Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – June 4th, 2007

When Bernanke Talks...Rates Listen

FED Minutes Released

Last Wednesday, May 30, 2007, the Fed Minutes were released from May 9^th Fed Meeting.  The following statements were made, “nearly all participants viewed core inflation as remaining uncomfortably high,” and “all participants agreed the risks around the anticipated moderation in inflation were to the upside.”  So even though the Fed indicated that they felt as though the economy was growing at a slower pace and that rates should come down as a direct reflect of this, rates didn’t react normally, as inflation is still too much of a concern.

Interestingly enough, the Preliminary Gross Domestic Product (GDP) numbers were released and lowered to 0.6% which was lower than the expected 0.8% for the first quarter of 2007.  This showed the slowest growth since the last quarter of 2002.  Two consecutive quarters of negative GDP is a Recession, however, it’s expected that the second quarter of ‘07 will be better.

Market Movers

Something that should have moved the markets was that China tried to cool off their red hot stock market by increasing their “stamp tax” on stock trading transactions.  So, Chinese investors would have to pay more to execute a stock trade.  This caused the global stock markets to tumble, enabling money to move from stocks to bonds, however, it was very short-lived, and basically, within twenty-four hours the global economy and particularly US Stocks ignored the maneuver. 

For the past few months I have been talking about the Core Personal Consumption Expenditure (PCE) Index for April, which measures core consumer inflation.  This gauge is generally the Fed’s favorite measure of inflation.  Finally, we hit below expectation levels at 0.1%  Therefore, the Fed’s year-over-year core rate of consumer inflation fell to 2.0%.  This is the level that the Fed wants to see inflation, from 1.0 to 2.0%.  Unfortunately, it did not help Mortgage Backed Securities because the Jobs Report was much hotter than expected.  157,000 new jobs were created in may, when we only expected 137,000.  Unemployment remained at 4.5%. 

Ben Bernanke Speaks

Tuesday morning, Fed Chairman Ben Bernanke spoke at a conference on housing and the economy.  He stated that the economy is expected to move moderately at an annual growth rate of 3%, however, he also mentioned that, “inflation risks remain on the upside.”  This caused the mortgage backed securities to tumble 28 basis points.  Remember, bond values declining means that their yields are increasing, causing increasing interest rates. 

So, when will we hit bottom and move from this vacuum of downtrend movement in bond prices?  Until we see stocks moving lower, everyone is enjoying the ride by moving money out of bonds into stocks.  It will change, but when is the question.  So, how high will rates go until we see the ride come to its end and you get off the high riding Matterhorn and Space Mountain feel, to a simple glide down the California Adventure path?  We’ll have to wait and see how and when the market will change…Until next week.

This entry was posted on Monday, June 4th, 2007 at 5:45 pm and is filed under Chico Home Loans, Home Buying, Interest Rates, Weekly Market Report. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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