Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – July 22nd, 2008

Inflation, Inflation, Inflation

seems to have replaced the old adage, “Location, Location, Location,” at least in terms of the Real Estate Finance World.  Every time inflation rears its ugly head, we’re hit by higher interest rates.  It feels like we’re playin’ a game of Gopher Slam every time one pops up wearing an inflation T-shirt.  This past week the Consumer Price Index (CPI-Gopher) was wearing a shirt that read 0.7%.  Core CPI-Gopher (no shirt) saw a hotter than expected 0.3% inflation gain.  Another fact, that I’ve asked you to pay attention to in earlier articles, is the Treasury International Capital Report showing the foreign demand for our securities is getting weaker.  June showed $67 Billion in foreign investment compared to $115 Billion one month earlier.  This is also inflationary, as it gives added pressure to a weaker Dollar. 

Last week I mentioned the 25-Day, 50-Day, 100-Day and 200-Day moving averages.  Interest rates were attempting to touch or move above these trend lines, however, unfortunately, we just bounced right below them and we continue to fall.  A lot of the movement in negative territory is coming from stocks doing well.  JPMorgan Chase, Coca-Cola and United Technologies all reported earnings that were better than what was expected. 

Freddie Woes

FreddieMac is trying to deal with their woes by possibly selling $10 Billion in new preferred and common stock shares to raise capital and avoid a government take-over.  But that may be too little-too late and bonds fell an additional 47 basis points after that announcement.  They hit yearly lows on Friday, causing interest rates to move above the 6.641% APR range.  The only good news about this is that when bonds hit these all-time levels, they also act as a layer of support, like the moving average trend lines.  So, once we hit these lows, we should bounce back up and see a leveling or correcting of these higher interest rates. 

But, you do have to contend with comments that important people make. 

Like last weeks mentioning of the Senator that whispered about IndyMac troubles.  We know how that faired.  This week Philadelphia Fed President Charlie Plosser said, “inflation is too high.”  Well, we know this.  Some times I wonder if these guys just like seeing their names all over the papers and websites of the world so much, that they don’t thing how their comments will impact their industry, economy, or country in general.  At least I can come up with something a little fun like, “inflation, inflation, inflation.”  The good news is that he did come back and say that the Fed must, “back their words with action” and increase the overnight rate.  This helped oil prices to below $130 per barrel. 

Rates will take direction, the rest of the week, from stocks.  Also, Treasury Sectretary Henry Paulson said the Congress will pass a bill to help with the confidence in FannieMae and FreddieMac this week.  We’ll report on that next report.  Until next week…

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 – November 27th, 2007

50 Basis Point on the Waist

Wow!  Even with the short week there is a lot to report on.  First, I probably gained about 50 basis points on my waist-line this weekend.  Not good for “interest”…period! 

Anyway, housing starts were higher than expected, but interestingly, building permits (which shows future housing activity) were at there lowest levels in fourteen years.  This may indicate that new construction might level off. 

Freddie Needing More Money?

FreddieMac (the nations 2^nd largest purchaser of real estate loans) reported a loss of $2.0 Billion in the 3^rd quarter.  They are also indicating that they’re a little short on a comfortable margin above the required reserve funds and hired Goldman Sachs to help them raise capital.  This will be an interesting story to watch and see how it may affect the markets in the future. 

Last week we saw the Ten-Year Treasury and Mortgage-backed securities moving in opposite directions AGAIN.  It’s the second time in less than a month that this has occurred.  Remember, interest rates follow yields on mortgage backed securities…period.  So make sure you’re working with a mortgage professional that follows this…and understands it…or it could be quite costly, to YOU. 

Overnight Rate Cut?

The minutes were released from the Federal Open Market Committee’s last meeting.  It was interesting to note that the Fed thought that lower inflation may be in the forecast.  So, while in the recent past, it looked as though the Fed was definitely NOT going to lower the overnight rate in December, with this lower inflationary tone, coupled with slower economic growth and job growth…who knows…maybe there WILL be a cut. 

Did You Lock On Monday?

Earlier this week mortgage backed securities were at their best levels in over two years.  Monday was the day to lock!  What happened was very interesting.  Interest rates benefited because stocks took quite a hit.  Remember that when stocks aren’t doing well, money flows out of them and into bonds…benefiting interest rates.  Well, the Dow Jones Industrial Average, the NASDAQ and the S & P 500 were all trading below their 200-day moving averages.  Just like bonds, stocks have trends and averages that they like to hover around.  Once they break through a trend (above or below) markets can move quickly. 

With the lowering of stocks, money flowed into bonds.  Bond prices went up, causing rates to move down.  But once bond values touched on the two year high…it was time to lock…cause it’s VERY hard to break though a tough level of resistance that hasn’t been broken in over two years.  So, locking was prudent. 

Abu Dhabi Invests in Citi

Sure enough, first thing on Tuesday morning, Abu Dhabi Investment Authority and Citigroup announced that Abu Dhabi was putting $7.5 Billion of capital into Citigroup to help them offset their recent losses particularly from the Sub-prime mortgage fiasco.  This sent a message to investors that stocks might be hitting rock bottom.  And, if investment companies are willing to come in a buy, buy, buy, obviously stocks will benefit.  But, at whose expense?  Bonds of course!  So, interest rates moved in the opposite direction as on Monday. 

To make things a little worse, Goldman Sachs reported that the Fed WILL decrease the overnight rate by 150 basis points to help with the credit crisis and have the overnight rate at 3.0% by the middle of 2008.  This is thought of as inflationary, because it lowers the value of the American Dollar, making foreign imports more expensive. Last, the New York Federal Reserve Bank announced that they are putting $8 Billion worth of liquidity into the market.  This should calm investor’s fears of a continued liquidity crisis.  Rates continue to be below 6% for conforming loans.  If you’re a fence sitter…start taking out the splinters and make a move…it is time.  Until next week…