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Personal Finance Blog By MoneyRates - March 2013

Savers feel the heat from rising oil prices

February 21, 2013

| MoneyRates.com Senior Financial Analyst, CFA

The disappearance of inflation in the fourth quarter of 2012 helped make the low level of rates on savings accounts and other deposits more bearable. Unfortunately, a surge by oil and gasoline prices in recent weeks threatens to end that inflation holiday.

According to the U.S. Energy Information Administration (EIA), crude oil prices began rising just before New Year's Day, and the trend continued in the first weeks of 2013. As of mid-February, crude oil prices were up by 6 percent already in 2013. That's a significant rise, but it is nothing compared to the jump in retail gasoline prices lately.

According to the EIA, retail gasoline prices nationally were up by 13.1 percent in the first seven weeks of 2013. Worse, the pace of increase has increased in recent weeks. While crude oil prices are a key driver of retail gasoline prices, the latter are also affected by refining output, and a squeeze in refining capacity may be what's driving gas prices up faster than the rise in oil prices.

The recent rise has pushed the average retail gasoline price in the U.S. from $3.37 to $3.81 a gallon already this year. Four times previously -- in 2008, 2011 and twice last year -- retail gasoline prices peaked at around $4 a gallon. It looks as though gas prices may be heading for that same destination once again.

The impact on inflation

Last summer, a rise in oil prices sparked a flare-up of inflation during August and September. The Consumer Price Index (CPI) rose by 0.5 percent in each of those two months, a rate that would push inflation north of 6 percent a year if it continued. It was only when oil prices eased that inflation eased. The CPI was essentially flat during the fourth quarter.

Oil and gasoline prices have a very significant impact on inflation. Not only are they important components of consumer prices in their own right, but they also impact the prices of most other goods and services because they are involved in the production and delivery of so many things. That's why the key to what 2013 holds for inflation may be whether this recent surge in oil and gas prices continues.

Changing the perspective on interest rates

When even the best savings accounts, CDs and money market accounts are offering only about 1 percent annually in interest, it can be hard for people to get motivated to shop for rates. However, if inflation starts to rise again, it may put things in a different perspective. While the best rates are around 1 percent, the average rates on savings accounts are much closer to zero. As inflation makes a comeback, finding the best CD, savings and money market rates can make the difference between staying even with rising prices a little longer, or starting to lose ground almost immediately.

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Mortgage and deposit rates go their separate ways

February 14, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Thirty-year mortgage rates rose in January, while savings account and certificate of deposit rates continued to languish. Mortgage rates and deposit rates had been moving in the same direction for most of the past few years, so why have they recently gone their separate ways?

Parting company

According to mortgage finance company Freddie Mac, the average 30-year mortgage rate rose by 18 basis points in January 2013, to 3.53 percent. 18 basis points is not an extraordinary jump in mortgage rates, and 3.53 percent is still very low by historical standards. Still, against a backdrop that has seen mortgage rates fall steadily for years, this sudden upward turn was noteworthy.

There was no such turnaround for savings accounts. According to FDIC figures, the average interest rate on savings accounts remained at 0.07 percent throughout January. Rates on CDs and money market accounts also remained at extremely low levels.

Long- and short-term expectations

Although interest rates generally have been moving together in recent years, it is not unprecedented for mortgage rates and deposit rates to veer off in different directions. After all, mortgage rates represent long-term commitments and deposit rates represent short-term commitments. There are fundamental differences between the two.

Both long- and short-term interest rates would be inclined to rise if there were solid evidence that the economy was improving. Where the difference comes in is with respect to time horizon. Long-term interest rates, such as rates on a 30-year mortgage, would be more influenced by the long view, and would start to rise if the outlook for six months or or a year down the road seemed to be getting better. Deposit rates, on the other hand, only represent a short-term commitment, and would tend to stay in place until solid evidence of economic improvement was at hand.

That difference is relevant to the current environment. The resolution of the fiscal cliff crisis led to a general feeling that conditions were starting to fall into place that would allow the economy to improve, but current economic data does not yet show that improvement.

The risk to the banking system

There is another element at work here, and that is the inherent risk of lending money at low rates for 30 years. Current mortgage rates are lower than even short-term rates have typically been in the past, and about at the historical level of inflation. If things return to normal at some point over the next 30 years, mortgage lenders would find themselves stuck with a whole generation of unprofitable loans.

The recent rise in mortgage rates, therefore, might be a recognition of the risk of making long-term loans at overly low rates. While it might seem that consumers are getting the worst of both worlds -- loan rates rising while deposit rates remain low -- ultimately a rise in mortgage rates could benefit everyone by taking some risk out of the banking system.

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The mismatch between the stock market and the economy

February 8, 2013

| MoneyRates.com Senior Financial Analyst, CFA

Last week the Bureau of Labor Statistics (BLS) released an employment report that was the latest in a series of mediocre economic news. In contrast, the stock market has begun 2013 as if happy days are here again. Which do you want to believe?

Employment growth stumbles

The BLS report showed 157,000 new jobs in January. This was disappointing -- think of 200,000 as an informal benchmark for decent monthly job growth, and with the fiscal cliff out of the way, many had hoped 2013 would get off to a stronger start.

Some of the sting was taken out of this number by strong upward revisions to the job gains for November and December, but viewing these months together with the latest figure only highlights how much things seem to have slowed down in January.

Making sense of the stock market

The S&P 500 Index gained over 5 percent in January, a roaring start for a lackluster economic environment. Why the disconnect between investor behavior and the big-picture economic data? Here are four possible reasons:

  1. Revenues are truly improving. It is possible that individual companies are starting to see improved sales, and these haven't yet translated this into hiring plans and wage increases. The optimistic case would be that as companies gain confidence from their sales figures, they'll plow some of their earnings back into expansion plans. That reinvestment could make growth more sustainable.
  2. Earnings are improving due to spending cuts. While companies are reporting earnings growth, this is not always necessarily due to top-line revenue growth. Spending cuts can help a company make its earnings forecast for a quarter or two, but this does not represent true growth in the business.
  3. Investors lack alternatives. CD, savings, and money market rates are languishing below 1 percent. Bond yields are around 2 percent. For investors who need better returns than that, there is little alternative than to try stocks. Low interest rates increase demand for stocks, but rising demand does not make the companies investors are buying any more valuable. Ultimately, there are limits to what demand alone will do for the stock market, and just because investors need better returns than they get on interest rates doesn't mean the stock market will come through for them.
  4. Investors are chasing a bull market. What's going on may not be as rational as any as the three explanations above. When investors get a whiff of a bull market, they don't need good reasons -- they just start chasing the market. January's rally was accompanied by the kind of giddy prognostications that often spell trouble in the end.

Those with money in the stock market can enjoy its strong start to 2013, though they had better hope some improved economic fundamentals come along to support the rise in prices. As for depositors in savings accounts, until those improved fundamentals come along, they are no closer to seeing higher rates than they were a year ago.

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