Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – May 14th, 2007

Horrible Retail Sales brought rates down

The Fed’s Interest Rate Decision and Policy Statement…

…was released on Wednesday, and as expected, the Fed did nothing to the overnight rate.  You’d think I would be elated.  You might wonder if interest rates moved below six percent for no points.  Unfortunately, the “tone” of the meeting wasn’t as positive as the decision itself. 

Good ‘ole Ben Bernanke and his bond-buying buddies believe wage-based inflation better be controllable before bonds aren’t bought in favor of better bets with stocks (huh?).

That being bellowed…The market reacted negatively, because it was looking for inflation to be commented on favorably by the statement.  Even though recent data from wage information and inflation has been relatively friendly, and the economy is slowing somewhat, the Fed is mostly concerned that inflation will, “fail to moderate as expected.”  So even though the Fed admitted that they “expect” inflation to moderate, their concern is that it won’t.  How’s that for the power of one’s words having an effect on not only our nation, but the world! 

Retail Sales were at their worst level in seven months. 

These are sales for everyday items like clothing, cars, etc.  One reason is undoubtedly the price of gasoline.  When the price of gas goes up, expect that price of everything else to go up with it.  Over and above that we had a really cold winter.  Remember last month I talked about people finding it difficult to go out and buy a home in the cold weather, well that cold weather froze crops.  Also, many corn products are being converted to other fuels, which is causing a shortage of corn which increases its value.  

By the time you read this article the oh-so-important Core Consumer Price Index will have been released.  With all of the past inflation information showing that inflation is moderating we hope to see a favorable number.  The 200-day moving average has been a HUGE level of support for mortgage-backed securities, so it would really have to be a surprise on Tuesday to break through that trend-line.  But if it is bad news we could see higher rates and a difficult time breaking back above that 200-day moving average.  

Also, housing information is expected on Wednesday with the release of Housing Starts and Building Permits.  As the weather warms over the nation, these figures should start looking more favorable.  It’s an exciting time for interest rates.  I hope that next week we’ll be talking about inflation looking in total control and bonds breaking above the 25, 50, and 100-day moving averages to bring a trend of lower interest rates.  Until next week…