Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – July 31st, 2007

Lower Inflation = Lower Rates

Inflation Slowing Its Pace

We should thank Good ‘Ole Ben for watching his comments appropriately and helping interest rates by stating, “Core inflation should edge a bit lower, on net, over the remainder of this year and next year.  If energy prices level off as currently anticipated, overall inflation should slow to a pace close to that of core inflation in coming quarters.” 

Rates are bouncing between the 25-Day and 40 & 50-Day Moving Averages

Bonds have been basically taking a ride on the 25-day moving average and fortunately just hanging out just above this trend line.  Remember, when Bond prices go up (their yields move down), home loan rates improve, and when Bond prices go down (their yields move up), home loan rates worsen.  A good mortgage b roker will follow these movements and know when a good time to lock in an interest rate is.  Also, there are “trends” that bonds (mortgage backed securities) follow.  For example, as mention above, the 25-day moving average, however, there are also 40-Day, 50-Day, 100, 200, etc.  This past week we have been bouncing in-between the 25-Day and the 40 and 50-Day moving averages.  So, the current “trend” is just above the 25-Day moving average…so since we’re above that, it acts as a level of support for interest rates.  If we can get enough economic information to catapult us above the 40 and 50-day moving averages, then we could see lower rates.  If you don’t understand what I just wrote, go back and read it again.  It’s an excellent explanation as to how this stuff works, I don’t mind saying so, myself! 

Median Priced Home Moving Up

Existing Home Sales for June were at 5.75 Million Units.  Less than the 5.90 Million expected.  However (and this is a big however), the median home sales price increased 0.3% to $230,100.  This is the first year over year price increase in 11 months.  Also, the monthly sales inventory dropped from 8.9 months to 8.8 months.  Further evidence that the housing market is stabilizing and not as bad as the media is portraying. 

Obviously, the stock market has been of some interest lately.  Generally, stocks and bonds move in opposite directions, as if stocks are moving down, then people pull money out of stocks and move them into bonds.  With stocks at some all-time highs, as of late, and with oil giant Exxon reporting weak earnings, you can just imagine how volatile the stock and bond markets have been recently.  To add to the turmoil, the Gross Domestic Product numbers are showing hotter than expected at 3.4% (causing rates to increase), but Tuesday’s release of the Fed’s favorite gauge on inflation, the Core Personal Consumption Expenditure (PCE) Price Index was reported at a cool 0.1% for June.  This also shows the year-over-year Core PCE at 1.9%.  Remember from last articles that the Fed wants to see inflation between 1-2%.  Consumer Confidence is way up, so people are still ready to spend their money. 

It looks as though the real estate market is stabilizing, and we should be set for a nice bond and interest rate rebound.  So, get ready…but keep in mind…how quickly markets change…