Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – April 15th, 2008

Bernanke Toying With Inflation

As I write this article, it’s Tax Day.  April 15!  So, if the tone of this article rubs you the wrong way, let me apologize in advance. 

Last week the Federal Reserve Open Market Committee’s Minutes were being released as I wrote the article.  These minutes produced a behind-the-scenes look at the past FOMC meeting and a closer peak at the dissenting voters and Fed Presidents Richard Fisher and Charlie Plosser.  Both felt as though inflation was still quite a concern.  “Inflation expectations could potentially become unhinged if the Fed continued to lower the funds rate in the current environment,” they both felt.  Remember that inflation is interest rates’ worst enemy.  Another interesting note is that this was the first time since 2002 that two FOMC voters dissented on the same vote.  It will be interesting if Good ‘Ole Ben Bernanke can keep the ship sailing smoothly, or if there will be mutiny at the helm…

Jobless Claim Numbers A Surprise

This last week Initial Jobless Claims reported 357,000 new claims.  This is much lower than what we’ve been seeing lately, however, remember that the four-week moving average is what we’ve been shocked by…and sure enough those numbers rose to 378,250.  This is the highest four week average since October of 2005.  Remember that we’ve fell into two recessions when this reading was previously 362,000.

The European Central Bank left it’s overnight rate untouched at 4.0%, but the Bank of England cut their overnight rate by .25% to hopefully stimulate their economy.  They’re kind of going through the same thing that we are, here in the United States. 

This last week General Electric reported worse than expected earnings and indicated that their future earning weren’t looking too hot also.  Their excuse:  The credit crunch and slow economy.

Consumers Tightening Their Belts

Generally, I only mention reports like the University of Michigan Consumer Sentiment Index when it may be alarming, or interesting to mention.  Well, April reported a number of 63.2.  Who cares, you might ask!  Well, this level is a 26 year low and was far below what the markets thought.  Also, this indicates that consumers may not be too willing to purchase large items, now or in the near future.  Another indicator that the economy may still be slowing, but a 26 year low?  Retail sales increased slightly.

Yea!  We’re Only Reports Losses in the “Millions”

Wachovia, the fourth largest bank in the U.S., reported a $393 million dollar loss due to the subprime fiasco.  Isn’t that great?!!!  We’re only talking million of dollars now, as opposed to the billions that have been coming out in recent issues.  Whew!  Isn’t that just great!

The Producer Price Index (PPI) moved up 1.1% in March thanks to the record breaking oil prices and oil industry salaries that we’ve been seeing.  Not to mention food prices being at a 17 year high.  More importantly, the Core PPI was reported at 2.7%.  This is a little scary, since the Fed would rather see inflation reading of 1-2%.  The CPI  will be reported on next week.  Hopefully, that will be more in line with the 1-2% inflation reading that the Fed is looking for, as increases in wholesale inflation (PPI) don’t always get past on to the consumer (CPI).    We’ll report on that next week…Until then…

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

Jobs Report Figures Compared to ADP

Look to your right when you’re in Valencia and you’ll see the interest rate chart I’m staring at off on the horizon.  That’s right…you’d get whiplash if you read it too quickly.  The interest rate chart looks like The Colossal at Magic Mountain.  First, remember me mentioning Automatic Data Processing (ADP) in other articles?  Well, they came out and said that the US would report about 189,000 new jobs.  We were expecting 70,000.  Another report showed Productivity revised to the highest level in four years, at 6.3%. 

Wage Based Inflation Lower

Interestingly, however, was the fact that Annual Unit Labor Costs, a gauge of inflation and profit that is closely observed by the Fed, declined 2.0%.  It’s the steepest decline in four years.  So, even with the hot jobs estimates from ADP and high productivity, what helped interest rates was this lower read on the Annual Unit Labor Costs (keeping wage-based inflation lower).

Other Countries’ Lower Rates Will Lower Our Rates

‘This last week Great Britain’s central bank, The Bank of England, lowered their overnight rate to 5.5% from 5.75%.  This is good news for the US because it will ease some of the pressure on the lowering US Dollar.  The European Central Bank remained steady, however.

Change Was Eminent

As you saw in last week’s article, we were enjoying low, low interest rates.  So low that we knew a correction was eminent.  It happened with the jobs numbers formally coming in at 94,000 new jobs (not ADP’s numbers, however, still quite high).  What was worse (for rates) was that the unemployment rate remained at 4.7%.  They expected those numbers to move to 4.8%.  Coupled with an Hourly Earnings number up 0.5% and above the 0.3% that was expected, this caused higher wage and tight job market fears.  Both inflationary – and interest rate’s nemesis.  So, the Fed’s task of determining which factor, weaker jobs growth compared to wage-based inflation, would have an impact on a .25% or .50% cut in rates on the 11th. 

It’s An Excellent Time To Buy

We’re back in the volatility craze right now, for sure.  And what happened on the 11th?…The Fed lowered the overnight rate (or Fed Funds Rate) only .25%  This was a little surprising to the stock market which was not doing very well late Tuesday.  It was down over 220 points.  So mortgage backed securities were up 74 basis points around noon time.  Remember, that’s approximately .75% better in points than a loan locked the day before.  The dollar responded to this move nicely.  This preserved the value of bonds, but obviously, the stock market did NOT like the move.   There is a level of resistance, just above where interest rates ended up on Tuesday the 11th, so we’ll have to watch those levels and lock in interest rates if they bounce off of those levels and cannot pierce through them.  Need I remind you that it’s an excellent time to buy?  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…