Danny Salas

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

Jobs Report Helps Rates

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 – July 10th, 2007

Sparks Fly As Rates Go Up...

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…