Mortgage Credit News – July 2, 2009

News of a 467,000-job loss in June, one-third worse than forecast, is hurting stocks but no help to long rates: the 10-year is stuck at 3.50%, mortgages just under 5.50%.

Green Shooters say the payroll weakness was magnified by temporary auto-plant closings, and they point to signs of bottom in auto sales and housing prices, and see optimism in the June ISM-manufacturing survey crawling uphill.

Overall car and truck sales did have their least-bad month since last September, but still dropped 28% from last June. At an annual rate of sales near 10 million, temporary closings will become permanent, GM and Chrysler survival in doubt. Even if payroll-loss forecasts had been correct near 325,000, the figure would have been worse than the bottom of the 2001-2002 recession. Some inventory pipeline-filling is underway, May factory orders up 1.2%, but the ISM’s 44.8 is still five points into contraction.

New data support the Agent Orangers’ L-shaped non-recovery. The gradual rise in consumer confidence sagged in June, to 49.3 from 54.9 in May. Case-Shiller home prices did mark a bottom, but minus 18.1% year-over-year versus minus 18.7% is thin cheer. Applications for purchase mortgages fell at the end of June; refis are down 80%.

The credit panic has stopped. However, the public-policy panic is still underway, in a new stage: fibrillation at disappointing data, flinching from contingencies.

After the extraordinary measures taken last winter it was appropriate to give them several months to work. The Fed has been the hero in its dozens of interventions to stop runs on money-markets and commercial paper, to secure bank funding, and in the most expansive monetary policy ever, including outright purchase of $800 billion-worth of Treasurys and MBS so far this year. The authorities have failed to restore credit, still garroted by a banking system allowed to shrink. The stimulus has been a flop, if not a waste, a deeply anxious public saving most of the money.

If Perfesser Bernanke could today erase the term “green shoot” from the English language, he would. Another month of “L” data like this, and government will spring back into action. May the Saints preserve us.

Barack Obama is a good and charming man. He and his people have done extraordinarily well in foreign policy, and setting an open and inclusive tone at home. He has governed to the left of his campaign, but not far. All of his interventions in the financial world have turned away from nationalization (some de facto was inevitable, the automakers, Citi, BoA) and have emphasized public-private partnership.

That demonstrated competence makes his blind spot all the more unaccountable. Thus far Mr. Obama has absolutely refused to face the nation’s budget. His big social plans — Obamacare and cap-and-trade — have been hostage to a fiscal black hole from the get-go, but he has stuck to belief in a normal, cyclical economic recovery, and recovery in tax revenue. Mr. Obama is a good poker player, but he looks uneasy now, aware that he is overplaying his hand. He must know that he will soon face cries for more borrowing-spending stimulus from his own party, risking more harm than good.

Bill Clinton faced a smaller version of the same problem in his first year. He lurched left, pushing social “investments,” and then his Treasury Secretary, Robert Rubin, warned him: spend and borrow too much, and long-term rates will rise and choke your economy and your tax revenue. To Clinton’s great credit, he embraced discipline, cut a deal with Republicans, and produced the best fiscal performance since Eisenhower.

Mr. Geithner looks more bureaucrat than actor, and so today’s warning to the President comes directly from the bond market. Housing and the economy desperately need lower long-term rates, beyond the Fed’s power to deliver. Today’s awful data should have pushed rates lower, but the effect was completely canceled by the prospect of another wave of long-term Treasury borrowing next week.

If Mr. Obama will vow spending the nation can afford, and borrowing limits like any family, and put his people to work on credible plans, the bond market will listen. Fast.