Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – January 22th, 2008

Rates are up…Oh Wait…A BIG Surprise

Another Roller Coaster of a weak regarding the stock market and interest rates!  The Consumer Price Index (CPI) came in at 0.3%, slightly higher than expectations of 0.2%, and the highly watched Core CPI came in right at expectations of 0.2%.  Unfortunately, the year-over-year numbers rose by 4.1%, mostly due to high energy costs, but even pulling those out the Core CPI was at 2.4%.  Remember, that the Fed wants to see their inflationary reporting levels between 1 and 2 percent.  And more recently, these numbers have been lingering around 2.1%, so this information is alarming.  Again, it’s gotta be a tough area to be, with inflation lurking about but with the economy slumping so much.  I feel for Bernanke and this leads to an amazingly volatile market.  Bonds have moved around 190 basis points upwardly, since Christmas, causing rates to be priced extremely aggressively.

Bernanke spoke to the House Budget Committee last week and told them that he sees no recession, but slow growth.  He confirmed that additional rate cuts may be required but indicated that he knew that inflation is still a risk.  He said that overall headline and core inflation should slow, however.

The Index of Leading economic Indicators (LEI) for December was -0.2%; less than the

-0.1% expected.  This low reading is a true sign of a recession around the corner.

Then the big surprise hit. 

I mentioned in a recent article that there was some discussion of an emergency meeting, but the Fed, even before their scheduled January 30 meeting…and in a surprise move on Tuesday, January 22, The Fed cut the Fed Funds Rate by .75%, lowering it to 3.5%.  While we were enjoying the Martin Luther King, Jr. Holiday, the world markets sold off their stocks sharply, fearing a US recession.  This was the first emergency meeting by the Fed since September 17, 2001 and the largest cut in rates since 1984. 

Here’s the Fed’s Statement from the morning of January 22:

The Federal Open Market Committee has decided to lower its target for the federal funds rate 75 basis points to 3 ½ percent.  The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth.  While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households.  Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.  The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully.  Appreciable downside risks to growth remain.  The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

Discount Rate Hits 4.0%

The Discount Rate was also lowered to 4.0%, and on the 30th’s meeting, they may lower it even more.  The stock market plunge on Tuesday helped bonds and interest rates to move to their best levels since June of 2005.  Time to Refinance?  Just keep in mind the volatility in today’s market.  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – May 14th, 2007

Horrible Retail Sales brought rates down

The Fed’s Interest Rate Decision and Policy Statement…

…was released on Wednesday, and as expected, the Fed did nothing to the overnight rate.  You’d think I would be elated.  You might wonder if interest rates moved below six percent for no points.  Unfortunately, the “tone” of the meeting wasn’t as positive as the decision itself. 

Good ‘ole Ben Bernanke and his bond-buying buddies believe wage-based inflation better be controllable before bonds aren’t bought in favor of better bets with stocks (huh?).

That being bellowed…The market reacted negatively, because it was looking for inflation to be commented on favorably by the statement.  Even though recent data from wage information and inflation has been relatively friendly, and the economy is slowing somewhat, the Fed is mostly concerned that inflation will, “fail to moderate as expected.”  So even though the Fed admitted that they “expect” inflation to moderate, their concern is that it won’t.  How’s that for the power of one’s words having an effect on not only our nation, but the world! 

Retail Sales were at their worst level in seven months. 

These are sales for everyday items like clothing, cars, etc.  One reason is undoubtedly the price of gasoline.  When the price of gas goes up, expect that price of everything else to go up with it.  Over and above that we had a really cold winter.  Remember last month I talked about people finding it difficult to go out and buy a home in the cold weather, well that cold weather froze crops.  Also, many corn products are being converted to other fuels, which is causing a shortage of corn which increases its value.  

By the time you read this article the oh-so-important Core Consumer Price Index will have been released.  With all of the past inflation information showing that inflation is moderating we hope to see a favorable number.  The 200-day moving average has been a HUGE level of support for mortgage-backed securities, so it would really have to be a surprise on Tuesday to break through that trend-line.  But if it is bad news we could see higher rates and a difficult time breaking back above that 200-day moving average.  

Also, housing information is expected on Wednesday with the release of Housing Starts and Building Permits.  As the weather warms over the nation, these figures should start looking more favorable.  It’s an exciting time for interest rates.  I hope that next week we’ll be talking about inflation looking in total control and bonds breaking above the 25, 50, and 100-day moving averages to bring a trend of lower interest rates.  Until next week…