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Market Commentary 2/25/22

Posted on February 25, 2022 by Damon Germanides

Russian Invasion Slows Pace Of Fed Tightening Plan

The Russian invasion into Ukraine sent global markets on a wild ride with globally traded public securities, bonds, commodities, and crypto trading. Wednesday evening was a sad day as I witnessed the first invasion of Europe in my lifetime. The last few years have certainly been challenging for everyone due to the pandemic. The destabilization of a European country will continue to create additional known and unknown risks throughout the world at a very delicate time. While our economy is doing well overall, it is also slowing as inflation inhibits consumer spending ability. The Russian invasion of Ukraine will add more pressure to food and oil prices. While we hope sanctions move Putin to negotiate, he is simply unpredictable.

The U.S. being the safe haven in the world witnessed a quick drawdown on equities this Thursday morning, which turned into “a rip your face off” type of rally. The old trader’s adage of “buy on the sound of cannons” certainly played out. Bond yields sank but then reversed higher and gold and silver traded down as well, which I found to be curious. The reason bonds yields rose is due to unprecedented global inflation. Ultimately, the bond markets quickly overcame their concern about what Putin may do to Ukraine and beyond. Personally, I believe we have yet to see the worst of Putin’s intentions. There could be very troubling days ahead in the market. Make no mistake, China is watching all of this very closely, as its own ambitions to take control of Taiwan cannot be forgotten. Additionally, the relationship between Russia and China has been growing more established over the last few years.

As the world has become more dangerous overnight, real estate should benefit as a less volatile asset to own. Good solid real estate holding at a reasonable price will continue to be sought after. Also, as many investors have had a great run in the equity portfolios, I am hearing anecdotally from several financial advisors that those investors with big gains are looking to cash out their winnings for either a new home or a cash flow producing property.

The demand for U.S. bonds during more unstable periods should keep a lid on high bonds as yields may go. However, as inflation is running at the hottest rate in over 40 years, rates will need to rise (but probably not as much prior to the conflict). This will be good for tech stocks who were very worried about the 10 year Treasury quickly moving north of 2.500%. While rates can move higher over time, the pace will be more gradual now. Borrowers should take note that there is still time to lock in favorable interest rates. This opportunity could quickly change if there is a pullback by Russia over Ukraine. For the moment, this seems unlikely, but still cannot be totally discounted.

Market Commentary 2/18/22

Posted on February 18, 2022 by Damon Germanides

Yields Dip As Ukraine & Fed Policy Weigh Down On Market

Ukraine-Russia tensions, inflation worries, a more restrictive Fed, and a slowing economy weighed heavily on the equity markets this week. Bond yields surged and fell in very volatile trading, while credit spreads widened. These are all signs that the economy may be headed for tougher times. Although the Ukrainian conflict is scary, the bigger concern is the expectation of rising interest rates that affect consumer confidence, with the calculus on discounting long-duration equities (think unprofitable tech) and housing. While housing now has a natural floor due to such limited supply, other asset classes such as tech have been crushed by changing opinions on risk. As the stock market is viewed as a store of wealth, consumer spending could be discouraged if equity losses continue to mount.

It seems as if the Fed has lost control of inflation as members of the FOMC appear on television to express their ideas on how inflation should be tackled. Aggressive rate-hiking has been discussed and has played a big role in increased volatility in global markets. There is now talk amongst analysts of up to 7 hikes next year. This may be too aggressive, especially as the equity market cools off. However, the more conservative estimate of 5 hikes seems more likely. The increasingly important bond market has not been watched very closely over the last two years, due to the ultra-accommodative Fed policy. The 10-year Treasury yield, as well as the slope of the yield curve, are now being closely watched. The flatter the yield curve, the less of a possibility of additional rate hikes.

Mortgage rates are very volatile and Insignia Mortgage team members have a big advantage over bank loan officers at the moment. Our mortgage brokers have access to many different products and lenders. Our community-based banks and credit unions are holding the line on interest rates as they are focused on keeping production volume healthy rather than raising interest rates.

Market Commentary 2/11/22

Posted on February 11, 2022 by Damon Germanides

Stocks Slammed As Fed Set To Raise Rates In March

Stocks were slammed yesterday with a hotter than expected CPI report. Another contributing factor is the comment by a Federal Reserve board member on the need for more rapid increases in short-term interest rates as well as a pickup in the pace of quantitative tightening. However, a Bloomberg report late in the day asserted the Fed is not going to rush to raise rates. The President of the ECB has also talked down rapid rate hikes which calmed markets (for the moment). Expect this type of back-and-forth rhetoric as the Fed weighs how best to raise interest rates without creating an economic slowdown. This will not be an easy task.

The consumer confidence index was lower, which supports the notion of measured hikes over rapid ones. Confidence can work both as a stimulant and depressant, so fading confidence should assist in easing inflation in the next few months. The old saying may apply here that “the cure for high prices is high prices.” Should confidence move lower, both consumers and businesses will be less eager to spend money on goods and services. It may take some time for inflation to subside and with the highest readings in 40 years. The Fed is being forced to act on inflation; especially after getting it so wrong a few months earlier.

The 10-year Treasury is now over 2.000%. The same financial pundits who, a short time ago, said we would never see Treasury bonds at this level (something we have been mindful of for some time) have now expressed those rates may go much higher. From a technical standpoint, it is important to watch yields as should the 10-year Treasury bond approach 2.150%. Rates could go much higher. Also, be mindful of the yield curve and what it is forecasting. A flattening yield curve supports an economic slowdown whereas a sloping yield curve means the Fed is getting it right on tightening.

Insignia Mortgage has very aggressive jumbo interest rates. The lenders we work with are holding the line on raising interest rates. There is a limit to how long these institutions are willing to hold interest rates. It is now time for those on the fence to apply for a mortgage- as rates are much more likely to go up than go down in the near term. It is important to remember the Fed has played a big role in keeping interest rates artificially low and that policy is now reversing.

Note: Commentary was written prior to increased concerns on Ukraine-Russia conflict which sent bond yields lower

Market Commentary 2/4/22

Posted on February 4, 2022 by Admin

Yields Spike On Blow Out Jobs Number

The Jobs picture proved to be better than expected as November and December payroll data was revised up by a total of 709,000 jobs. The January employment report gain of 467,000 caught many forecasters off-guard. Most believed the combination of the Omicron variant, reduction in seasonal holiday jobs, and decreased travel spending, would prevent such a robust report. More importantly, bonds spiked due to the better expected report and the increase in average hourly earnings, which rose .7%, above the .5% expected (remember wage inflation is sticky). The January Jobs Report has all but cemented a March lift-off in short-term interest rates. A 50 BPS point rate increase can no longer be discounted as the labor market is tighter than expected and inflation is proving to be harder to tame.

Across the pond is the same story as inflation is smashing records. The Bank of England raised overnight lending rates and the ECB had to walk back dovish commentary on rate increases as fears of inflation threaten to become embedded within their economy. Rising global rates will put pressure on the U.S. to act as well. It can be argued that various central bankers waited too long to raise rates and are now embarking on a rate increase path while the global economic recovery is showing signs of possible slowing. A mixed bag of earnings is providing no clear sign of where the economy is headed. Common themes in earnings reports relate to ongoing issues with inflationary pressures and supply chains. How much cost companies can pass on to consumers will decide which industries do well and which are hit hard in the coming months. Oil is now above 90 per barrel. Food and basic goods have all increased in price. If this continues it will hit the economy as consumers’ pocketbooks are getting stretched.

Volatility in both equities and bonds is expected to continue with the Fed’s focus more on main street instead of Wall Street. How far markets would have to slide for the so-called Fed to be activated is anyone’s guess. However, with 40% of Americans uninvested in the stock market and really feeling the pinch of inflation and two years of lockdowns due to Covid, the Fed will let markets fall as they beat down inflation. A volatile equity market may be a good thing for real estate purchases as it will provide a more level playing field for buyers and sellers. Rising rates, which are still very low but not in the extraordinarily low bucket any longer, will also keep real estate values from ascending at the recent clip. Keeping home affordability sustainable will be key to the housing market going forward. For those on the fence and worried about monthly mortgage payments, now is time to move as rates seem headed about 2.000% on the 10-Year Treasury note. Careful attention must now be placed on the 2-10 Treasury spread as it flattens. This could be a sign of tougher times if this relationship is compressed further. Also, Fed speak in the coming weeks will be watched closely. The markets are fragile and a misstep by the Fed could create increased volatility and large price swings in bonds and equities.

Market Commentary 1/28/22

Posted on January 28, 2022 by Damon Germanides

Fed Set To Raise Rates Elevates Market Unease

This week’s widely anticipated Fed meeting confirmed to markets that inflation is an ongoing problem. To calm inflation and inflation-related expectations, the Fed is reversing course by running off QE and warning the markets that short-term interest rates will rise this year. They are less concerned about the markets going down, especially given the run-up in asset prices over the last two years. It is important for investors to understand that the Fed has been very dovish with policy for many years (minus short periods of time that the Fed tried to be more hawkish). It has been understood that the Fed would step in should markets go down. However, with CPI running near 7% and the PCE running near 5%, the Fed is faced with both a mounting inflation problem and a tight employment market, which increases the chances that they will be self-fulfilling. We believe inflation for goods and services will likely come down, but we are less convinced that wage inflation will cool off. There are simply too many job openings and too few employees willing to fill these jobs. Higher wages will be needed to inspire individuals who have left the workforce back into it. This has pushed the Fed to act on inflation while the U.S. economy is still relatively strong.

Since the start of 2022, equity, crypto, and bond markets have experienced heightened volatility. This volatility is probably a good thing in the long term as it will squash speculation (think Meme stocks) and slow growth in asset classes like real estate. While we all welcome healthy appreciation in the assets we own, outsized year-over-year gains in any market are troubling. Many individuals, especially younger ones, believe markets only go up. That is far from true.

Volatile equity and crypto markets are positive for the housing market, as individuals seek to buy property for its durability and stability. While rising rates will create more friction between buyers and sellers on an agreed-upon sales price, the stability of owning hard assets cannot be discounted. Also, lenders remain committed to keeping business flowing. They are taking less of a margin in order to hold down interest rates and lure in prospective borrowers. Keep an eye on the 10-year as it has moved up and is settling in around 1.82%. A quick rise above 2.22% could be painful for all markets, real estate included.

Market Commentary 1/21/22

Posted on January 21, 2022 by Damon Germanides

Interest Rates Drop As Equity Market Volatility Picks Up

The tremendous volatility in the equity market, bond market, and crypto markets is making investors nervous. However, these asset classes have all experienced outsized pricing gains over the last several years so the pullback while painful, may be healthy for the long-term durability of the markets. What has been driving this volatility? A big reason for the pick-up in volatility and re-pricing of certain parts of the market is the Fed’s signaling that it will no longer be ultra-accommodative. Markets have come to expect the so-called “Fed put”, and it appears that the Fed is removing that safety measure from the market as it focuses on taming inflation. Also, a slowing global economy and slowing earnings growth have Wall Street analysts adjusting forecasts downward as the U.S and global economy bounce back from a once in a century event.

Assuming that this last wave of the Covid virus (called Omicron) creates durable herd immunity, in addition to, the many treatments now available, the U.S. should start to see a return to normal life within the next few months. This return to normal will dramatically help reduce supply chain issues and employment shortages, and, hopefully, coupled with the Fed tightening reverse rising inflation. Rising interest rates (should higher rates stick) will also help new buyers of real estate be in a better negotiating position with sellers. While higher rates will cap the home prices ascent, especially after such big gains in housing the last year, it is important for the long-term stability of the housing market that prices don’t move up faster than incomes. Yet, housing inventory remains very tight so there is little concern that housing prices will go lower by any significant amount even in the face of rising interest rates.

Keep watchful eyes on Ukraine – U.S. tensions, ongoing earnings reports from big tech, and a flattening yield curve. The world is a complex place and for the moment the markets are in a negative mood.

Market Commentary 1/14/22

Posted on January 14, 2022 by Admin

Inflation Tops 40 Year High & Bond Yields Jump

Mortgage rates have risen quickly. As we stated in our previous commentaries, once longer-dated bond yields begin to ascend from historically low levels, the outcome is violent given how quickly interest rates on mortgages move up. This has to do with the way bonds are calculated and the lower level of early payoffs from refinancing transactions as rates rise. The equity markets have also been hurt by rising rates and 40-year high consumer inflation readings. The Fed has admitted inflation is a bigger than expected problem and that it’s time to wind down QE measures by March, as well as start raising short-term interest rates. Thirty-year mortgage rates are now selling well above 3.25%, a dramatic move in percentage terms compared to only a few weeks ago. As inflation outpaces jobs gains, the rise in the cost of goods and services makes our country more vulnerable. From hourly workers to the elderly on a fixed income, inflation is a hidden tax. The Fed is behind the curve due to their extraordinary money printing policies enacted in part with Congress due to COVID-19. Prices in equities and real estate will adjust, but with so much liquidity in the system, we wouldn’t expect major down drifts in value.

Now, the good news. Inflation on the goods and service side is most likely not structural. Inflation readings should come down over the next 12-18 months. Also, interest rates are still very low. Should bond traders believe the economy is slowing, longer-dated interest rates may not go up that much further. Housing expense remains affordable due to low-interest rates even with housing prices at record highs. A cooling-off of high-risk trading (think crypto and meme stocks) may not be as bad as individuals reassess risk and reward. Finally, the economy remains strong with many millions of job openings. As the Omicron variant (which is more contagious but much less virulent) makes its way through our population, we may finally be able to put the pandemic in the rearview mirror. This should be good for spending and increasing overall economic productivity, as individuals come together again without concern of infection.

However, crosscurrents are everywhere. We are keeping a close eye on the Treasury yield curve, volatility indexes, and consumer confidence readings as signs for where we may go in the coming months. Follow the Fed has been good advice for a long time. We are actively contacting clients and encouraging them to apply for still very attractive loan terms, albeit off the all-time lows. Now is not the time to be complacent.

Market Commentary 1/7/22

Posted on January 7, 2022 by Admin

Fed Signals Rates Will Rise In 2022 With Inflation Running At 30 Year Highs

It has been a forgettable start to 2022 for the U.S. financial markets, and more specifically, for many tech companies and bond investors. While the last several weeks of 2021 were quite volatile, Wednesday’s hawkish release of the Fed minutes crushed many stocks and also shook the bond market.

Inflation is now a major concern for the Fed. Friday’s Job Report, which contained both positive and negative elements about the employment picture, reinforces the belief that the U.S. economy is near full employment. The current unemployment rate stands at 3.90% with many million job openings still remaining. Wages continue to increase running above many expectations, but, these wage increases are not keeping pace with consumer inflation and this is what the Fed is worried about.

Housing demand remains robust. Should interest rates continue to rise, housing demand and housing affordability will be impacted. However, with the housing supply still too low, housing demand should not dip too much. Lumber will be important to watch as it has quietly gone back up to a 7-month-high. Increased labor costs for construction workers are also a concern along with supply chain issues. Higher rates will force builders to work on keeping costs down on new home builds. It is too early to tell what could happen but homebuilder stocks have not traded well to start the year even as demand is strong.

Another hot CPI report is expected for December, which is due out next week. While the market is already pricing in the likelihood of ongoing inflation, interest rates will be under continued pressure as both PPI and CPI inflation readings run at 30-year highs. We don’t recommend sitting around waiting for interest rates to abate or the Fed to pump large-scale stimulus into the economy in response to the Omicron outbreak. Borrowers who have not taken advantage of the ultra-low rate environment still have some time to lock in very attractive interest rates. For those borrowers with complex financials, Insignia Mortgage has several local banks and credit unions willing to work closely with us to approve loans that larger institutions simply won’t take the time to underwrite. Interest-only products are abundant, as are mortgages for second homes and investment properties.

Market Commentary 12/17/21

Posted on December 17, 2021 by Admin

Yields Fall Surprisingly Lower As Fed Acknowledges Inflation Is No Longer Transitory

It was a very interesting week for the equity and bond markets. The Fed Chair, Jerome Powell, finally acknowledged inflation is running hotter than Fed models expected. As employment gains move the U.S. closer to full employment and with inflation running at levels not seen in decades, the Fed simultaneously agreed to start tapering mortgage bonds and Treasury purchases, also known as QE. The Fed also expects to raise short-term rates starting the middle of next year. The Fed Chair stated that if the new Omicron variant creates havoc on the economy, the policy would be subject to change. Long bond yields fell on this news as equities moved higher, anathema to what one would expect on the idea that the Fed would become less accommodative. However, equities ended the week on a low note, and tech was hit particularly hard. The more interesting observation is to understand why long bond yielding is moving lower and why the yield curve flattening. The thought is that bond traders are sensing that a slowing economy is in front of us; possibly a recession. A flattening yield curve must be watched carefully and is now a key indicator used by many economists for guidance as to the health of the global economic recovery.

We have spoken ad nauseam about inflation not being transitory and we are now being proved correct on this belief. Hard assets such as real estate have long been prized during inflationary periods. That being said, real estate should remain a great hedge against inflation. In addition, low mortgage rates amidst surging inflation is a never-before-seen phenomenon, so while valuations are high, payments remain low. The appeal of paying fixed payment debts with inflating wages creates positive arbitrage and more disposable income as borrowers and businesses continue to lock in low monthly interest expenses.

Why might rates not move up much? The biggest reason is Uncle Sam’s balance sheet is so massive that a rapid rise in rates will create a payment burden. Furthermore, rapidly rising interest rates would put additional stress on the equities market and hurt consumer spending should stock portfolios drop steeply. No one has a crystal ball, but a mild rise in rates over the coming year seems likely with the 10 year Treasury leveling off around 2.00% to 2.25%, especially if economic activity slows.

Market Commentary 12/10/21

Posted on December 10, 2021 by Admin

Interest Rates Hold Steady As U.S. Inflation Hits 39-Year High

Inflation readings rose to levels unseen in almost 40 years, with the CPI index clocking in at 6.80% annually. We don’t expect these readings to cool off anytime soon, as the slow housing-related component of the inflation calculation has risen dramatically. As an example of how bad the supply chain really is, the local Starbucks I usually go to was out of all breakfast items this morning except for one or two of the less popular foods. The manager informed me that they simply can’t get the food on time or consistently from their suppliers. This is holding true for so many goods, leaving companies scrambling.

Further complicating matters is the imbalance between job openings and job seekers which currently stands at over 5 million. Companies are scratching their heads as the promise of higher wages, signing bonuses, and more flexible hours isn’t filling the void. The dynamics of employment have changed since COVID. Employees have pricing power for the moment and this will lead to still higher inflation. As wages and fixed costs are elevated, companies will do all they can to pass those costs to customers. Supply chain issues will also force companies to bid up inventory. These factors will keep inflation as a key concern for the U.S. consumer through the foreseeable future.

Bonds curiously took the hot inflation reading in stride. The reasons for this are many, but, perhaps long-term bond traders know that these soaring input costs and wage increases will lead to an economic slowdown. The equity market was unconcerned with the news as well. Equity traders are working hard to keep the year-end rally intact after a quick but violent shake-out at the start of the month. Rest assured if inflation stays at these levels or higher, volatile days are ahead. The impact probably won’t start to be felt until early next year.

Housing and real estate remain a great hedge against inflation. Low long-term rates are helping borrowers pay for houses, but with low fixed interest expenses. There is something for everyone in terms of mortgages- from private banking with extra-low rates for the ultra-rich, to the community bank who is eager to gain market share, to the alternative doc mortgage bank who is willing to support customers with or without income verification. Thankfully, Insignia Mortgage has access to all of these products which are keeping us very busy finding solutions for our many clients.