Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – October 16, 2007

Thursday Was The Day To Lock

Inflation Is UGLY!

Last week I mentioned that the Federal Open Market Committee’s Minutes, from the September 18^th meeting, would be released to the public.  Basically, the Fed is showing more and more concern for economic growth.  They also were very vocal regarding inflationary pressures.  So Bond traders are concerned that there won’t be any support for bonds, if inflation starts rearing its ugly head.  And remember, interest rates think that inflation is uglier than Cinderella’s less attractive, of the two, half sisters.  

Interesting little note; since the Fed lowered the overnight rate by 0.5%, the value of the U.S. Dollar has lowered against foreign currencies.  When the dollar is low, things overseas cost more.  When things cost more money, well, that’s inflationary.  So, this inflation puts pressure on bonds and mortgage-backed securities, causing higher rates. 

“Trend Lines” Again?

The good news is that bonds have had support from the 50-day and 200-day moving averages.  Remember that interest rates change daily, but they also set averages that become trend lines.  So, rates can bounce back and forth between two trend lines, as one could act as support, but the other could act as resistance.  So, movement between the two averages, if those two trend line averages are close together, keeps interest rates relatively stable.  Read that again, slowly, it actually does make sense.  This last couple of weeks, Bonds have touched the 200 day moving average twelve times. 

This last week initial jobless claims were reported at 308,000.  This is still hinting that the labor market remains stubbornly bold.  The Balance of Trade for August was lower than expected and represented the closest deficit since last January.  So, in contrast to paragraph two, this is good news for inflation because of the weak dollar…we’ll have to keep an eye on how import and export costs will influence inflation.  “Witch” way will inflation go?

The Producer Price Index (PPI), which measures inflation at the wholesale or producer level, was 1.1% higher in September than in August.  This, of course, caused Cinderella’s sister to reveal her disadvantage once again.  Even tough the year-over-year Core PPI was right around the Fed’s desired inflation level of 2.0%, the PPI made traders nervous. 

Missed It By That Much…

Of course, this week’s article will miss the biggest potential market changing statistic by one day, just as last week’s Fed minutes were missed by such a close time-frame.  The Consumer Price Index will read consumer inflation and could give us a hint as to what the Fed is going to do on their Halloween Meeting.

Remember when I had said to watch foreign investment in our bonds?  Well, in August, foreigners dumped $69 Billion is US debt securities.  This could be scary for bonds! 

For loans right now, however, we are cautiously floating and waiting to see what tomorrow’s CPI and Core CPI will bring.  We’re expecting both to be about 2.1%.  So we’ll have our fingers on the lock trigger if they’re reported higher than that!  Happy Halloween!

Chico, CA Interest Rates Market Report – Economic Influences – September 18th, 2007

There's Support at the 200 Day Moving Average

“A Perfect Time To Lock”

Well, the news is out!  After an interesting week of relatively calm economic information coming out of the markets, the long awaited anticipation of the release of the Federal Open Market Committee’s (FOMC) Monetary Policy is here…but you’ll have to wait.  Let’s go over this past week’s calendar.  First of all, last week I told you about the Jobs Numbers coming in at a net loss of 4,000 jobs.  That started speculation that the Fed might lower the overnight rate 0.5% point as opposed to the 0.25% reduction anticipated, before these jobs numbers.  So remember when I said, “A perfect time to lock!?” Let me pat myself on the back!  I also received a wonderful bottle of wine from some extremely pleased clients who follow this article, and understand why I chose to lock their loan in when I did. 

Lock OR Float?  When AND Why?

Throughout the rest of the week, we saw noticeable price erosions as investors lost their feeling that a 0.5% cut was likely.  We did decide to float new loans, however, from applications taken after the window of opportunity late last week.  Here’s why: 

Remember the stubborn 200-day moving average that acted as such a heavy line of resistance for so long?  Well, since those jobs numbers, mortgage backed securities have been able to stay above that trend line, hence, making it a heavy level of support.  So, with the release of economic data having little effect on rates, and the stock market not moving too much in any one direction this past week, rates have remained relatively stable.  All in anticipation of the FOMC meeting!  Even Retail Sales were lower than expected.  Particularly taking out auto sales numbers they fell by an astonishing 0.4% below expectations.  The largest decline in a year!  But investors favored waiting on Bernanke’s report. 

Michigan!  What Do They Know?

The University of Michigan’s Consumer Confidence Index was surprisingly higher than expected.  This pushed investors to believe that as long as consumer confidence remains healthy and the Fed kept liquidity in the markets, an economic slowdown would only be temporary and long term interest rates would continue to move higher.  Now, I don’t know what consumers you’re out their talking to, but what’s going on in Michigan?

When Greenspan Speaks…

Did you see Alan Greenspan on 60 Minutes Sunday Night?  He’s out pushing his new book “The Age of Turbulence:  Adventure in a New World.”  Our old fearless FOMC leader stated, that the greatest problem facing our economy is “the re-emergence of inflation.”  Not a very good comment for interest rates, as inflation is its worst enemy

Drum roll, please! 

Here’s the announcement!  A surprise move of 50 basis points!  Now, while the market reacted quite nicely, initially, the fed also commented that, “inflation remains a concern.”  Our advice here would be to see how far the initial reaction will go…lock when traders realize that this is not really good for bonds…as money will go into the stock market and away from bonds and mortgage-backed securities.  So watching the market closely and locking into an interest rate just before bond values start declining would be prudent and you will have beaten the system, so to speak…Until next week…