Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – Nov 4th, 2008

Interest Rates “Come About”

Interest Rates made an abrupt U-Turn in positive territory on Voter Tuesday (probably because Obama was leading in the polls).  Actually, it looked as though the Monetary Policy Committee overseeing the Bank of England was poised to lower their overnight rate by 0.5% points to 4.5%.  They also have another meeting Thursday, where they are expected to lower it again by an additional 0.5% points.  This helps with the value of our dollar, particularly after we have continued to lower our overnight rate to record lows.  Also expected to join in on the rate slashing is the European Central Bank.  They’re meeting in Germany this coming week.

As I wrote this article, rates finally moved into positive territory, after eight straight days of ugliness.  Let’s go back to last week and see what was occurring.

Up, Down, Up, Down

First, Wednesday was Fed Day.  Everyone expected a 0.5% point cut but the stock market anticipated this on Tuesday and had a nice 900 point rally, so long-term rates actually benefited Wednesday, after being beaten on Tuesday.   This type of volatility is not only hard to prognosticate, it’s down right impossible. This month alone we’ve moved up or down in the stock market so ridiculously and mortgage backed securities have moved over 300 basis points in six days.  That’s 3.0% points on a mortgage loan.  But, we’ve now moved back about 350 basis points in four days.  If my computer screen were any closer, you could make a bobble-head out of me.

OK, It’s Official…

But in the end, the Fed did cut the rate by 0.5% and long term rates paid the price, but minimally.  With Hong Kong and Taiwan cutting their rates, it helped stabilize the dollar and therefore not too much weight was given to the cut.  Oh yeah…it’s official…we’re in a recession.  That’s right!  The textbook definition of a recession was met this past week with the documentation of two consecutive quarters of a negative Gross Domestic Product reading.

The Fed’s favorite gauge on inflation, The Personal Consumption Expenditure Index (PCE) brought some good news (uh, for rates that is).  Even though the Fed would like to see Core Inflation between 1.0  to 2.0%, the Core PCE dropped from 2.5% to 2.4%.  This was the weakest spending performance by consumers on a quarterly basis in over thirty years.  Also, the Bank of Japan ended up lowering their benchmark interest rate to 0.3% to help stave off any further inflation in their country.

Opportunity Knocks

So, when we see a U-turn in rates, as we saw on Voter Tuesday, it’s wise to take advantage of the opportunity and lock clients in.  Why?  Well, the foreign investors that I’ve been writing about for years, that loved to put money into our mortgage-backed securities, are kind of sitting on the sidelines and waiting to see the implications of the Treasury Departments’ guarantees.  Until there’s more comfort in that arena, don’t expect significant changes in interest rates.  The opportunity knocked on Voter Tuesday (let’s hope in more ways than one) and that was a good time to lock.  We do have some support, now, above the 25, 50, 100 and 200-day trend lines, but with all of the newness and volatility in the marketplace, who knows when we’ll have more opportunities like this one.

Values are down, rates are good…what are you waiting for?  NOW is an unbelievable time to buy…Until next week…

This entry was posted on Tuesday, November 4th, 2008 at 7:34 pm and is filed under 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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