Danny Salas

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

Last week we talked about the Federal Reserve Open Market Committee’s, March 21^st minutes being released to the public in Wednesday.  In those Fed Minutes, the Fed stated the Labor costs might rise more rapidly than expected.  Also, of concern, is the fact that there is evidence of a decline in productivity.  This means that employers may find themselves having to pay new workers higher wages, or increase existing workers’ compensation for the same jobs.  All of which adds to concerns of wage-based inflation. 

Also, on Wednesday, Fed Chairman Ben Bernanke spoke regarding all of the recent concerns in the mortgage lending industry.  Jeffrey “The Dissenter” Lacker spoke with economists and Fed President Michael Moskow spoke on the economic outlook for the United States.  All speakers showed concern for inflation.  It was definitely a busy Wednesday with the outlook for interest rates looking somewhat grim.  So, through the week we saw slightly increased rates…until Friday…

On Friday, the Producer Price Index (PPI) Report, which measures wholesale or producer inflation, showed that Core (PPI) was unchanged for the month of March (coming in less than the expectations that we would see a 0.2% increase).  It’s very interesting to note that this is a perfect example on how interest rates move a lot on speculation with what might happen in the market, as opposed to what actually does happen.  Even though there was no change, in those two months, a change was expected.  This assisted with the overall year-over-year Core PPI inflation rate to 1.7%, down from the 2.2% reading that we saw in January.  Core Inflation, at the wholesale or producer level is beginning to show signs of lower inflation.  Great news for interest rates, however, we’d really like to see this passed on to the consumer level.  This is where we could really see help with lower interest rates.  This coming Tuesday, the Consumer Price Index (CPI) is being released.  This will give us a read on consumer inflation and may be a real help with lower interest rates.   

The University of Michigan’s Consumer Sentiment Index for April was reported at 85.3 which is was lower than expectations of 87.5.  The report showed that people have concerns about inflation underscoring the significance of next week’s CPI Report.  

The US Dollar has been weakening of late against the Euro.  A weaker Dollar gradually pressures our Bond values lower for foreign investors…and reduced demand for our Bonds can cause Bond prices to go down, and interest rates to go up over time.  We have been watching this very closely for months, as foreign investment in our Bonds has really been a major impact on our lower interest rates.  If these foreign investors start taking their money and putting it in other economies, our bonds’ values could go down, causing their yields to go up, and interest rates follow bond yields.     

The 200-day moving average has been a nice floor of support for mortgage backed securities.  Tuesday’s CPI report will hopefully show inflation at a comfortable level.  Its hard to break through these “trend lines” and may determine the future of rates throughout the summer.  This week holds a lot of information that will be reported on next Thursday, so until next week…