Inflation Rearing Its Ugly Head?

Rates On The Move?

We’ve broken through the 200-Day Moving Average and the 25-Day Moving average.  Not good!  We, actually, broke through the 50-Day Moving average, early this morning, but have managed to bounce off of that, and settle just above it…for the time being.  The 50-Day is significant, because we have bounced off of that trend line three times, since mid-August, saving interest rates.  If we break through today, we are risking another 60 basis points (about .625% Points in Cost) to the next layer of support.  Remember, when Bond Values move down, interest rates move up.

Interest Rates Nemesis

The Core Consumer Price Index (CPI) rose 0.2% in September, while only expecting to move 0.1%.  This is a little concerning, as mentioned in the article yesterday, that the creative accounting, established by our government to stave off inflation in the Cash for Clunkers Program, was supposed to keep inflation down.  Well, a higher than expected reading in the CPI has inflationary fears hovering all around it.  Particularly when this creative accounting structure should have lowered inflation fears.  Remember, inflation is interest rates’ nemesis. 

 Jobless Claims Lower

Initial Jobless Claims came in 10,000 lower than the week before, at a 514,000 new claim level.  Lower than the 520,000 expected, but still as ugly as Phyliss Diller’s less attractive younger sister.  Continuing claims fell to 5.99 Million, but not due to people getting new jobs, just people running out of time to claim their unemployment benefits. 

Manufacturing’s Hot

Another inflationary number was the New York State Manufacturing Index.  It completely surpassed expected reading of 17.25 and roared in at 34.57.  This is the highest improvement in five years.  Was it due to economic growth, or re-stalking of shelves that had finally run dry for the worst economic recession since the Great Depression?  It will be interesting to see…

You Know What Really Chaps My Hide?

Freddie Mac reported interest rates were 4.92%, yesterday, at a cost of .7% Points.  Well, it takes time for Freddie’s comments to circulate to the media.  That was, actually, last week’s pricing.  We’re very close to those rates, however, it’s tough when the media gets its spin on things and reports on interest rates, when it takes time to relay the information, AND normally, the pricing on a loan like that is passed on from Freddie, to the banks, at a cost.  Generally, it translates into more like an ad that would read 4.92% with zero points.  Which is a legal ad, but when broken down on the final closing statement in escrow would read like this:  1.25% Origination Fee (or discount fee…it’s the same thing) for 4.92% with an APR of 5.021%.  The ad makes the phone ring, but is it fair to the client when true rates are quoted from an honest banker! 

Related Must Reads

Remember Pong? A Little Paragraph About Bonds and Rates
March of ’08’s Take On Jobless Numbers

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Global Crises Brewing?

Foreign Interest in US Bonds Secure…For The Moment

Well, did you guess correctly, as to where you thought interest rates were going?  Last week I let you make the call.  As, we are in unchartered waters, regarding the real estate and interest rate market.  Even though the Consumer Price Index (CPI) for July matched expectations and the Core CPI which takes out energy and food prices also matching expectations, and low gas prices spurring a decrease in inflationary pressures, we should have seen bonds move nicely upwardly, but they barely moved on that information.  This is really important:  Net Foreign Purchases of US Securities for June were $121 Billion.   This shows us that the foreign market is still interested in our bonds.  If this continues, it will help long term interest rates. 

Housing Starts was reported at an annual rate of 1.381 million.  This was below expectations as well as new building permits.  The initial jobless claims was the highest level seen since June 16 and this is the third week in a row that we’ve seen higher than expected jobless claims.  A sign that the labor market is loosening up and waged based inflation may become under control.  This would also help interest rates, as inflation is interest rates worst enemy.

Don’t Follow The 10-Year Treasury

Also very interesting to note:  Most mortgage professionals will follow the 10-Year Treasury Note Yield (T-Bill) to find out if interest rates are moving upwardly, or downwardly.  A COSTLY mistake!!!  On Thursday, August 16, Mortgage Bonds were trading at 25 basis points lower than when they opened.  Lower values mean higher yields, or higher interest rates.  So following Bonds, you’d see that it may be prudent to lock in a borrower.  However, the 10-year Note was trading 62 basis points higher then when trading opened.  Higher cost means lower yields, so someone following the 10-Year Treasury note would THINK that rates should be getting lower…but that’s simply not the case.  Mortgage interest rates follow (as it seems obvious) Mortgage Backed Securities. 

FED Lowers DISCOUNT RATE

We had a nice surprise to help this credit crisis that we’ve been experiencing as of late.  The Federal Reserve lowered their Discount Rate by .50% to 5.75%.  The Discount Rate is the rate by which the Fed lends money directly to commercial banks, credit unions, and savings and loans.  It’s different than the Fed Funds Rate that I generally write about.  By lowering this rate, banks have the opportunity to borrower at lower rates, enabling them to free up funds to close more loans.  Also, instead of letting banks borrow over night, they are extending the borrowing period for thirty days.  Again, very interesting.  This enables banks to be able to position their loans and hope that investors start feeling better about purchasing these loans in the secondary market. 

Global Crash?

Recently, there is concern over a German banking crisis.  Also, it’s rumored that a British Insurance company had to borrow funds from the Bank of England to be able to fund loans.  This is a global situation people.  It’s truly something that you should be reading about every day.  Remember when I mentioned that a Senator had suggested that we increase the conforming loan limits from $417,000 to a higher figure?  As of Tuesday, Ben Bernanke was meeting with Power’s that Be to see if that’s exactly what Congress and the Senate should do…help banks have the backing of the federal government to buy more loans to help with this current liquidity crisis.  We’ll have to wait and see what happened in next week’s article…until then…