Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – April 9th, 2007

O.K.

…all you well wishers out there, hoping for a good economy and low unemployment figures from this past Friday, you were heard…”loud and clear.”

The Labor Department Reported a Very Strong Jobs Report. 

180,000 new jobs!  Completely beating the 135,000 expected number and even blowing away whispers of a hot 150,000 number.  To make thing even worse (for interest rates, remember), the two previous months jobs reports had revisions that added an additional 32,000 jobs.  The unemployment rate dropped to a six year low of 4.4%.  

Hourly earnings are up to $17.22 per hour, which is where they were expected to be, however, over the year, hourly earnings are up approximately 4.0%.  This has us concerned about wage-based inflation.  And, as mentioned in an earlier article, inflation is interest rate’s main enemy.  

If this sounds like a pretty darn strong labor market to you, than you’re paying attention.  Congratulations!  But be aware that the Fed is paying attention to all of these hot numbers as well.  So, while just one month ago we were looking at a possible cooling down of the market and old Fed Chair Alan Greenspan was upsetting current Fed Chair Ben Bernanke by statements like we’re headed into a recession…how quickly markets can change.  

This week will be very interesting. 

First of all, the jobs report numbers only had a few hours to trade because of Good Friday.  So, we may see the market move further just to “catch up” with last week.  On Wednesday, the Federal Reserve Board’s “Meeting Minutes” from the March 21^st meeting will be released to the public.  These comments can really stir the market and have a huge impact on interest rates.  This is simply because all of the little whispers, snickering, arguments, disagreements, etc. that may occur are in these actual document’s minutes of the Fed members.  So, the Fed Policy Statement may have been somewhat vague about why Fed President Jeffrey Lacker did not vote on what to do with the overnight rate, however, the minutes might divulge exactly how Lacker was feeling, or why he may have felt it might be better to raise the overnight rate.  

So, with the hot labor market adding more jobs and adjusting the last two months numbers, the concern that the Fed has regarding inflation, a Fed President not voting with the other Fed members to keep short-term interest rates at 5.25%, a six year low of 4.4% on the unemployment rate…I think rates are going to have a tough time moving downwardly, compared with staying at current levels are even moving upwardly a bit.  But keep in mind, please…how quickly markets can change…how quickly markets can change. 

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Chico, CA Interest Rates Market Report – Economic Influences – April 2nd, 2007

Well, on Friday the Core Personal Consumption Expenditure Index ended up reporting higher than expectations.  As mentioned in last week’s article about Chico Interest Rates, this could have a negative effect on mortgage backed securities…and guess what…it did.  Particularly due to the fact that the index rose 0.3% higher, in February, than th

e previous month.  This is the largest monthly increase since August and higher than the 0.2% increase that was expected, giving the index a 2.4% reading, when the Fed really wants the index at 2.0% for a few months before considering lowering the overnight rate.  

Remember last week we mentioned “trends” or “averages?”  After Friday’s reports bonds actually faired well for a few hours, however hit the 100-day moving average of bond prices and bounced off that trend line like two opposite poles of a magnet.  Remember, when bond prices move downwardly, their yields move upwardly, causing interest rates to rise.  Currently, we are now focused on the 50 day moving average and the 200 day moving average (both of which are priced below the 100 day moving average).  If we cannot get inflation in line and if this economy continues to have hot reporting indices, than we could be in for a higher interest rate trend throughout the spring.  

This next week has several reports coming out that could move rates, however, the biggest market movers could be Thursday’s Jobless Claims Report and Friday’s Non-Farm Payrolls Report and The Unemployment Rate.  Generally speaking, weaker than expected economic data is good for interest rates.  So, let’s hope that the unemployment rate moves up considerably and new jobless claims spike upwardly too.  This would put homebuyers in a better capacity to buy, with lower interest rates!  It looks as if it’s going to be a rocky spring, so pay close attention to this article and see how the markets can be extremely volatile.  For those of you not sure about the unemployment rate comment, yes, it was a joke.  Until next week….

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Chico, CA Interest Rates Market Report – Economic Influences – March 26, 2007

The financial markets sat with pins and needles, this week, waiting to see what the Federal Open Market Committee was going to do with the overnight rate of 5.25%.  As expected, they ended up leaving the Fed Funds Rate at this current level.  Their policy statement did have some interesting changes to its tone, however, indicating that their next move might be to lower the overnight rate, as opposed to increasing it.

However, the fed also mentioned that Core Inflation (interest rates worst enemy) continues to hover above the fed’s comfort level, and the overnight rate will not be cut as long as inflation is a threat.  Basically, it’s the Fed’s job to keep inflation in check.  Their favorite tool for measuring inflation is the Core Personal Consumption Expenditure Index.  This index has consistently been over 2.0% and the Fed Funds Rate will not change until this index sits at 2.0% or lower for a few consecutive months…so don’t expect the overnight rate to change for a while.

The housing sector gave us mixed signals this last week.  New construction housing starts were higher, yet new building permit requests were lower.   Nationwide, existing home sales surprisingly rose in February marking the largest monthly gain since March 2004 and the highest pace of sales since April of 2006.  Many experts feel as though the housing market saw its worst levels around August of last year.  This is good news for the housing market, and with rates still at or below the 6.0% level, a wonderful time to buy a home.

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 broker will follow these movements and know when a good time to lock in an interest rate is.  There are also “trends” that bonds (mortgage backed securities) follow.  For example bonds will make a 25 day, 50 day, or 100 day moving average that they like to stay close to.  By watching and measuring these “averages” or “trends” you can generally tell where bonds (and therefore interest rates) will move.

Weak or negative economic news generally is bad for the stock market, and good for bonds or mortgaged backed securities.  Good economic news will cause investors to put funds into stocks and generally take money out of bonds, causing these bonds to move lower, and therefore their yields higher…causing higher interest rates.  Over the past couple of weeks we have had interest rates bouncing in between two “trends” or “averages.”  So, as economic information came out…interest rates would trade between these two levels of support (trends), causing a lot of stableness.  This week holds a lot of economic reports.  Every day there is something being released.  New Home Sales, Consumer Confidence, Durable Goods Orders, Final 4^th Quarter GDP, and finally, on Friday, the Personal Consumption Expenditure Index.

So, look for slightly lower interest rates throughout this next week.  However, be wary of this Personal Consumption Expenditure Index…it could wipe away all of our gains.

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