Danny Salas

Archive for September, 2007

Chico, CA Interest Rates Market Report – Economic Influences – September 25th, 2007

Can The Fed Prevent A Recession?

Last week I had mentioned the lowering of the Federal Reserve’s overnight rate by 0.5% and the effect that it would have on the markets.  I indicated that, “Our advice here would be to see how far the initial reaction will go…lock when traders realize that this is not really good for bonds…”  So when the Fed did this on Tuesday, interest rates reacted quite favorably with bonds moving upward forty-one basis points.  But how short-lived this was…as predicted, bonds started heading in the opposite direction as soon as the very next day!  First, here’s what the Fed had to say about their cuts; “Economic growth was moderate during the first half of the year, but the tightening of credit conditions has the potential to intensify the housing correction and to restrain economic growth more generally.  Today’s action is intended to help forestall some of the adverse effects on the broader economy that might otherwise arise from the disruptions in financial markets and to promote moderate growth over time.” 

In Short…

In other words, the Fed will take whatever precautions necessary to try and prevent a recession, as long as inflation is kept at bay. 

The biggest concern, here, is this:  The dollar is at its weakest point against the Euro and current at the same value as the Canadian Dollar.  This puts inflationary pressure on the United States, because imports will now be more expensive to purchase.  Remember that inflation is interest rates worst enemy! 

I Predicted Correctly!

Interest rates reacted exactly as in last week’s prediction…our locking advice was strategically precise.  We have also moved, again, below that darn 200-day moving average.  For so long it acted as a level of resistance to better interest rates.  Then we finally moved above it for about a weak and half, and again…we’ve managed to plunge below it.  But keep in mind that conforming interest rates are still at excellent levels with APR’s below 6.5%.  And with Friday’s release of the Fed’s Favorite gauge on inflation, the Core Personal Consumption Expenditure Index, let’s hope that we see inflation in check. 

FHA Reform Bill

Remember when I was talking about the government getting involved with the credit crisis?  Well the House just passed the comprehensive FHA reform bill.  This will still has to go through the Senate, however, it would do a number of things, including enabling lower down payments and increasing the loan amount the FHA loans will insure.  Currently, the FHA loan limit in our area is $304,000.  That means that the Federal Government will insure a certain percentage of a loan to a lender.  Hence, the loan could be sold in the secondary market with some guarantees.  By raising the loan limit to $417,000 it would assist in this liquidity crisis by enabling more loans to be sold.

So, we’re watching the 200-day moving average closely, and most of the economic information will be release this week, after I write this article.  So, let’s see what happens throughout the week and I’ll report it to you then… Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – September 18th, 2007

“A Perfect Time To Lock”

Well, the news is out!  After an interesting week of relatively calm economic information coming out of the markets, the long awaited anticipation of the release of the Federal Open Market Committee’s (FOMC) Monetary Policy is here…but you’ll have to wait.  Let’s go over this past week’s calendar.  First of all, last week I told you about the Jobs Numbers coming in at a net loss of 4,000 jobs.  That started speculation that the Fed might lower the overnight rate 0.5% point as opposed to the 0.25% reduction anticipated, before these jobs numbers.  So remember when I said, “A perfect time to lock!?” Let me pat myself on the back!  I also received a wonderful bottle of wine from some extremely pleased clients who follow this article, and understand why I chose to lock their loan in when I did. 

Lock OR Float?  When AND Why?

Throughout the rest of the week, we saw noticeable price erosions as investors lost their feeling that a 0.5% cut was likely.  We did decide to float new loans, however, from applications taken after the window of opportunity late last week.  Here’s why: 

Remember the stubborn 200-day moving average that acted as such a heavy line of resistance for so long?  Well, since those jobs numbers, mortgage backed securities have been able to stay above that trend line, hence, making it a heavy level of support.  So, with the release of economic data having little effect on rates, and the stock market not moving too much in any one direction this past week, rates have remained relatively stable.  All in anticipation of the FOMC meeting!  Even Retail Sales were lower than expected.  Particularly taking out auto sales numbers they fell by an astonishing 0.4% below expectations.  The largest decline in a year!  But investors favored waiting on Bernanke’s report. 

Michigan!  What Do They Know?

The University of Michigan’s Consumer Confidence Index was surprisingly higher than expected.  This pushed investors to believe that as long as consumer confidence remains healthy and the Fed kept liquidity in the markets, an economic slowdown would only be temporary and long term interest rates would continue to move higher.  Now, I don’t know what consumers you’re out their talking to, but what’s going on in Michigan?

When Greenspan Speaks…

Did you see Alan Greenspan on 60 Minutes Sunday Night?  He’s out pushing his new book “The Age of Turbulence:  Adventure in a New World.”  Our old fearless FOMC leader stated, that the greatest problem facing our economy is “the re-emergence of inflation.”  Not a very good comment for interest rates, as inflation is its worst enemy

Drum roll, please! 

Here’s the announcement!  A surprise move of 50 basis points!  Now, while the market reacted quite nicely, initially, the fed also commented that, “inflation remains a concern.”  Our advice here would be to see how far the initial reaction will go…lock when traders realize that this is not really good for bonds…as money will go into the stock market and away from bonds and mortgage-backed securities.  So watching the market closely and locking into an interest rate just before bond values start declining would be prudent and you will have beaten the system, so to speak…Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – September 11th, 2007

Stubborn Trend Lines FINALLY Broken

Last week we were talking about two things of great importance.  Mortgage Backed Securities difficulty regarding moving above the 200-day moving average, and what the Jobs Report numbers would be. 

Well, first thing on Wednesday morning, Automatic Data Processing came out with their ADP National Employment Report.  The ADP National Employment Report is a monthly estimate of private non-farm employment in the United States based on aggregated and anonymous ADP payroll data.  Now, they haven’t been the most reliable source regarding employment numbers, this past year.  However, the markets still watch them very closely and react to the information that they report.  The government expect 123,000 new jobs for the month of August, however, ADP’s figures came in at 65,000-significantly lower than expectations.  This resulted in the first significant rise above the 200-day moving average…FINALLY!  The next day we lost some ground, however, mortgage bonds sat at $100.22 level.  They 200-day moving average was at the $100.14 level.  Just $ 0.08 above.  Talk about positioning itself causiously in line with the next morning’s report. 

More Job Loses

Sure enough, Friday morning’s Job Report was below expectations.  Far below!  As opposed to 123,000 new jobs, the government reported LOSING 4,000 jobs.  This report was so bad, that now traders are wondering if the Federal Reserve will lower the overnight rate more than the .25% expected, and actually lower .5%.  The market reacted accordingly, and by the end of the day, mortgage backed securities were up 53 basis points.  This means that a loan that might cost you 1.0% point (or one percent of the loan amount) on Thursday, would only cost you 0.5% point (½ of one percent on the loan amount) on Friday evening.  A perfect time to lock!    

The unemployment rate remains steady at 4.6%, however, with the consulting firm Challenger, Gray, & Christmas announcing an 85% jump in corporate layoffs during August, compared to July, keep your eyes and ears tuned to these figures too. 

Lower Rates?

What this action did was to give a significant increase in bond values, lowering their yield, and therefore interest rates!  If we can stay above the 200-day moving average for quite some time, than that will become a layer of support, as opposed to the layer of resistance that it has been in the past. 

September 18^th is our big day.  Will the Fed cut the overnight rate by .25%, or by .5%?  What the Fed says when it releases the expected cut will be of severe importance.  The overnight rate will help lower rates on Home Equity Lines of Credit, personal loans, and auto loans, but it could have an adverse effect on mortgage rates.  If the Fed comments that they feel as though inflation is under control, we should be O.K., however, if they indicate that they’re cutting rates, even though inflation is a concern of theirs, interest rates could worsen. 

Bernanke Speaks

Ben Bernanke is speaking in Germany this week, and believe me, the markets are listening.  Next week we should just have time to report on the Fed’s rate decision.  With rates still hovering around 6%, it’s a wonderful buyers’ market out there…Until next week…

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

Market Jitters

As expected, it has been grueling, trying to get past that stubborn 200-day moving average.  The stock market started to rebound, which hurt interest rates earlier last week.  Also hurting rates was the fact that the Federal Reserve Board’s Minutes, from their last meeting, didn’t give us any hints as to what they will do on their September 18^th meeting.  Most expect the Fed to lower the overnight rate from 5.25%, however, the market’s a little jittery right now, as you can imagine. 

Jobless Claims Increasing?

This week’s Initial Jobless Claims numbers were reported at 334,000.  It wasn’t too long ago that the expected weekly number was coming in at approximately 300,000.  The week before we hit 325,000.  We’re watching this closely because recently, waged-based inflation was a real concern with the Federal Reserve.  If the unemployment numbers start to grow, there isn’t as much pressure to pay people more for the same services, easing these inflationary concerns.  Remember, inflation is interest rate’s nemesis! 

Fed’s Favorite Inflation Gauge Keeping Things Cool

The Gross Domestic Product numbers were revised to 4.0% for the second quarter.  Lower than the expected 4.1%, however not a recessionary figure.  We’re still experiencing positive economic growth.  The long awaited Core Personal Consumption Expenditure Index came in less than expectations at 0.1%.  Keep in mind that this is the Federal Reserve’s favorite gauge on where inflation is.  The PCE tame reading on inflation should have helped bonds, however, interestingly, the stock market read this as support that the September 18^th meeting would surely have a cut, and the move to the stock market actually hurt bonds…what a catch 22, hey? 

FHA Refi’s To The Rescue?

Now, what’s all over the news is President Bush’s speech on tackling the mortgage credit crisis that we have been alluding to in past articles.  While some of the proposals may be beneficial or helpful to many homeowners, any proposed government bailout for struggling homeowners will have to go through Congress and could be a significant burden on the US taxpayer.  Basically, one of the elements in Bush’s plan would allow homeowner’s with good past credit history, and were recently struggling with their mortgage payments, to refinance with a Federally Insured FHA loan to 97% of the home’s value.  Now, keep in mind that FHA loan limits, currently in Butte County are only $304,000.  So, as disused in last week’s article, an increase in that loan amount could potentially help thousands more in our area.  They are asking for easier qualification guidelines for the loans as well.  This will be an interesting story to follow in the weeks ahead. 

What Will Next Friday Show?

Friday is going to be a big day.  The Jobs Report information will be released and this report could move rates vigorously.  Remember how I have been talking about the 200-day moving average (or trend line) being a very tough level of resistance to break through?  Well, we have not been able to get mortgage bonds to move past this level.  Also, the 100 day moving average has been a level of support.  So try and follow this…the 200-day moving average has been moving downwardly and the 100-day moving average has been moving upwardly.  When bond values move up, rates move down, and vice-versa.  So, with the 100-day moving up toward the 200-day trend line…where will interest rates go?  Will the level of support move bonds up past the 200-day, or will the level of resistance bring bond values down below the 100-day moving average causing rates to increase?   We’ll see in next week’s article.  Until then…