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 – May 8th, 2007

Yeah for unemployment figures???

Halleluiah!  For interest rates, that is! 

The biggest report for last week was that only 88,000 new jobs were created for the month of March and unemployment moved back up to 4.5%.  Now, I don’t want to sound greedy or selfish, but honestly, this is what I do…so…Yeah for unemployment!  Another important fact that you didn’t see in the papers was that revisions to previous months’ jobs numbers was a subtraction of 26,000 more jobs.  Currently, it look like we may be in a change of environment.  The strong labor market that I have been alluding to in other articles, seems to be softening.  Wage based inflation pressure is also moderating…all good news for interest rates! 

Recently, I met with my financial advisor as to where to allocate some of my funds.  It was really interesting to get a feel for where investment strategists felt the market was going.  Basically, their take on interest rates was that the fed was going to start cutting the overnight rate…by as much as 0.5% in June!  While, personally, I think that it will be a little later than that, I think that the second half of the year should see some easing on the Fed Funds Rate…which in turn will have an effect on home loan rates.  

So all of you home purchasers our there that have been sittin’ on the fence, get ready for this summer.  It’s going to by HOT!  The housing market, I predict. 

The media loves to report bad news. 

They’ve been on our housing market for years now, telling us that it’s going to crash.  While there are a lot of opportunities out there for picking up or rescuing sellers out of foreclosures, with interest rates remaining low over this next year, we should see a little pick up in our market.  

Yesterday will be another HUGE day for interest rates.  While that sentence doesn’t seem to make much sense…keep in mind I’m writing this a few days ahead of you reading this.  Ben Bernanke and the Fed will have discussed their Interest Rate Decision and Policy Statement, but you won’t get to ready about that until next week (unless you’re lucky enough to be a Realtor that subscribes to my daily market updates).  Don’t expect them to change the overnight rate, however, I believe that we will hear a hint of possibilities for a change in the next few months, and this could really move the market.  Keep in mind, that interest rates often moving significantly with speculation in the market, as opposed to when changes actually occur.  The tough levels of resistance that we have been experiencing just might be able to be broken through if the Fed’s comments are strong enough to push bonds upwardly.  However, if they indicate more concern about inflation, it might be a while forward we’re able to make that break.  

So, my unemployment comments earlier…take them with a grain of salt.  But we really should be pleased.  We’re experiencing moderate, stable economic growth and inflation looks as though it’s staying in check…you can’t really ask for a much better environment for homebuyers.  Isn’t the market fun! 

Until next week…