back on January 28th. Grave sounding media sources are pointing to a decline in government spending as well as a drop in consumer spending from the 4.4% pace originally reported - to 4.1% this time around as the primary cause of the decline in Q4 economic growth.
What is really worth noting here is that even with today's downward revision the pace of economic growth is running along at its best level since the first three-months of 2006 -- and the revised fourth-quarter growth rate shows a remarkable acceleration from the third-quarter 2010 2.4% pace. The "so what" factor here as it applies to the trend trajectory of mortgage interest rates is straightforward - a faster pace of economic growth increases the aggregate demand for capital - which in-turn pushes up overall interest rates - including the ones your investors fire over to you everyday.
In the past several days I have talked with a number of you regarding the impact of rising fuel costs on the likely direction of mortgage interest rates. From my perspective here are a couple of things to bear-in-mind. While it is true that global oil prices have surged by roughly 15% to the $100 per barrel range since the antigovernment protests erupted in Tunisia, Egypt, Bahrain and Libya - you have lived and prospered through much worse. During the spike in the summer of 2008, oil prices topped $145 per barrel. In October of 2008 the national average price for a gallon of gasoline was $3.80 and the national average rate on a 30-year fixed-rate mortgage was 6.2% -- and people were busy buying houses and refinancing mortgages.
I'm not suggesting a sustained surge in energy prices does not have the potential to ratchet up inflation pressures and/or tilt the country back into another recession. I'm just saying current chatter along those lines is almost certainly premature. For now, the flight-to-quality buying spree that is single-handedly supporting the rally in the mortgage market is based more on anxiety than on any real evidence that the spike in oil prices is hurting the U.S. economy specifically - and the global economy in general. A couple of months of sharply higher oil prices would likely have a major impact - but a couple of weeks are not likely going to generate a noticeable decline in economic growth. When a large enough number of market participants come to this same realization - the current "flight-to-quality" buying spree will likely come to a screeching halt.
Looking ahead to next week -- Monday's Personal Income and Spending report will serve as one bookend - and Friday's February nonfarm payroll report will serve as the other. In between, market participants will get a look at the pace of economic activity in both the manufacturing and service sectors of the economy. The collective data is likely to support the view that the pace of economic growth and the attendant inflation pressures are beginning to accelerate. If my assessment proves accurate, the upward pressure on mortgage interest rates will probably ramp-up before the week is over.
THE MARKET IS ALWAYS RIGHT! . YOU AND I ARE SOME OF THE TIME
