Danny Salas

Archive for July, 2007

Chico, CA Interest Rates Market Report – Economic Influences – July 31st, 2007

Inflation Slowing Its Pace

We should thank Good ‘Ole Ben for watching his comments appropriately and helping interest rates by stating, “Core inflation should edge a bit lower, on net, over the remainder of this year and next year.  If energy prices level off as currently anticipated, overall inflation should slow to a pace close to that of core inflation in coming quarters.” 

Rates are bouncing between the 25-Day and 40 & 50-Day Moving Averages

Bonds have been basically taking a ride on the 25-day moving average and fortunately just hanging out just above this trend line.  Remember, when Bond prices go up (their yields move down), home loan rates improve, and when Bond prices go down (their yields move up), home loan rates worsen.  A good mortgage b roker will follow these movements and know when a good time to lock in an interest rate is.  Also, there are “trends” that bonds (mortgage backed securities) follow.  For example, as mention above, the 25-day moving average, however, there are also 40-Day, 50-Day, 100, 200, etc.  This past week we have been bouncing in-between the 25-Day and the 40 and 50-Day moving averages.  So, the current “trend” is just above the 25-Day moving average…so since we’re above that, it acts as a level of support for interest rates.  If we can get enough economic information to catapult us above the 40 and 50-day moving averages, then we could see lower rates.  If you don’t understand what I just wrote, go back and read it again.  It’s an excellent explanation as to how this stuff works, I don’t mind saying so, myself! 

Median Priced Home Moving Up

Existing Home Sales for June were at 5.75 Million Units.  Less than the 5.90 Million expected.  However (and this is a big however), the median home sales price increased 0.3% to $230,100.  This is the first year over year price increase in 11 months.  Also, the monthly sales inventory dropped from 8.9 months to 8.8 months.  Further evidence that the housing market is stabilizing and not as bad as the media is portraying. 

Obviously, the stock market has been of some interest lately.  Generally, stocks and bonds move in opposite directions, as if stocks are moving down, then people pull money out of stocks and move them into bonds.  With stocks at some all-time highs, as of late, and with oil giant Exxon reporting weak earnings, you can just imagine how volatile the stock and bond markets have been recently.  To add to the turmoil, the Gross Domestic Product numbers are showing hotter than expected at 3.4% (causing rates to increase), but Tuesday’s release of the Fed’s favorite gauge on inflation, the Core Personal Consumption Expenditure (PCE) Price Index was reported at a cool 0.1% for June.  This also shows the year-over-year Core PCE at 1.9%.  Remember from last articles that the Fed wants to see inflation between 1-2%.  Consumer Confidence is way up, so people are still ready to spend their money. 

It looks as though the real estate market is stabilizing, and we should be set for a nice bond and interest rate rebound.  So, get ready…but keep in mind…how quickly markets change…

Chico, CA Interest Rates Market Report – Economic Influences – July 24th, 2007

Bernanke’s Statement

Well, Federal Reserve Chair Ben Bernanke’s statements did have an influence on the market.  Wednesday and Thursday of last week he spoke to Congress and The Senate and his question-answer session went fairly well for Bonds.  Even though he mentioned that inflation is still a concern, he said that recent numbers have been showing moderation of inflation.  So, we should thank ‘Ole Ben for watching his comments appropriately and helping interest rates.  “Core inflation should edge a bit lower, on net, over the remainder of this year and next year.  If energy prices level off as currently anticipated, overall inflation should slow to a pace close to that of core inflation in coming quarters.”  Also of particular interest were his comments on “the ongoing housing correction…”  The media is just so dang powerful…they report what they want.  Here’s what transpired:  …”might prove larger than anticipated,” was the complete sentence that the media was so quick to print.  But here’s the big picture…he goes on to say that …”larger than anticipated and impacting consumer spending,” but that consumers are spending at a very wholesome stride. 

Dow Tops 14,000

Not too much information to report on this last week, so interest rates and bonds have been battling it out with the Stock market to see which investment would be more beneficial.  Rates have been moving up and down, almost on a daily basis, with one day stocks doing well…then the next day bonds doing well.  As you probably heard, the stock market broke a record 14,000 mark on the Dow…then Google came out and reported disappointing earnings which sent shockwaves through the market, and investors immediately got spooked and moved money from stocks, to bonds. 

Remember that when Bond prices go up (their yields move down), home loan rates improve, and when Bond prices go down (their yields move up), home loan rates worsen.  A good mortgage broker will follow these movements and know when a good time to lock in an interest rate is.  There are also “trends” that bonds (mortgage backed securities) follow.  For example bonds will make a 25 day, 50 day, or 100 day moving average that they like to stay close to.  By watching and measuring these “averages” or “trends” you can generally tell where bonds (and therefore interest rates) will move. 

Bonds vs. Stocks – Who Will Win?

We have been battling-it-out with the 25-day moving average for quite some time.  Friday, we finally ended the day above that hard trend-line of resistance.  We have remained just above this for a few days.  Thursday, we had initial Jobless Claims lower than the last two months still suggesting a strong labor market.  This Monday, foreign investment six-month T-Bills was strong.  More bond sales are occurring Tuesday, so foreign investment is huge regarding where interest rates will go.  Let’s keep our fingers crossed.  If we can continue to show strong foreign investment in our bonds, we should be able to break above that stubborn 25-day moving average and see better rates.  If stock earnings are reported strongly; then it would weaken any gains.  How quickly markets can change…Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – July 17th, 2007

Watching the Subprime Loan Situation?

Well, last week I had indicated that Good ‘ole Ben Bernanke would be speaking out and that I would report about his comments, and how the market reacted, this week.  Well, when Ben spoke, mortgage backed securities…didn’t even react…they were too busy watching the stock market…how’s that for anti-climactic? 

Something that we should be watching is this whole subprime loan situation.  I’m sure you’ve been reading about it lately.  Well, some bond rating services from Standard & Poor’s and Moody’s are considering, or may actually be in the process of, lowering the credit ratings of Mortgaged-Backed Securities.  When a large amount of A-Paper Loans are pooled together and offered for sale, they generally are accompanied by some subprime loans as well.  So the entire pool could potentially be contaminated and this could bring the pricing for Mortgage Bonds to a more risky level.  This could hurt interest rates, in the future. 

We’ve really been having a difficult time breaking through the 25-day moving average.  If fact, we continue to bounce off of that level of resistance, and the trend line keeps moving lower…so rates keep moving a little higher, as that trend line lowers (remember, when Mortgage Backed Securities move lower, their yield moves higher, causing interest rates to move higher). 

Wal-Mart Staying Strong

Last week, WalMart reported a much stronger than expected 2.4% increase in their sales for June of 2007.  In the pits, on Wall Street, there is a common saying, “As goes WalMart…so goes Retail.”  So rates moved up on speculation that Retail Sales will be strong (based on WalMart’s reports).  Again, speculation moving our markets…I keep talking about this…but a funny thing happened…Retail Sales plunged -0,9% in June.  This was the lowest level reported since August of 2005.  Over and above that, previous numbers for April and May were revised lower.  This was a big surprise for the markets and we enjoyed a little breathing room.  Interestingly, the University of Michigan’s Preliminary Consumer Sentiment Index for July was reported at 92.4.  Much higher than the 85.5 that was expected.  What this means is that consumers weren’t spending too much money in June, but they felt as though their financial outlook for the future looked promising.  Go figure…now that’s optimism, hey?  

Some great news regarding foreign investment in our bonds!!! 

$126 Billion was invested in US Securities, when we only expected $72 Billion of foreign assistance.  Remember that we have been watching this VERY closely, as foreign investment has really helped keep our long term rates lower.  So this was very good news to see. 

The Producer Price Index (PPI) for June, was reported at -0.2%, lower than expectations, but the Core PPI rose 0.3%.  This was not good for interest rates, but the bigger news will have to wait until next week issue, as print time is hounding me.  Also, I’ll have to wait to comment on Ben Bernanke’s semi-annual monetary policy report to the House of Representatives Financial Services Committee.  Then he speaks to the Senate Banking Committee.  It will be interesting to see how the financial markets will react to the question and answer event.  Let’s hope that Bernanke can keep his comments on inflation at a level that the markets can cope with.  I’d hate to have another anti-climactic article…Until next week

Chico, CA Interest Rates Market Report – Economic Influences – July 10th, 2007

Fourth of July Flares…Not Necessarily Good

Sparks certainly did fly, rockets glared, and the fireworks…well they went off too.  Off to a hot new jobs number that sent mortgage-backed securities tumbling on Friday.  Last week we discussed the probability of a volatile week, due to the Fourth of July Holiday.  Let’s just take a look at this yo-yo of a week.  Tuesday was sort of slow.  There was no real economic information reporting, so the day looked promising.  Unfortunately, Thursday had to show up and ruin a perfect Fourth of July Weekend. 

Foreign Investors Pulling Out of US Bonds?

If you’ve been following this article on a weekly basis you’ve noticed that I have discussed foreign involvement in our bond market has been keeping our long term interest rates low for many years.  However, when short term rates are climbing in other countries, and there is talk of our Fed leaving the overnight rate alone, foreigners have an opportunity to move their money out of our market and into others’.  Well, Thursday, the Bank of England raised their overnight rate to 5.75%.  Keep in mind that our overnight rate is 5.25%, so you do the math.  This really pressured bonds and we had, yet another set back.  Some good news came out of the European Central Bank, as they decided to leave their overnight rate untouched.  There still is concern that they will continue to raise their overnight rate in the months ahead and into 2008. 

Speculation Can Move Markets

Thursday also offered information that ADP (our nation’s biggest payroll company) stated that there were 150,000 new jobs created in the private sector for June.  Coupled with 25,000 new government jobs, the market went crazy thinking that the Friday Jobs Report was going to be significantly more robust than what experts anticipated.  Remember my comments about how speculation can sometimes have incredible effects on markets?  This is another example.  Turns out that the ADP was actually right for once!  They have been incredibly incorrect with their estimates, in the past, however Thursday’s numbers were supported by a higher than expected 125,000 number when reports came in at 132,000 jobs.  To make things worse, 75,000 were added to previous months’ numbers. 

Unemployment Remains Low

Other factors that influenced rates were that average hourly earnings were up 0.3% for a 12-month gain of 3.9%.  Unemployment also remains low at 4.5%.  So with all of this employment information continuing to show strength, a tight labor market puts pressure on waged based inflation.  And remember, inflation is bonds and mortgage backed securities worst enemy!  By the time this article is sent to print, Good “ole Ben Bernanke will have spoken about inflation in a speech, Wednesday at 1 PM, Eastern.  I’ll report next week as to what Ben said, and how the markets interpreted what he said. 

A nice boost for lower rates was the corporate earnings announcements for the second quarter.  Disappointing earnings sent stock markets lower, and thereby moving stock money into bonds.  There’s not much activity expected until Friday’s Retail Sales and Consumer Sentiment numbers arrive.  So, until next week…