Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – October 29, 2009

GDP is HOT, BUT...

Technical Difficulties

I was, somewhat, out of commission since Saturday Night.  My laptop crashed out, and on Tuesday Night, my cell phone froze up on me.  Made for many more hours in the office, however, that’s why the Market UPdates were delayed until today.

What’s Going On?

In the words of Marvin Gaye, here’s what’s been happening.  Treasury Auctions have, so far, fared quite well.  Tuesday’s $44 Billion auction of 2-Year Notes, and yesterday’s auction of $41 Billion in 5-Year Notes were well received by foreign markets.  This pleasant surprise helped keep interest rates stable, however, keep in mind that there is nowhere for rates to go…but up!

Don’t Be Foolish

If you think that by waiting for the “bottom” of the real estate market, that you will somehow benefit from that, a heeded warning:  Don’t be foolish!  Higher interest rates will substantially influence your buying power more than declining values.  IF the government extends the tax credit for first-time home buyers, I recommend getting off of the fence and buying, as soon as you’re able.

Important Side Notes

Durable Goods Orders were reported exactly where the market expected them to be.  Consumer Confidence is down, particularly due to the labor situation.  The government is considering an expansion of unemployment benefits.  If this occurs, expect the number of claims to SKYROCKET, as unemployment numbers only report for a certain amount of time, before you’re ineligible for benefits, and drop off the statistics automatically.  Inventory Levels for New Home Sales were reported at 7.5 months.  This is a little higher than the 7.3 Months that we saw last month, however, it’s still promising, considering inventory was at 12.4 Months in January.

“Advanced” GDP is HOT, BUT…

Gross Domestic Product numbers (so far) for the 3rd Quarter were reported at a 3.5% increase.  Much hotter than the 3.2% expected, AND the first gain in a year, coupled with the greatest gain in two years.  Now, the media has gone hog wild with this news.  Bonds are reacting negatively, the stock market is going nuts, and everyone seems to be partying and celebrating that the recession is over.  Sorry to be the bearer of bad news but is everyone forgetting the “Cash for Clunkers” government refund program?  Is everyone forgetting the $8,000 First Time Home Buyer Tax Credit?  Without these subsidized government programs the real GDP is growth of 1.9%.  Nothing to get too excited about, I think.  The market will figure this out, but in the meantime, interest rates will suffer.

Jobless Claims Are Cool, BUT…

Again, we’re looking at Initial Jobless Claims of $531,000.  And claims that “only” 5.8 Million people are out of work.  The media is spinning this as good news.  Well, I don’t see the joy and happiness regarding these numbers, but I guess I’m in the minority.

Today, $31 Billion in 7-Year Treasury Notes will be auctioned off.  Will foreign appetite gobble up these notes, or will they shy from the longer termed risk?  We’ll see, but if foreign interest is bleak, prepare for rates to plummet this afternoon, coupled with these other media hyped “lies.”

Senate Approved Tax Credit Extension

Not only did the Senate approve an extension of this credit, however, they proposed a $6,500 tax credit for any primary home purchase, not just first time home buyers.  Also, increased, was the income limits for qualification for these credits.  $75,000 for a single person was raised to $125,000 a year in income.  Also, a married couple’s income was increased from $175,000 to $250,000 per year.  You have to have a contract dated by April 30, 2010 to qualify, and the transaction MUST close by June 30, 2010.  This still has to be negotiated between the House and Senate, so expect changes, but it is encouraging news, nonetheless.

Related Must Reads

How Foreign Interest in US Bonds Helps Interest Rates
Tax Credit “FAX”

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Chico, CA Interest Rates Market Report – Economic Influences – August 26, 2009

Here’s The Scoop

Yesterday, I expected difficulty with the Treasury Department auctioning $42 Billion in two-year notes.  We expected that our Government would have to stand up and do the borrowing to purchase all, or most of those investments, for a couple of reasons.  First, foreign appetite for our bonds has been relatively bleak, requiring Uncle Sam to purchase these bonds.  While that’s what our leaders have positioned the stimulus funds for, it still will, eventually, cause inflation (interest rate’s worst enemy).  Second, the announcement of rising home prices and rising consumer confidence should have told investors to stay away from the lower yielding bond market and put money in stocks, hurting rates.

What Happened?

Instead, Mortgage-Backed Securities reacted differently.  Foreign investors, including their central banks, participated in 49.4% of those shares.  What a wonderful surprise!  Careful, though, because two-year bonds are a short investment, and therefore, less risky than the two remaining auctions left, this week.

Why Be Leery of Yesterday’s Auction Success…

The longer your bond investment length, the more risky that investment.  Longer investment periods run the risk of higher inflation, in the future.  If there is high inflation, that subtracts from the fixed income the investor is receiving on their asset (investment).  So, the longer you hold the investment, the riskier that investment.  If you have to sell the bond, in two years, you have an opportunity to make some interest, and receive your initial investment back again.  If that span is longer than two years, than if inflation hits…you might have to sell at a discount, or if you wait for the maturity of the investment (who’s going to buy it if the investor’s selling it?), you’ll have to suffer the consequences and take a huge loss.  Very risky!  In order for foreign markets to accept longer terms, at the rest of the week’s auctions, the rate of return better be higher, which means higher rates, potentially. 

Economic Factors

Durable Goods Orders were reported at and increase of 4.9%, when the government had prepared for 3.2%.  Factored into the equation was aircraft orders. When subtracting the transportation information the staistic leveled down to a .08% increase, when the government expected a 1.0% mark.  Mortgage-Backed Securities enjoyed that info. early in the morning, however, again, the market is jittery before the five-year note auction set for this afternoon. 

New Home Sales

These figures were hot again!  We expected approximately 390,000, however, reports came in at 433,000.  This is, generally, not good for rates because it’s a good economic report that will take money out of bonds (MBS) and into stocks.  When money flows out of bonds, their values go down, and therefore, their yields (or interest rates) increase.

Mr. Optimistic

Yes, generally, I consider myself an Optimist, however, are these housing numbers due to a lack in construction?  Possibly!  How about, as mentioned in yesterday’s article, people moving whilst the gettin’s good?  While rates and home values are at one of their most opportunistic times?  Perhaps both!

What To Do?

Currently, take advantage of yesterday’s surprise and float into the day.  But, your loan expert better have their finger on the lock button…like I will today.  Until tomorrow…

Chico, CA Interest Rates Market Report – Economic Influences – April 29th, 2008

Uh Oh…Watch those 50 & 100-Day Moving Averages

Last week we noticed Bonds move 38 basis points in 15 minutes.  That’s about a .375% point cost in the same interest rate in a very little amount of time.  Last week I had said I thought it was a good time to lock, and that advice proved positively, as rates have moved up slightly over the week.  What ended up happening was that bond prices moved below the 50 and 100-day moving averages.  The primary push downward was the report of the weekly Initial Jobless Claims coming in at only 342,000.  The market was expecting 375,000 and the number was the lowest number in over two months.  I have been reporting on these weekly figures and indicating that a four-week average of this number at a level above 362,000 is recessionary.  So, at 342,000 it was taken by the market as a good sign.  Another item that added to bonds coming below those two trend lines was the Durable Goods Report.  February’s numbers were revised.  The numbers were still horrible numbers, but in a market that reacts to Ben Bernanke sneezing at the wrong time, you can imagine that any news that might be a little better than the previous news will move markets. 

Slow Down in Home Salas

Last week I mentioned that the cost to build a new home is going up tremendously.  It wasn’t a huge surprise then that when the New Home Sales numbers were released they reported only 526,000 new homes sold for March, and they expected 580,000.  Also the inventory for New Homes rose to 11 months.  This is not good news to builders across the country.  However, incentives for home buyers should become more and more applicable.  For example, how would you like to move into a new home and not have to make the first six payments!  You’ll be seeing opportunities like that a lot more. 

World-Wide Inflation

Inflation fears reared its ugly head this week.  But, not only from the United States; from the ever-shrinking Global Economy!  With the cost of energy and food skyrocketing, inflation fears are just woeful these days.  And interest rates will continue to pay. 

Germany’s largest Bank, Deutsche Bank, reported its first quarterly loss in five years.  $4.2 Billion Dollars.  This, of course, was related to the subprime crises. 

As this report is being written, the Fed is meeting and on Wednesday, a lot will happen.  The Fed will report on their monetary policy decision and statement.  It’s expected that the Fed will lower the overnight rate by .25% to 2.00%.  The markets are poised for this, so any movement lower will become inflationary and may cause rates to increase in the near future.  The emphasis on may here…If the policy indicates that this may be the final rate cut…then that would not be inflationary and rates could bounce back.  It’s a calculated risk that for the protection of buyers, discussing those risks with each client would be a prudent action. 

Another big mover of rates will be the reporting of the Fed’s favorite gauge on inflation the Core Personal Consumption Expenditure Index (PCE).  This report comes out Thursday.  Friday will bring the Job’s Report…so a lot will be reported on next week…Until then…

Chico, CA Interest Rates Market Report – Economic Influences – April 1st, 2008

Rates Down…No Up…No Down…No Up

Up 38 basis points on Wednesday, down 28 basis points on Thursday, up 19 basis points on Friday, up 9 basis points the next Monday, down 50 basis points early Tuesday morning, and by the time I wrote this article at 11:00 on Tuesday, the market had moved up 25 basis points at 10:00 am, and back to down 44 by 11:44 a.m.

That’s the type of volatility that’ll give a forty year old mortgage broker a weak ticker!  Not to mention that we’ve hit all time low’s in 30 year interest rates at approximately 4.25%, but when you remember that Tuesday was April Fools Day (when this article’s due), than you can understand that that statement was just in fun..  How’s your ticker?  5.875% with an APR of 6.061% was as of Tuesday morning.

So let’s start with the up 38 basis points on Wednesday.  A poor Durable Goods number helped mortgage backed securities gain ground, meaning that their yields moved downward and so therefore, interest rates moved downward.  But then, late that day and early Thursday morning bonds wanted to see if they could break downward, and did so.  Fortunately for us…that good ‘ole 50 day moving average held strong and kept bonds holding right above it.  The fourth quarter GDP was unrevised at 0.6%, so that kept things pretty calm.  Interestingly enough, though, Initial Jobless Claims came in at 366,000; moving the four week moving average to 358,000.  Remember the 362,000 four week figure is recessionary, so with this number coming out this past week, money poured into the stock market and out of bonds, so rates moved upwardly a little. 

Finally…the Fed’s Desirabe Inflationary Rate

This week, the Fed’s favorite gauge on inflation (the Personal Consumption Expenditure Index (PCE), and the Core PCE came out.  More importantly, there were revisions to the prior months’ reporting of this index, which moved the year-over-year Core PCE to 2.0%!  This is huge, and IS in the Fed’s desired range of inflationary figures to be reporting between 1% and 2%!  Yeehaw!  Let’s hope this trend continues ’cause remember, inflation is interest rates’ worst nemesis! 

Are Our Forefather’s Turning in Their Graves?

Then, over the weekend, the announcement regarding the Federal Reserve Board having more control over not just the conduct of banks, but, “…for overall issues of financial market stability…” Now, this will be interesting to see what happens here.  If I’m not mistaken, isn’t this one of the reasons the Colonists moved to the New World?  To get away from this type of control by the banking industry!  Now, I’m the first to tell you that there are some unscrupulous people in the banking industry, and that there should be some monitored, controlled way of disciplining the bad apples, but maybe I’m not understanding these proposals yet, but believe me, I’ll be watching this closely.  And frankly, I think you should too! 

On Tuesday, Stock prices started moving higher and belief that the worst has already occurred regarding the credit crises.  Lehman, UBS, and Deutsche Bank were all reporting new capital raising measures and indicating that they’ve “off-ed” their subprime loans from their asset management portfolios.  This will also be interesting to keep an eye on.  By the way, have I mentioned that it’s an incredibly wonderful time to buy?  Until next week…