Danny Salas

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

Recession, Recession, Recession

So many changes!  So little space to report to you about them!  First, the initial Jobless Claims skyrocketed to 406,000.  This helped rates lower, coupled with the fact the Ford Motor Company reported close to a $9 Billion loss for the second quarter.  Remember, news like that hurts that stock market, and therefore money gets put into Bonds and Mortgage-Backed Securities, helping interest rates.  Then, of course, the very next day we had a string of positive economic news that helped the stock market.  Durable Goods Orders rose 0.8% in June.  New Home Sales for June came in at a healthy 530,000.  Don’t count on this setting a new precedent, however.

Is Consumer Confidence Getting Stronger?

The not mentioned often, Michigan Consumer Sentiment came in significantly higher than expected.  This was kind of a precursor to the Consumer Confidence Report later in the week.  Keep in mind that when consumer confidence is up, that excites the stock market, allowing money to flow out of bonds.

Probably of greatest importance was a healthier Dollar and lower Oil prices.  I’ve written before about how lower oil costs help inflation.  Here’s the scoop on what’s EXPECTED to happen to the Fed funds rate:  August 5th; nothing, September 16th; 50% chance of a .25% increase.  You saw it here!  But keep in mind…there are always surprises!

We’re “Setting the Stage”

Germany’s Consumer Confidence was lower than expected; together with other weak data coming from Europe this helped Bonds in the US.  The Federal Reserve Bank of Minneapolis President, Gary Stern, reported that “the credit crunch will continue for several quarters and could still get worse…Headwinds to the economy haven’t diminished and are possibly getting worse, setting the stage for a lengthy period of weakness like that seen in the early 1990’s.”  This pressured stocks and rallied bonds, too.

Consumer Confidence High…Why…?

The morning this article was written, Consumer Confidence was reported at 51.9.  This was barely over the estimated 50.0 reading expected, however, it was the first increase in the index since December.  So, the market went crazy.  Now get this…just one day before, check out these headlines:  Intrade; a 20% chance that “the US economy will fall into a recession during the remainder of calendar year 2008.”  USA Today; “33% of Americans believe there could be a collapse of the country’s economic markets within the next five years.”  That sounds really confident to me!  But we must keep in mind that if consumers are less worried about inflation, and oil prices continue to decline, that this could heat up the stock market and take funds from bonds.

Changing the Way We Do Business…

The biggest news of the week was an announcement from Treasury Secretary Henry M. Paulson, Jr.  Together with four of our largest banks, Secretary Paulson announced the concept of “Covered Bonds.”  This would be a new way of financing mortgages for the United States.  Used in parts of Europe, Covered Bonds are securities that a bank can sell to raise money for home loans.  Then, the monthly payments from homeowners go back to pay back the bonds.  These payments are kept on the banks financial statements for all to see.  Now, if a customer defaults on these types of securities, than the bank must “cover” the loss.

Next week we’ll touch on the Personal Consumption Expenditure Index to get a real feel on where inflation is…Until then…

Chico, CA Interest Rates Market Report – Economic Influences – June 10th, 2008

Whoa Nelly, Whoa!

It was, frankly, a horrible week for interest rates and inflation was the primary reason!  First of all, Productivity (output per hour worked) rose at a 2.6% annual rate, this past quarter.  This is revised from 2.3% estimate that we saw just one month ago.  Also, unit labor costs rose 2.2%.  This is revised from 2.3% that we saw just one month ago.  Both of these revisions are actually good for inflation, as productivity can increase the amount of sales and services of a business, without increasing the business’ costs.  Also, unit labor costs can increase wage-based inflation, so a lowering of costs is good also.  Not good enough to help with the inflationary concerns that we keep seeing, however.

Jobless Claims Lower Than Expected

The initial Jobless Claims Report showed only 357,000 new claims this week.  Much lower than the 372,000 the market was expecting.  This was kind of the tip of the iceberg regarding the spike in interest rates.  What should have helped rates a little was the announcement from the Bank of England (BOE) and European Central Bank (ECB) to leave their interest rates unchanged.  Unfortunately, however, The ECB President Jean-Claude Trichet mentioned that they may have to raise their rates due to spiking costs in oil to over $134.00 per barrel.  This weekend the US Dollar, and therefore created more negative movement regarding US interest rates.

Oil’s Just Killin’ Us

Even with this week’s 5.5% Unemployment Rate jump from 5.0% just a month ago (the biggest increase since 1986), rates couldn’t get over the oil cost and inflation concerns.  As mentioned in another article, Goldman Sachs says that gas prices in the US will spike to $5.75 per gallon while the price per barrel with soar to $200 in the next two years.  Also, the US economy has lost 324,000 jobs this year.

Good news on housing, though!  Pending Home Sales for April rose 6.3%.  The market expected a loss of 1.0% and there seems to be a lot more activity here in our area too.

Are We In A Labyrinth?

Check out this comment by Good ‘Ole Ben Bernanke from this week, “the latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations.”  He indicated that the Fed is in no hurry to increase the overnight rate due to “slack” in the economy, which can lower inflation.  This is interesting because oil prices are out of control and the dollar has been weekend by this and the lowering of the overnight rate (oil is traded in dollars).  If the Fed doesn’t start considering increasing the overnight rate, the dollar may continue to weaken.  Here’s my take…increase the overnight rate.  This will strengthen the dollar, and oil prices will go back down to $100 a barrel.  Doesn’t that sound lovely!  $100 a barrel!  Just this year that was despicable, now it sounds lovely.  Another cause for interest rate deterioration was the comments by Richard “Loose Lips” Fisher, “We are witnessing a negative feedback loop…which is that a weaker dollar can lead to further inflationary pressures which in turn leads to a weaker dollar, etc., and to dampened economic actitity.”  If the overnight rate doesn’t get increased, we may be stuck in this labyrinth of higher long term rates for some time to come.  Hopefully, next week I’ll have more consumer friendly information…Unitl next week.

Chico, CA Interest Rates Market Report – Economic Influences – May 13th, 2008

Inflation “Troublesome”

Last week the Federal Reserve Board Bank of Kansas City President mentioned that inflation pressures are “troublesome.”  He went on to say that if inflation gets too high, the economy could suffer greatly.  This guy isn’t even a voting member and he’s spouting out comments that are “troublesome” to hear.  As if we don’t know these things.  Sometimes, I guess, these guys just like to see their names in the papers.  Maybe it increases their opportunity to become a voting member.  I just don’t see the reason!  Why say that stuff and scare markets?  It’s kinda like little junior riling up big brother just to see what his reaction might be (I never did that). 

On Wednesday, May 7, the Treasury Department auctioned off $15 Billion in 10-Year Treasury Bonds.  Now even though we all are educated and know that interest rates follow Mortgage-Backed Security Yields, the interest in this auction determined how long term interest rates would be influenced.  It went well.

Watch the World Economy…Not Just USA’s

Initial Jobless Claims were reported at 365,000 this week.  The government expected 375,000 but, again, the more closely watched four-week average of claims edged to a slightly higher 367,500.  A sign that we are currently in a recession.  The European Central Bank (ECB) and the Bank of England kept their overnight rate unchanged, but their also concerned about inflation and their economies.  It will be interesting to watch what’s happening around the world, compared to the United States’ economy over the next few years.  Interest rates moved in the opposite direction of the stock market, mainly last week; as there was not a lot of economic information to move markets.  So, when the stock market ended the day below 13,000 (a significant level), mortgage-backed securities moved up nicely; causing rates to go down.

AIG Needing Capital

American International Group (AIG) indicated that they were looking to raise about $12 Billion in Capital to help with their enormous 1st Quarter Loss.  This was alarming to the markets because it showed new depth into how deeply the mortgage credit crisis is touching the world.  This fact, coupled with the announcement of $126 a barrel for oil, cause rates to spike again. 

Making things worse this week was retail sales.  Now, they were down 0.5%, however, excluding auto sales, we actually dropped 0.2%.  Coupled with another market moving statement from Bernanke and dropping below the 50 and 100-day moving averages rates worsened a bit more. 

The good news:  we’ll have to wait and see how next week busy schedule makes out.  This will include information on the Consumer Price Index, more weekly jobless numbers, and the Producer Price Index.  So, hang in there.  We’re still under 6.0% on 30 year fixed rates, so take advantage of that.  It’s still a great time to buy.  Until next week…