Tangerine Dreams

Today we dip into the mailbag.

How high will the funds rate get?

I have no earthly idea.

What do the latest IP numbers show?

According to

numbers released Monday, industrial-production growth, which has been accelerating since the first quarter of 1999, is currently running at a 6.1% year-on-year rate, its fastest since the first quarter of 1998. It also shows that capacity growth, which has been decelerating since the fourth quarter of 1998, is running at a 3.7% year-on-year rate, its slowest since the fourth quarter of 1994.

The gap between these now stands at 2.3 percentage points, the biggest such spread since the first quarter of 1995 (our

data page has a great chart of this). Capacity utilization has risen to 82.1% now (compared to the 1967-1999 average of 82.0%) from a first-quarter 1999 trough of 80.4%.

The global-capacity glut is growing less glutty, and we now have less spare capacity here at home than we've had at any point in almost two years. During that time, policymakers only needed to worry about tightness in labor markets; now product-market tightness figures into the equation. Recall that when the 1994 tightening cycle began, utilization stood at 82.0% (and had risen just seven-tenths of 1% during the year prior). It ended up peaking at 84.4% a month before the cycle ended.

How high will the funds rate get?

Asked and answered.

Are you still upbeat about the bond?

Yup.

Yields have been rising since April 10, when they settled at 5.69%, but they're still more than half a percentage point lower now (6.23%) than they were when they peaked on January 18 (6.75%).

Recall that bond yields peaked three months before the last tightening cycle ended: They settled at 8.16% on both Nov. 4 and Nov. 7, 1994, and the last hike of the cycle didn't hit until February 1, 1995. (Note also that the yield on the two (the two-year Treasury note) peaked at 7.74% on Dec. 23.

Yields also peaked seven months before the 1988-1989 tightening cycle ended: They settled at 9.32% on Aug. 25, 1988, and the last hike of the cycle didn't hit until March 10, 1989. The yield on the two, meantime, peaked at 9.92%, 11 days later.

This time around bond yields have either already topped out, in which case they will have peaked more than seven months before the end of the cycle (because it's tough to believe that policymakers will be finished by August), or they'll run up and mark another high. Either way, I trust a bond signal more than I do the average market economist or analyst. Maybe that ain't the way to go this time. We'll see.

How high will the funds rate get?

Fine. 8% or so. OK?

Now please quit asking.

Why are you always so grumpy?

That's just the way I come across in writing.

Weird, that.

I'm actually one of the happiest people I know.

Side Dish

There's much talk today in the trading community today about a central-bank

piece that appears in a Chicago paper.

Listen up. For a columnist to suggest that he or she knows precisely what went down in the boardroom on Tuesday is s-t-u-p-i-d. Cause he or she most certainly does

not

know.

Period.