Danny Salas

Chico, CA Interest Rates Market Report – Economic Influences – October 6, 2009

Rates Will Move Up On Australia's Rate Increase

Put Another Quarter Percent On The Overnight, Mate

That’s right…Australia’s Reserve Bank increased their overnight rate to 3.25% from 3.0%.  It was totally unexpected!  They indicated that they felt as though it was not only safe to do so, but that other hikes could be around the corner.  This signaled stock market frenzy throughout the world, as the markets are taking this as a hint, that globally, things are looking better.

There’s Gold In Them Thar Hills

And it reached its highest value ever!  $1,040 an ounce.  The Australian announcement is also pushing up oil costs, putting pressure on the U.S. dollar, and increasing metal costs all over the world.  This is concerning, as if other countries are more prepared for an economic recovery, before the United States, it could prove more difficult for the U.S. to get out of our financial woes.  With our unemployment rate near 10%, it’s difficult to see the Fed making a move to increase the overnight rate, any time soon.

Drum Roll Please

Stocks 3rd Quarter Earnings will start to pour out their financial status, starting tomorrow.  This is huge news, particularly due to the fact that things have been looking so rosy for the last few months.  I think that the information won’t be as bright a picture as the media has been portraying, as of late.  It’s one of the main reasons why I called rates to be in the fours, almost two months ago.

Why Not Lock?

With rates this good, an so much uncertainty in the market.  I’d take my chances and lock.  Today may see some volatility, then after the 3rd Quarter Earnings Reports start to hit the market, we may see some lowering back to where we were yesterday.

Related Must Reads

Read, “Unchartered Territory in this ‘08 Article
What Will Cause Rates To Be In The Fours?
Recession Around The Corner? From August of 2007

What To Subscribe To:

Get Our Twitter Updates
Get Our Blog Blast
Connect With Us On Facebook

Chico, CA Interest Rates Market Report – Economic Influences – Oct 14th, 2008

Unchartered Territory…Again

Last week I indicated that… “some experts think that the Fed might have a surprise lowering of our (overnight) rate by 50 basis points before the October 29th meeting.”  Also, I indicated that generally, that would be inflationary, however, with a coordinated effort of banks all over the world, lowering their benchmark rates too, “the value of the dollar would not be affected and rates might benefit from this.”  Well…rates haven’t benefited.  I did say also that, “we’re in unchartered territory.”  So, that’s my out!

So, the European Central Bank, Canada, the United Kingdom, Switzerland, and Sweden all lowered their Benchmark Overnight Rate.  This should have kept rates lower and should have not had an inflationary reaction since the value of the dollar would be in check.  Also, since the value of the dollar was increasing, and oil is traded in dollars, the price of oil came down…this should have helped interest rates too.  So I was right about the actions of the banks, just wrong about what the affect of those actions would be.  Unfortunately…there was no lowering of interest rates.

A Catch-22 for Interest Rates

The next day, Central Banks in Asia, followed suit.  What ended up happening here was a flight of investors, back into the stock market, which was at the expense of bonds, mortgage-backed securities, and therefore, interest rates.  We’re stuck in somewhat of a catch-22 scenario and interest rates are bearing the brunt.

The four-week average of Initial Jobless Claims moved to a seven year high.  But, as mentioned before, here’s some good news…oil is trading at about $82 per barrel.  Remember when I was writing about $100 dollars, then $147 in July?  So…at least we’re spending less at the pump!  Other good news was that two weeks ago I reported on the sharpest decline in the Dow Jones History…well…this last week we had the highest gain in the Dow Jones History…a 936 point increase.  That’s cool, but this volatility can be frightening.  We’ll just have to buckle down and try to be optimistic about the future.

Follow The Right Index

Once again we were experiencing opposite directions regarding the 10-Year Treasury and the yield on mortgage-backed securities.  I have spoken more often of this in the past year than any other year in history.  It’s important to note that many of my colleagues use the 10-Year Treasury Yield to follow interest rates and that is a dangerous path to follow.  For example, last week Treasuries were getting pummeled as people took money out of them and put them into the stock market.  However, Mortgage Bonds (or mortgage-backed securities) started to look a little more favorable to investors, as they tried to gain some momentum on the recent declining values of these bonds.  So again, some in the industry may have locked in an interest rate on the wrong day, by following the wrong index.

So, $250 Billion of the $700 Billion rescue plan (or whatever the final number ended up being) went to invest directly in our banking system.  So, the government will start buying stock in the biggest American Banks.  This will stabilize the marketplace, and it’s truly needed right now, but will be interesting to see how the government will get out of this habit in the future.  Banks just had too many loans compared to what capital they held.  The only way to offset this is to sell the loans at a discount or raise capital.  Hard to raise capital when nobody’s interested…so the government will step in.  There are incredible buying opportunities out there…get out and work with your favorite real estate agent and mortgage professional to see the safe haven real estate holds for the future.  It’s an excellent time to buy.  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – December 11th, 2007

Jobs Report Figures Compared to ADP

Look to your right when you’re in Valencia and you’ll see the interest rate chart I’m staring at off on the horizon.  That’s right…you’d get whiplash if you read it too quickly.  The interest rate chart looks like The Colossal at Magic Mountain.  First, remember me mentioning Automatic Data Processing (ADP) in other articles?  Well, they came out and said that the US would report about 189,000 new jobs.  We were expecting 70,000.  Another report showed Productivity revised to the highest level in four years, at 6.3%. 

Wage Based Inflation Lower

Interestingly, however, was the fact that Annual Unit Labor Costs, a gauge of inflation and profit that is closely observed by the Fed, declined 2.0%.  It’s the steepest decline in four years.  So, even with the hot jobs estimates from ADP and high productivity, what helped interest rates was this lower read on the Annual Unit Labor Costs (keeping wage-based inflation lower).

Other Countries’ Lower Rates Will Lower Our Rates

‘This last week Great Britain’s central bank, The Bank of England, lowered their overnight rate to 5.5% from 5.75%.  This is good news for the US because it will ease some of the pressure on the lowering US Dollar.  The European Central Bank remained steady, however.

Change Was Eminent

As you saw in last week’s article, we were enjoying low, low interest rates.  So low that we knew a correction was eminent.  It happened with the jobs numbers formally coming in at 94,000 new jobs (not ADP’s numbers, however, still quite high).  What was worse (for rates) was that the unemployment rate remained at 4.7%.  They expected those numbers to move to 4.8%.  Coupled with an Hourly Earnings number up 0.5% and above the 0.3% that was expected, this caused higher wage and tight job market fears.  Both inflationary – and interest rate’s nemesis.  So, the Fed’s task of determining which factor, weaker jobs growth compared to wage-based inflation, would have an impact on a .25% or .50% cut in rates on the 11th. 

It’s An Excellent Time To Buy

We’re back in the volatility craze right now, for sure.  And what happened on the 11th?…The Fed lowered the overnight rate (or Fed Funds Rate) only .25%  This was a little surprising to the stock market which was not doing very well late Tuesday.  It was down over 220 points.  So mortgage backed securities were up 74 basis points around noon time.  Remember, that’s approximately .75% better in points than a loan locked the day before.  The dollar responded to this move nicely.  This preserved the value of bonds, but obviously, the stock market did NOT like the move.   There is a level of resistance, just above where interest rates ended up on Tuesday the 11th, so we’ll have to watch those levels and lock in interest rates if they bounce off of those levels and cannot pierce through them.  Need I remind you that it’s an excellent time to buy?  Until next week…

Chico, CA Interest Rates Market Report – Economic Influences – June 12th, 2007

Foreign Interest in US Bonds

In May 3^rd’s issue of Chico’s News and Review’s Market Outlook I discussed the concern of the foreign market’s interest in American Bonds.  I said, “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.”

In May 17^th’s issue of Chico’s News and Review’s Market Outlook I mentioned that we did not expect to, however, if we did break below the 200-day moving average, “…we could see higher rates and a difficult time breaking back above that 200-day moving average.”  At that time, we were locking in interest rates of around 6.0%.  Today, the market demands rates of approximately 6.75% for the same cost.  

On Wednesday, June 5, The European Central Bank (ECB) for thirteen European Countries increased their overnight rate by .25% to 4.0%.  The ECB is Europe’s version of our Federal Reserve.  They also are expected to continue increasing their rate over the next year to levels of 5.0% due to their continuing economic growth and concern for inflation.  So…global investors have an opportunity to move their money from our bonds to Europe’s bonds as Europe’s become more desirable to foreign investors in search of higher yields. 

Thursday, June 7^th was a nightmare!  New Zealand’s Central Bank did the same thing that the ECU did.  They increased their overnight rate, but this was a complete surprise.  So, not only were foreign investor’s lured from the US to maybe “closer to home” investments in Europe, but now the possibility of “closer to home” investments in New Zealand became a reality, causing our bonds to plummet downwardly 91 basis points on the day.  Remember, bond values (or mortgage backed securities) moving down means that interest rates are moving up.  91 Basis points basically boils down to a .875% cost in points to buy the same interest rate.  So a zero point loan on Wednesday could cost you .875% points for the same interest rate on Thursday.  That’s almost a full point! 

It was the worst single day loss in over three years. 

Then, later that same day, Australia was talking about doing the same thing, to curb their hot market and luring inflation concerns. 

So, Friday, June 8^th comes around and we lose another 44 basis points, but bonds tried to rally and finished the day about where they started…WOW!

So thank God for last weekend.  It was the only time rates weren’t skyrocketing!  This week started out as badly as last…Japan’s economy is growing rapidly as well.  Japan has more foreign investors in US Bonds than any other country.  Coupled with the fact that the dollar is losing value compared to the Japanese Yen, this puts more pressure on US bonds.

On Tuesday, June 12, China and Japan were talking about pulling out of US Bonds. 

Then at 1 PM ET, $8 Billion of 10-Year US Treasury Notes were auctioned off…with almost NO foreign investment interest…sending mortgage backed securities down, down, down another 61 basis points. 

Hopefully, Tuesday will be the bottom of the barrel, so to speak, and mortgage backed securities will recover…Until next week…