CPI and what it means

I last wrote about CPI 2 months ago (back in December).
It had to do with the November CPI and Core CPI data

Sometimes I like to go back and read what happened and why.
It gives you a perspective on how topsy turvy the markets can be sometimes.

Here's the post from December: LINK



Here's a rehash of the why and what of CPI:

It's put together by the Dept. of Labor and is a weighted average of prices of a specified set of goods and services purchased by consumers.

In simple terms, it tracks the prices of a "specified basket of consumer goods and services, providing a measure of inflation". It's considered a cost-of-living index.

When that shopping cart of goodies rises dramatically we have inflation.

You'll hear from time to time people referring to "Core Inflation".
Core Inflation is when you take the CPI numbers and back out the most volatile components - food and energy.

Why you ask?

Because these two groups can have dramatic mood swings, which then will skew the monthly numbers, which then might have even more dramatic results on the market.

Why do we care?
> CPI is very closely watched by the Feds.
> The Feds raise and lower short term interest rates.
> That changes influences the markets in general (not 30 yr mortgages)
> Which then determines how much investment money is out there for lenders to use and at what rates.

So other there are other reasons why we as members of society care about CPI than just how much it's going to cost us to live here, cloth our children in the latest fashions, and so on.

So back in December, when the CPI came out I reported the actual odds of the Fed's having a RATE CUT in the near future doubled!
That wasn't my odds, those were the odds given from large institutional types.

"Mike, you said a Rate Cut? All I hear about in the news is about the Fed's having to Raise rates - not lower them. What gives?"

Easy. Back in December, the November CPI was referred to as very tame.
In fact it was unchanged in both raw data and core data.

Since then we've had a number of other factors come into play.

First of which, the latest core inflation number bumped up .2%!
That's the largest jump since last June.
(the experts were expecting a number closer to .1%)

Then just last week, in talking to the nation's lawmakers, Mr. Bernanke said that "The Fed expects core inflation to drift lower, but cautioned that the Fed is poised to raise rates if necessary to contain inflation."

So...

• The core inflation figure they were expecting went up not down.
• Not only did it not go down, it doubled what they were expecting.
• And the "Head Fed" publicly and specifically announced their intentions concerning this indicator.

That's a clear cut signal to the big money playing with the odds that what might have been back in December, isn't anymore now in February.

In the end, the market is always right.
We can just sit back, try to make sense of it all, and enjoy the ride.

Crystal Ball Anyone?

The news this week that the mortgage world seems to be talking about has to do with the economic forecast from two of the biggest insiders.

Last week it was Freddie Mac issuing it's forecast.

This week, the Mortgage Bankers Association released its economic forecasts for the next three years.

These projections did not differ substantially from those set out last week by Freddie Mac, however, here is a summary of the report.

• Real GDP growth will average about 3.0 percent in 2007, 3.3 percent in 2008 and 3.4 percent in 2009.
• Fixed mortgage rates are expected to rise to about 6.5 percent by the end of 2007 and to remain around that level through the forecast period.
• Existing-home sales will decline by about 7 percent and new home sales 8 percent relative to 2006. Both categories are projected to rebound in 2008 by about 3 percent and a further 1 percent in 2009.
• Existing home price appreciation will slow significantly over the next three years. Median prices for both new and existing homes should remain relatively flat next year and rise about 2 percent in 2008 and 2009.
• Purchase mortgage originations will reach $1.33 trillion in 2007 and remain flat in 2008. Refinance loans will total $1.06 trillion in 2007 and then decline to $957 billion in 2008. Purchase originations should edge up slightly the next year while refi originations should decline to about $800 billon.
• Total residential mortgage production in 2007 will be $2.39 trillion, declining by about 5 percent from an estimated $2.51 trillion in 2006. Total mortgage originations are expected to decline an additional 4 percent to $2.29 trillion in 2008 and drop another 6 percent to $2.15 trillion in 2009.

A couple of things to remember here.

1. Both these companies have a vested interest in the housing market.
2. This is a wild guess on both their parts, nobody can accurately tell you what tomorrow is going to be like. Not in terms of rates, or GDP growth, or anything else they have listed.
3. This is a national report, the bay area is special, we a have a certain amount of insulation that places like Podunk, MO doesn't have. Our appreciation is going to always be different.
   

I'd be pleased as punch if rates stayed where they say they will for the next 3 years.
I'll also tell you this - don't count on it.
If anything rates cannot stay the same.
Just by the nature of the beast.

Here's a chart I throw up on the screen in seminars:


You can click on that and make it really bigger, but do you see any period in time when rates stayed the same?
Not me.

Rates will change.
They'll either go up or down but they will always change.
Get used to it.

December Jobs Report

This morning we had the release of the December Jobs Report.

Surprise!
It was better than expected.

Now if you recall, in a post a while back I mentioned that when we had a poor Jobs Report the 10 yr yield would drop in the coming week. Does that mean that when the Jobs comes out positive we'll see higher rates?

The answer would have to be a definite maybe.

You didn't think it would be that simple did you?

You'll also recall a prior post talking about the odds of the Fed's dropping rates in the first quarter. It had to do with one of their hot buttons - Core CPI.

Just last Wednesday we saw the release of the Fed minutes from that last meeting.
In this we learned that one of the issues they showed concern about economy wise was the balance in the construction and manufacturing portion of the economy as compared to the service sectors.

The timing couldn't have been better.
Looking into the Jobs Report , overall it was up, with the biggest job gains in education and health care, business services, financial firms and leisure and hospitality (that's pretty much the service sector).

It wasn't all sunshine - the report also had losses of jobs.
And guess where they were...?
Construction and manufacturing!

So let's recap...

• The Feds do not raise or lower in their last meeting - (Good Thing)
  
• CPI comes out rosy and looks good core inflation wise - (Good Thing)
• The odds of a Fed rate cut double - (Good Thing)
• PPI comes out, not so rosy - (Bad Thing)
• Then the Fed minutes come out - (Ok Thing)
• And now the Jobs Report - (Bad Thing due in part to previous OK Thing)
• The odds dropped dramatically for a future rate cut - (Bad Thing)
• Lot's of talk about a future rate hike too! - (Bad Thing, Duh...)
  

It's a roller coaster out there, that's what makes it so exciting.
Hang on and enjoy the ride!

Not Much to Chew On

The Buzz in the markets this week is that there isn't a Buzz to be Buzzing about.

The market feeds on data,
the market feeds on news,
and the market feeds on reports.

This week, other than the initial PPI kneejerk reaction, there really hasn't been anything solid for the markets to chew on.

So we're in a holding pattern.
We're waiting for anything, positive or negative.

The market doesn't change for the sake of change.
It changes because of perceptions and hunches.
It's the data, the news, and the reports that provide the catalyst for those perceptions and hunches.
Going back to Chem 101, "a catalyst accelerates a reaction".

or from Wikipedia...
Catalysts generally react with one or more reactants to form a chemical intermediate that subsequently reacts to form the final reaction product, in the process regenerating the catalyst. The following is a typical reaction scheme, where C represents the catalyst, A and B are reactants, D is the product of the reaction of A and B:

A + C -> AC (1)
B + AC -> ABC (2)
ABC -> CD (3)
CD -> C + D (4)

Although the catalyst (C) is consumed by reaction 1, it is subsequently produced by reaction 4, so for the overall reaction:

A + B + C -> D + C

the catalyst is neither consumed nor produced.

See how easy the world can be with Wikipedia?

Here's my analogy of the markets this week.

We're all at a "Big Bob's All-You-Can-Eat Buffet".
Bob doesn't do what other buffets do.
Bob's buffet consists entirely of 100 different pasta shapes,
all with the same canned cheesy cream sauce!

No Chicken Fricassee, No Swedish Meatballs - Just your choice of fettuccine, linguine, or wagon wheels.
Top that with a super sized scoop from the vats and vats of Bob's Famous Cheesy Cream Sauce.
And don't forget to take home a 10 lb. can of Bob's Cheesy Cream Sauce available for purchase at the cashier on your way out. It's great on any type of pasta!

Not very catalytic, eh?
That's how the market feels right about now.


On the other side of life I have been recently been bombarded by email alert after fax alert after wholesale rep coming into my office.
They pretty much all warn the same thing.
Loans may soon jump dramatically in pricing.

As we watch the market (in particular the treasuries), we'll see pricing changes if there is a dramatic change in the yields. That change needs to be abrupt and dramatic.
If it's a slow rise, no daily price change.
If it's a sharp directional change with conviction, the fax will light up with pricing changes from all the lenders.


Normally lenders don't issue broad warnings like this.
They are now because they see an approaching tier.
If the rates on notes stay where they are for much longer, the lenders will have to adjust accordingly.

What does this mean?
It means that although rates have been fluctuating within in a specific range for a while, they have been hovering for a while on the ceiling of that range. The general idea is that if they are hovering or pushing for a while they will eventually push through.
That breakthrough is what the lenders are warning us in business about.

So if you are thinking about a refi or purchase anywhere in the next month or two it may be wise to lock that loan as soon as you can.

Or as the saying in the industry goes, "Lock 'em if you got 'em!"

Lock your loan, get a confirmation, then go out and enjoy the holidays.
And while you are out shopping, don't forget to stop in at that all you can eat buffet.
"Yummmmmm! Canned Cheesy Cream Sauce!"

BTW: Here's Geri' Blog

Knee Jerk or Well Thunk'd?

If CPI is a number that reflects what cost of living for the consumer, PPI (the Producer Price Index) is the cost of living for the business world.

Sometimes referred to as the Wholesale Price Index, the November numbers came out this morning.

This may be a little too macro economics but here goes...

CPI is the end user, the end result, the terminus.

PPI is more the price business is going to have to pay to create whatever it is they make. It's a major factor going into the "cost of good sold" for the economy.
PPI is wholesale - CPI is retail.
Many look at it as a leading indicator to the CPI.

Why?

The cost of the goods that are produced will eventually get passed down to the consumer. That makes sense right?

So when the poor numbers came out this morning,
(which also added to the currency stuff from Thailand)
we had a big jump in the 10 year note.

But wait!
That was just at the open, then it looks like it went right back down to where it closed yesterday.
So what's up with that?

In part, here's what happened.
The initial reaction of the market is most always going to be done using a high powered magnifying glass.
That's initially. Then what happens is the cooler heads back up a couple of feet and look at the big picture.

That's what happened today. The data wasn't good looking at the one month number.
But back it up and look at the wide angle and you'll get a different view.

Remember, the guys down on the floor of the CBOT or NASDAQ, or NYSE are there for a reason. They are there to feel the market. They can feel momentum. They feel the change of tides before the numbers show it. They are paid for their knee jerk reactions.

Meanwhile, back at the office...
The analysts start digesting the data. They look at the bigger picture and make the call down to the floor explaining that maybe this is just a minor correction and the sky isn't really falling. The market then stabilizes and goes back to where it should be. All is well again in the world.

Of course this is gross generalization but in the big picture, this is what actually happens.

I mentioned the same magnification reference when looking at local housing prices in a previous post HERE.

Make sure your looking through the right looking glass, Alice.

CPI Data and the Santa Claus Rally

So the CPI numbers came out today.
That's the Consumer Price Index (just in case)

It's put together by the Dept. of Labor and is a weighted average of prices of a specified set of goods and services purchased by consumers.

In simple terms, it tracks the prices of a "specified basket of consumer goods and services, providing a measure of inflation". It's considered a cost-of-living index.

When that shopping cart of goodies rises dramatically we have inflation.

You'll hear from time to time people referring to "Core Inflation".
Core Inflation is when you take the CPI numbers and back out the most volatile components - food and energy.

Why you ask?

Because these two groups can have dramatic mood swings, which then will skew the monthly numbers, which then might have even more dramatic results on the market.

Why do we care?
> CPI is very closely watched by the Feds.
> The Feds raise and lower short term interest rates.
> That changes influences the markets in general (not 30 yr mortgages)
> Which then determines how much investment money is out there for lenders to use and at what rates.

So other there are other reasons why we as members of society care about CPI than just how much it's going to cost us to live here, cloth our children in the latest fashions, and so on.

I'm not a betting man.
It's not a moral, ethical or religious stance, it's just that I don't find gambling fun.
I promise not to go into tirade on why poker, billiards, and the like actually takes up space on my sports channels,
(if you know any good reason I'd like to hear it)

But did you know you can bet on pretty much anything?
Even on whether the Fed's are going raise or lower rates in the future?
Pretty cool, eh?

And guess what?
The "Tame" CPI numbers that came out just changed the odds of that bet.

The odds of a future rate cut DOUBLED this morning!

"The odds of an interest rate cut by the end of the first quarter of 2007 increased after tamer-than-anticipated retail inflation data for November. April fed funds futures rose 0.03 to 94.81, which implied a 24% chance that the Federal Reserve would lower its target for overnight rates to 5% from 5.25% by the end of its policy setting meeting in late-March. Late Thursday, the odds of a rate cut were 12%. Earlier, the U.S. Labor Department said its November consumer price index was unchanged, as was core CPI, which excludes food and energy prices."

These "tame" numbers also seemed to have spurred on the Dow, the Nasdaq, the Russell, the S & P and so on. The Santa Claus Rally is now in full swing.
Or is it?

There are many economic analysts who do not believe in the S.C.R.
They believe the market is just doing what it is supposed to do.

I'll bet you can bet on that somewhere as well.
I just hope they don't start putting that on my sports channel.