More inflation news will follow

“THOSE WHO CAN SOAR TO THE HIGHEST HEIGHTS CAN ALSO PLUNGE TO THE DEEPEST DEPTHS.” Lucy Maud Montgomery. Despite all of the government’s efforts, markets here and around the world plunged this week as the financial crisis continues to grow.

On Tuesday, the Fed and Treasury Department announced plans to purchase short-term commercial paper that many companies rely on to finance their day-to-day operations, to help businesses with their short-term credit and funding needs. The government hoped this announcement would help ease uncertainty, restore confidence, and give Stocks a boost. They hoped for a similar result on Wednesday when the Federal Reserve cut the Fed Funds Rate by 50 basis points, and coordinated an emergency global interest rate cut with the European Central Bank, Canada, the UK, Switzerland and Sweden. The Central Banks in Asia followed suit and cut their benchmark interest rates overnight as well.

However, on Thursday, Stocks plummeted nearly 700 points to a five-year low, and on Friday Stocks ended the day another 126 points lower (after plunging 500 points three times throughout the day). Bonds and home loan rates also worsened sharply in the second part of the week, as Bonds dropped below several important floors of support, and home loan rates ended the week .50% higher than where they began.

From a historical perspective, we are in the midst of a brutal bear market that began on October 9th 2007. Remember that a decline of 20% constitutes a bear market…and a 10% decline is a “correction.” The last bear market occurred between March 24th of 2000 and October 9th 2002 saw a 49% drop. Overall, the average bear market lasts for 12.3 months, with the average decline being 32%. The current bear market is right in line with the average historical time frames, and the extent of the decline is worse than previous bear market averages, but still slightly better than the bottom made in 2002. So the historical data might suggest that we could be nearing a bottom. I will continue to monitor this situation closely, and let you know how this will impact home loan rates in the weeks and months ahead. One bright spot is that oil prices are also plunging, falling from a high of $147 per barrel last July to around $80 per barrel Friday morning…which at least makes a tr ip to fill up at the gas station slightly less painful.

PLUNGING PORTFOLIOS ARE SOMETHING WE NEVER WANT TO SEE HAPPEN, AND NEITHER ARE PLUNGING SAVINGS ACCOUNTS. CHECK OUT THIS WEEK’S MORTGAGE MARKET VIEW FOR SOME GREAT TIPS ON STAYING WITHIN YOUR BUDGET!

Forecast for the Week

Last week was a volatile one despite the lack of scheduled economic reports, and this week several big pending reports could add to the volatility…even with the markets being closed on Monday in observance of Columbus Day. Wednesday will bring the wholesale inflation measuring Producer Price Index and the Retail Sales report for September. The Retail Sales report is a measure of the total receipts of retail stores, and changes in these numbers are closely followed as a timely indicator of broad consumer spending patterns. It will be especially important to see what kind of impact the financial crisis has had on recent spending trends.

More inflation news will follow on Thursday, as September’s Consumer Price Index (CPI) report, which gives a read on inflation at the consumer level, will be released. CPI tells us how much more expensive goods and services are this month over last month, and this widely watched inflation indicator will definitely make headlines. And given what’s been happening in the markets, it will be important to note what’s happening in the housing sector, which Friday’s Housing Starts and Building Permits Report for September will reveal.

Remember when Bond prices move higher, home loan rates move lower…and vice versa. As you can see in the chart below, Bonds and home loan rates worsened this week, due to a variety of factors. I will be watching closely to see if Bonds and home loan rates can change direction.

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