Danny Salas

Archive for September 2nd, 2008

Chico, CA Interest Rates Market Report – Economic Influences – Sept 2nd, 2008

Float Cautionsly Into Next Week

More Volitility, But In The End…Lower Rates

The big news of the week was Hurricane Gustav.  Earlier in the week, the markets were quite concerned with where Gustav would hit, and would it interrupt or disrupt oil production.  The catch-22 of the week was a comment by Atlanta Fed President Dennis Lockhart, who said, “Inflation pressures should ease in coming months” and oil prices are likely to “prove transitory not persistent.”  Those comments should help the bond market and interest rates; however, the twist here is that it can help stock prices too.  So, money poured into stocks which coincidentally, hurt bonds and interest rates.  Go figure…

High GDP & Oil Meant Higher Rates

Gross Domestic Product readings for the 2nd Quarter were revised to 3.3%.  This is significantly higher than the 2.7% that was expected.  These numbers will be revised a final time next month, but certainly this was good news for Stocks and bad news for interest rates.  Initial Jobless Claims came in at 425,000, but this was expected.  Oil prices climbed over $120 a barrel, again, primarily due to Hurricane Gustav.  The good news was that the 50-day moving average caused rates to bounce off of that trend line, protecting further erosion in rates.

Last week I mentioned the record auction for 2-year and 5-year Treasury Notes.  The $32 Billion two year note auction, and the $22 Billion 5-year note auction, didn’t go over too well.  But not too badly either!  Some foreign interest in the sale, but not too much, so this record breaking auction that could have had some significant impact on the markets…just didn’t.

Even The PCE Rose

The Fed’s favorite gauge on inflation, the Personal Consumption Expenditure Index rose 4.5% year-over-year.  After taking out for energy and food the Core PCE rose 0.3% to 2.4%.  Way out of the Fed’s desire to keep inflationary measures between 1% and 2%.  Also, Personal Incomes dropped 0.7% for July and Personal Spending came in at 0.2%.  It looks as though the economic stimulus checks have started to lose their thunder.  Also putting pressure on inflation were the Chicago Purchasing Manager’s Index and the Michigan Sentiment reports.

Finally…Lower Oil Prices

So, last week’s advice to have that finger on the lock button really panned out well.  Then the big story hit…Gustav was not as powerful or damaging as originally expected.  Oil production was not slowed, and actually oil prices finally dipped down below the 200-day moving average to about $106.00 per barrel.  This is the first time in over a year that prices have moved below this tough layer of resistance and will be interesting to watch closely.  Lower oil prices mean lower inflation…which helps interest rates.  So this week’s inflationary news reports that caused rates to jump have been helped tremendously by the fact that Gustav was weaker than first thought.  This caused bonds to move above the 100-day moving average (rates moving down), but this is a very precarious area to be at.  So…again…we moved to a float position with a finger on the lock button.  The last three articles have advised this and it’s proven to be an excellent strategy, as rates have just momentarily gotten better a few times each week.  Then they seem to get worse relatively promptly.  Next week we’ll discuss a lot, including Non-Farm Payroll numbers.  So, until next week…