THE BASIS POINT

Will Rates Settle Following Recent Spike?

Oil prices are in the mid-$80 per barrel range, and gasoline in many parts of the nation is sitting at or above $3 per gallon for regular unleaded. This is bad news for anyone who uses transportation, or buys goods that are transported. (Did I leave anyone out?) What do higher oil prices mean for folks in the loan biz? At this time higher oil prices appear to be indicative of higher demand caused by a recovering economy, which in theory will also eventually help the real estate market. In this sense, a strong market for oil is good news for the fortunes of real estate. Many will argue, however, that a) we still have the foreclosure and inventory overhand keeping a lid on values, and b) the higher oil prices will have a negative impact on consumer spending on other goods & services. So higher energy prices may be a result a stronger economy, but they can also slow an economy down, and in fact can contribute to higher inflation which can then cause higher rates, causing another drag upon economic growth.

This past weekend I heard Alan Greenspan speak in Southern California. One of his big fears, in the current economic climate, is the price of food around the world. As nations develop, they move from grain-based foods toward eating more meat, and meat uses more grain per calorie and therefore is more expensive. Food prices have risen markedly lately and, in some cases, are near 2008 highs. This worldwide increase in food prices will likely not have major inflationary implications in most advanced economies where food has a relatively low weight in CPI baskets and where slack in labor markets makes a wage-price spiral unlikely. In contrast, however, food price inflation poses a significant downside risk to economic growth in many developing economies where food accounts for more of the consumption basket. Central banks in some important developing economies could end up tightening monetary policy too aggressively.

The recent move up in interest rates wasn’t unexpected, as the rate markets have been technically bearish since Halloween. But what was not expected was the magnitude of the run-up. So, interestingly, many analysts believe that we have already seen the big move for rates (unless the world stops buying our debt, of course), so although rates are gradually expected to increase for much of 2011, don’t look for any big moves higher.