Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – June 4th, 2007

When Bernanke Talks...Rates Listen

FED Minutes Released

Last Wednesday, May 30, 2007, the Fed Minutes were released from May 9^th Fed Meeting.  The following statements were made, “nearly all participants viewed core inflation as remaining uncomfortably high,” and “all participants agreed the risks around the anticipated moderation in inflation were to the upside.”  So even though the Fed indicated that they felt as though the economy was growing at a slower pace and that rates should come down as a direct reflect of this, rates didn’t react normally, as inflation is still too much of a concern.

Interestingly enough, the Preliminary Gross Domestic Product (GDP) numbers were released and lowered to 0.6% which was lower than the expected 0.8% for the first quarter of 2007.  This showed the slowest growth since the last quarter of 2002.  Two consecutive quarters of negative GDP is a Recession, however, it’s expected that the second quarter of ‘07 will be better.

Market Movers

Something that should have moved the markets was that China tried to cool off their red hot stock market by increasing their “stamp tax” on stock trading transactions.  So, Chinese investors would have to pay more to execute a stock trade.  This caused the global stock markets to tumble, enabling money to move from stocks to bonds, however, it was very short-lived, and basically, within twenty-four hours the global economy and particularly US Stocks ignored the maneuver. 

For the past few months I have been talking about the Core Personal Consumption Expenditure (PCE) Index for April, which measures core consumer inflation.  This gauge is generally the Fed’s favorite measure of inflation.  Finally, we hit below expectation levels at 0.1%  Therefore, the Fed’s year-over-year core rate of consumer inflation fell to 2.0%.  This is the level that the Fed wants to see inflation, from 1.0 to 2.0%.  Unfortunately, it did not help Mortgage Backed Securities because the Jobs Report was much hotter than expected.  157,000 new jobs were created in may, when we only expected 137,000.  Unemployment remained at 4.5%. 

Ben Bernanke Speaks

Tuesday morning, Fed Chairman Ben Bernanke spoke at a conference on housing and the economy.  He stated that the economy is expected to move moderately at an annual growth rate of 3%, however, he also mentioned that, “inflation risks remain on the upside.”  This caused the mortgage backed securities to tumble 28 basis points.  Remember, bond values declining means that their yields are increasing, causing increasing interest rates. 

So, when will we hit bottom and move from this vacuum of downtrend movement in bond prices?  Until we see stocks moving lower, everyone is enjoying the ride by moving money out of bonds into stocks.  It will change, but when is the question.  So, how high will rates go until we see the ride come to its end and you get off the high riding Matterhorn and Space Mountain feel, to a simple glide down the California Adventure path?  We’ll have to wait and see how and when the market will change…Until next week.

Chico, CA Interest Rates Market Report – Economic Influences – April 30th, 2007

Core Personal Consumption Expenditure Index bring rates lower

Existing Home Sales came in weaker than expected. 

March showed 6.12 Million Units, below expectations of 6.45 Million.  The number of existing homes for sale fell by 1.6%.  Keep in mind, however, that February was extremely cold all over the nation.  March homes sales would have been affected by people out looking for homes in February.  Not the warmest climate or best time to be home-shopping. 

Last week, we saw bonds move above the 25 day moving average, but just couldn’t get over the 50 or 100-day averages.  Durable Goods Orders moved up 3.4% when we thought they would only move upwardly by 2.5%.  Corporations spent an increased 4.7% in core capital equipment spending, which was the largest movement since September of 2004.  

The Treasury Auctioned 2-year Notes on Wednesday, and 5-Year Notes on Thursday.  Foreign interest in Treasury Notes have really helped keep interest rates low over the past years, however, foreign investment has been lacking lately.  This could really hurt rates, in the future, so we’re watching foreign interest very closely.  

The auctions didn’t go so well, coupled with the Dow moving over the 13,000 level.  So on Thursday, we broke below the 25 day moving average again.  Friday’s 1^st Quarter Gross Domestic Product Report was weaker than expected.  However, the Employment Cost Index (ECI) which measures the affect of wage and benefit cost growth in relation to inflation, showed some hints of inflation, erasing the GDP’s results. 

After Friday’s economic information, bonds were getting awfully close to moving below the strong level of support of the 200-day moving average.  If we broke below that trend line, we could have been seeing much higher rates for a long period of time.  I have mentioned the importance of this trend-level in the past few articles.  We have been above this level for eight months and the last time we went below this trend-line, it acted the opposite of how it acts now.  So, instead of being a level of support for lower rates, it was a level of residence for higher rates…for one and one-half years!  Scary!!! 

Thank goodness for the ‘ole Core Personal Consumption Expenditure Index (PCE). 

It was reported unchanged for March.  You may remember that in last month’s article, this really helped interest rates.  It did again this month with the year-over-year core inflation level down to 2.1%.  Remember that the Fed wants this level between 1 to 2% for approximately three consecutive months before lowering the overnight rate.  Interest rates reacted very positively regarding this report.  It truly should be the most watched report that mortgage brokers, banks, and realtors should keep an eye on, bus most don’t pay much attention to it.  That’s why working with a professional that knows the industry can be so beneficial.  

Next week is truly back-end oriented!  By the time you read this, Friday’s monthly Jobs Report.  If the news is good news for jobs, expect that we’ll be trading below the 200 day moving average with higher rates to come.  If the news is not so good for jobs, we could see an improvement for rates. 

Stay tuned for next weeks report on what happened in the job market and where rates went.  If my article feels upbeat and motivational, than the jobs report was poor, if I come across depressed and sad, then a lot of people are stoked that they’ve gotten a new job.

See ya next week…