There’s no time like the present, so the famous saying goes. And that’s certainly true when it comes to the good inflation news we saw last week. But, remember, things with inflation could change in the future as the economy continues to try to climb out of the recession…which could have a negative impact on Bonds and Florida mortgage rates. Here’s what you need to know.
The Consumer Price Index (CPI) for July was unchanged, and, the year-over-year CPI fell 2.1%, the largest 12-month decline since 1950.
There was also good news on inflation last week from the Labor Department. Worker Productivity came in better than expected, rising at its fastest pace in 6 years, as companies cut costs and try to maximize output from their current workforce. This efficiency helps curb inflation, which is good for Bonds and home loan rates.
So how does this news tie in with the economy overall?
For one thing, consider last week’s Retail Sales Report, which showed that Retail Sales dropped in July by 0.1%, well below the 0.8% gain that was expected. This report negated the better than expected Wal-Mart second quarter earnings report and signals that consumers are still saving more than spending.
Although low consumer spending may seem like a bad thing, it is actually not such bad news in terms of inflation because of a little known (and rarely discussed) but critical facet of the economy called the velocity of money.
The velocity of money concept is simple. It goes like this: when you buy a pair of shoes, the owner of the shoe store takes that profit and buys a big screen TV, then the TV store owner buys something else, etc. The same dollar passes through the economy over and over again, triggering growth, jobs and, ultimately, inflation. The latest Retail Sales Report tells us that the velocity of money effect has been stagnant…that shoe store owner is not running out to buy a big screen TV with the profits. Once consumer spending begins to increase and the velocity of money increases, inflation is likely to follow. This will be something to look for as the economy continues to stabilize.
Something else to look for is the approaching end of the Fed’s Bond purchase program. Home loan rates have stayed historically low since the program began in January. So, this is another variable that could push Bonds down and home loan rates up in the future.
Bonds and rates did manage to end last week better than where they began, but there was a great deal of volatility along the way. Give me a call if you want to look at your situation and see if now is the time for you to act.
LAST WEEK MARKED MORE TREASURY PURCHASES AND ANOTHER RATE AND POLICY DECISION FROM THE FED. CHECK OUT THIS WEEK’S MORTGAGE MARKET VIEW TO LEARN EVEN MORE ABOUT WHAT THE FED DOES.
Florida Mortgage Forecast for the Week of August 17, 2009
While there will be a break in the Fed Treasury auctions this week, there will still be plenty of news that could affect the markets. Tuesday will bring more inflation news in the form of the Producer Price Index (PPI), which provides information about wholesale level price changes. We’ll also get a read on the housing market with Tuesday’s Housing Starts and Building Permits Report as well as Friday’s Existing Home Sales Report.
Thursday brings both the Philadelphia Fed Report, which is one of the most-watched manufacturing reports overall, as well as the Initial Jobless Claims Report. We have seen three weeks of readings under 600,000 claims after 22 consecutive weeks of readings over that level. However, it may be that those numbers have dropped as a result of Claims benefits expiring, rather than people finding employment.
Remember: Weak economic news normally causes money to flow out of Stocks and into Bonds, helping Bonds and home loan rates improve, while strong economic news normally has the opposite result. As you can see in the chart below, Bonds and home loan rates were helped last week by tame inflation readings and a strong demand for Treasuries. I will be watching closely to see what this week brings.
Chart: Fannie Mae 4.5% Mortgage Bond (Friday Aug 14, 2009)
I hope you found this post useful! As always, if you or anyone you know is in need of a local Florida mortgage loan originator, I’m your guy. Call me at 888-859-7418 or apply online for your Florida mortgage. We’ll keep you posted and let you know when it’s time to pull the trigger!
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