Blog - Insignia Mortgage

Market Commentary 9/13/19

Posted on September 13, 2019 by Damon Germanides

Equities have been on a tear this week and bond yields ripped higher as recession fears take a back seat to positive commentary out of the U.S. and China on trade talks. Further calming fears about the state of the U.S. economy was better than expected August retail sales report and the steepening yield curve. With the U.S. consumer comprising a majority of the economy, this report reinforces that there is no imminent recession in sight. Just last week the 10-year Treasury note was trading around 1.500% versus the current rate of 1.87%, a remarkable move in just a few days. With rates on the rise, the recent flood of applications by U.S. individual and corporate borrowers will subside, especially if rates move a bit higher from here. However, as we have opined previously, our feeling was that the U.S. economy is in pretty good shape and that a 10-year treasury under 1.500% was an alert to lock-in rates.

Across the pond, the ECB eased their monetary policy in response to their stalling economy and doubled down on negative interest rate policies. It is becoming unclear how much negative rates help economic viability, but with rates already so low and Europe teetering on recession, the ECB believes it is best to err on the side of more easing. These policies are creating havoc with respect to how to evaluate risk and are pushing investors into riskier asset classes in search of yield. The one positive for the U.S. borrower is negative rates abroad will limit how high interest rates will move back home.

The next big news event is the Federal Open Market Committee meeting next week. Odds heavily favor a rate decrease of one-quarter of one percent on the Fed Funds rate to keep pace with the easing going on in the rest of the developed world. It will be interesting to hear the commentary from the Fed Chair after the rate decision is made and how the markets respond to more easing.

Market Commentary 9/6/19

Posted on September 6, 2019 by Damon Germanides

Stocks surged mid-week in response to some positive news regarding the news that the U.S. and China may be returning to the negotiating table on trade talks. Also, the U.S. economy, while slowing, appears to be in pretty good shape for the moment. The August jobs report was lower than expected but had no real effect on stocks and bonds. The unemployment rate held steady at 3.70%, and while the report suggests the economy is slowing, there were no real surprises within the report.

However, multiple mixed signals regarding recession persist. It is hard to reconcile the various reports as there many cross-currents on the direction of both the economy. Interest rates and bond yields are flashing different signals. Recently published manufacturing data in the U.S. is worrisome and support the need for lower rates to boost growth, but better than expected economic data out of China suggest otherwise. An inverted yield curve in the U.S. (indicating a potential recession) support the argument that U.S. interest rate policy may be too tight, but low inflation and low unemployment suggest that interest rate policy may be near neutral and on target. Strong consumer spending and high levels of small business optimism argue strongly against the recession outcome, while a global slowdown and negative yields in Europe and Japan are an ominous signal of a recession or worse in the coming 24 months.

What has been great for many homeowners or those buyers sitting on the sidelines is that low-interest rates are either lowering monthly expenses or helping new home buyers qualify for a bigger mortgage or a better quality home. We continue to be in the rate-lock camp and continue to advise clients to take advantage of the 10-year Treasury note at ~1.500% which has pushed loan rates way down.

Market Commentary 8/30/19

Posted on August 30, 2019 by Damon Germanides

Some positive headlines on trade negotiations as well as good consumer readings, modest corporate profits, and low inflation data helped stabilize the equity market this week. Bond yields seem to have hit a floor with the 10-year U.S. Treasury touching a low of 1.47% before settling at 1.50%. While the yield curve remains inverted and should be closely watched as it has historically foretold past recessions, fears of recession quieted this week as the markets stabilized after last Friday’s ugly trading day. However, there remain many potential landmines in the coming weeks that could turn markets for the worst beginning with an increase in tariffs on Chinese goods September 1^st, a highly anticipated Fed meeting, and a no-deal Brexit at the end of October. With negative rates in Europe and Japan, U.S. mortgage rates will only move so high, which should keep investors analyzing riskier asset classes such as equities and real estate for yield.

What is not making headlines is the fact that lenders are so busy that in order to slow the flow of business rates are being increased. This disconnect is creating opportunities for some smaller lenders to compete with larger money center banks on deals that they would usually not be able to compete on. Our office continues to see increased volume from our clients who are both buying new real estate and refinancing currently owned properties with favorable terms.

As we mentioned last week, our stance is to lock-in interest rates at these attractive levels, especially with the added knowledge that lenders are filling up to the point where rates may have to rise lender by lender to slow down the volume. This does not mean rates couldn’t go lower, but with the 10-year at ~1.500%, there is no shame in locking in loans at these low levels.

Market Commentary 8/23/19

Posted on August 23, 2019 by Damon Germanides

U.S. bond prices rose (yields moved lower) and stocks went negative quickly Friday morning as a result of tough talk out of both the U.S. and China regarding trade. This has become a tug of war over the direction of the U.S. economy against the backdrop of unprecedented trade negotiations with the world’s second-largest economy.

U.S.-China trade tensions, an inverted yield curve, and political issues in Italy, Argentina, and Hong Kong all support the lower rate narrative, while low unemployment, tame inflation, slowing but better than expected global manufacturing data, and good corporate earnings suggest that the U.S. economy will continue to grow. Only time will tell which camp is right.

The inverted yield curve is a very respected recessionary indicator, in which short-term yields move above long-term yields. This inversion suggests that the market is signaling slower growth long-term and that the current money supply may become too tight (banks can’t make money when interest rates are inverted), which could inhibit lending. The Fed will certainly address this inversion in its upcoming FOMC meeting, and the odds are on another rate cut by the Fed in the coming weeks.

However, other indicators are not flashing recession and the U.S. economy is healthy. Mortgage applications are surging and we are in the camp that believes that the lower rates will help boost consumer spending as overall financing costs for everything from autos to mortgage to business loans will move lower.

With the 10-year Treasury trading near 1.500%, we continue to be biased toward locking-in interest rates at these incredibly low levels.

Market Commentary 8/16/19

Posted on August 16, 2019 by Damon Germanides

This has become a tale of two narratives, one in which trade tensions and dropping bond yields portend an imminent slow-down in the U.S and world economy and a heightened risk of recession, and a totally different tale of healthy consumer spending, low unemployment, good business confidence readings, and better than expected earnings, which support the no-recession narrative.

Complicating the recession narrative further was a positive revision on GDP on Thursday even as global bond yields moved lower in the U.S. and more negative in Europe and Japan. While our own personal belief is the recession talk may be overdone, at some point even with the U.S. economy in good shape, should the economic slowdown in Europe and China continue, the U.S. will be affected. This ideology will play a role in the Fed’s September meeting. Odds favor another rate cut as the U.S. looks to keep its interest rates in line with the rest of the developed world.

Mortgage activity has picked up big-time as rates have returned to near historic lows. While the high-priced coastal housing market remains sluggish, we are optimistic the current low rate environment will motivate on the fence buyers.

The drop in monthly payments from refinance transactions will also benefit the economy as more money will be freed up for the purchase of other goods and services. Given our belief about the resilience of the U.S. economy in conjunction with where interest rates are at the moment, it is hard to argue against locking-in purchase and refinance transaction as these levels. However, as evidenced by central bank policy in Europe and Japan, rates could go even lower or even negative in today’s world.

Market Commentary 8/9/19

Posted on August 9, 2019 by Damon Germanides

Wow! Bond yields around the world plummeted as fears of a full-blown trade war with China escalated creating volatility in all markets. The U.S. China trade war has increased the odds of a U.S. recession as the deterioration in trade talks will add additional stress to decelerating global factory output. This prompted central banks around the world to cut interest rates further as the race to zero, or negative rates goes on. Gold also surged as a safer-haven investment. How this all will end is anyone’s guess.

Back in the U.S., the economy remains strong but slowing as the Trump tax cuts wear off and U.S. companies reconfigure global supply chains due to uncertainties with China. Recession concerns have increased as GDP forecasts have been cut and corporate earnings are slowing. This is what the inversion of parts of the U.S. yield curve is suggesting. An inverted yield curve is one of the best indicators of an oncoming recession. All of this activity pushed U.S. bond yields to levels thought not possible just a few months ago.

On the plus side, one group that is happy see rates plummet are borrowers. Refinance applications have skyrocketed and while the home purchase market has been stalling, the hope is that lower interest rates will spur buyers into action. While we have been cautious about locking in interest rates once the 10-year Treasury note touched 2.00%, the huge surge in loan applications may affect bank pricing so we continue to advise to lock-in. With interest rates so low, for some borrowers, the real cost of funding is near zero which should help consumers make additional purchases and lower monthly expenses.

Market Commentary 8/2/19

Posted on August 2, 2019 by Damon Germanides

Bond yields touched the lowest level since 2016 in a jam-packed information-filled week which included reporting on inflation and the monthly jobs report, the Fed Open Market Committee meeting, and renewed threats of increased tariffs on China.

The core PCE reading for June, the Fed’s favorite inflation reading, came in a tick lower than expected. Inflation remains a major conundrum for global central bankers. Even with ongoing massive stimulus programs in place, inflation readings in developed countries remain below targets. This is one of the big concerns for the Fed and is one of the main reasons that the Fed is comfortable lowering short term lending rates.

As expected, the Fed reduced short term lending rates on Wednesday by one-quarter of one percent. Equity markets fell during Chairman Powell’s press conference when he suggested that further Fed easing might not be necessary although not altogether ruled out either. Equity markets have become addicted to accommodative policies and stock pickers were looking for confirmation of ongoing rate reductions.

Trade discussions with China took a turn for the worse on Thursday, which is a big challenge facing the economy. It is hard to handicap how the trade dispute will influence monetary policy and what influence these talks will have on businesses. However, one should pay close attention to bond yields which dropped soon after the White House announcement. With some sectors of the economy slowing, the fear is the added costs of tariffs at both the business and consumer level could push the U.S. into recession sometime in 2020.

Friday saw a good June Jobs report with 164,000 new jobs created in the private sector. Unemployment remains near historic lows at 3.7%. This report supports the narrative of a strong domestic economy. However, the positive news on job creation was overshadowed by the trade tariffs threats made the previous day.

Rates are now so low absent a full-blown recession which does not appear to be likely near term, it is hard to argue against locking in interest rates. With many mortgage products at ultra-low levels, this has spurred both refinance and purchase activity. The monthly savings should be good for consumer spending and may keep real estate prices from falling further.

Market Commentary 7/26/19

Posted on July 26, 2019 by Damon Germanides

U.S. economic growth remains solid and better than many economists thought was possible just a few years ago, though it’s still below the White House’s goal of 4% growth. However, our strong U.S. economy is halting the move to lower yields as all eyes are fixed on the action-packed economic calendar next week which includes the Core PCE reading, the Fed meeting, and the July jobs report.

The Bureau of Economic Analysis (BEA) reported that Gross Domestic Product (GDP) in the second quarter of 2019 rose 2.1%, down from 3.1% in Q1 though a surge in consumer and business spending. This pushed the personal consumption expenditures index higher by 4.5%, the best since Q4 2017. Recent tariffs and a global economic slowdown stunted growth somewhat in Q2 though a GDP with a 2% handle is still solid.

2^nd quarter earnings proved better than expected as stocks continue to trade well on the good earnings coming out of some of the world’s biggest companies. Interest rates remain low and consumer and business confidence remains high. With the Fed set to lower the short-term lending rates between .25% and .5%, fears of recession have been taken off the table for the time being.

With a resilient U.S. economy and the unemployment rate under 4%, we continue to appreciate long-term interest rates around 2%, but also watchful of a move higher in interest rates here in the U.S. if inflation ticks up. However, one could argue that the U.S. economy does not need lower rates given the ongoing positive economic trends. Only time will tell if gloomier days are on the horizon given the slowdowns of the other major world economies.

It’s hard to time the bottom of the market, but with rates this good, we are biased towards locking.

Market Commentary 7/19/19

Posted on July 19, 2019 by Damon Germanides

Bank earnings this week support the notion that the U.S. consumer is feeling pretty upbeat about the economy. With consumer confidence high, the unemployment rate sitting at a 50-year low, and wages slowly rising, the consumer is doing just fine. Businesses and institutional analysts are not as upbeat citing slowing manufacturing data, slowing global growth rates, a flattened yield curve, and ongoing trade tensions with China as causes for concern.

The Fed is set to lower interest rates by .25% and possibly 5% at the end of July. All signs point to this being a done deal. However, with a strong June jobs report, solid bank earnings, and some other positive manufacturing related data coming in better than expected, some economists are torn as to whether a rate reduction by the Fed is necessary. Other economists believe it is important to act fast and aggressively with monetary policy as the U.S. economy shows some signs of slowing, especially with interest rates already so low.

With attractive interest rates for everything from car loans to home mortgages to corporate debt offerings, there has been increased demand for debt both in the corporate and consumer space. Mortgage activity has been strong. However, home prices in coastal areas are already very expensive so it’s still unknown whether lower interest rates will continue to drive on home buying trends.

Many did not see a return to 2% 10-year Treasury yields, so we remain cautious with respect to how much lower rates can go and we continue to advise locking in interest rates at these ultra-low levels

Market Commentary 7/12/19

Posted on July 12, 2019 by Damon Germanides

The prospect of lower rates has propelled the purchase of riskier asset classes such as equities. U.S. equities hit all times highs this week with the S&P index surpassing the 3,000 mark.

Fed Chairman Powell spoke Wednesday and Thursday with Congress and all but assured the markets that there will be a .25% point decrease in the Fed Funds rate later in the month. Market forecasters have already baked this rate increase into their investment strategies, but Chairman Powell used the visit to drive home the point.

Even with the prospect of lower short term rates, longer-dated Treasury bonds have moved higher with the all-important 10-year Treasury yield rising from below 2.00% to over 2.10% this past week. This steeping of the yield curve is a good sign and has put to the side recession concerns for the moment. An increase in the CPI reading this week also put pressure on bond yields. So long as the inflation readings do not get too hot, a little inflation is another positive indicator of a good economy.

Economic readings remain a mixed bag of good and bad. Consumer confidence remains high, and unemployment remains at historic lows. Both are positives. However, some key manufacturing and other producer related reading are starting to show signs of a slowdown. Also weighing on the direction or long term growth are the ongoing trade negotiations with China and their uncertain outcome.

With respect to the mortgage market, rates continue to remain at very attractive levels and are spurring purchases and refinances in both the residential and commercial marketplace. We continue to be biased toward locking-in loans at these levels as bank profitability remains under pressure due to the flattened yield curve. However, we do believe interest rates will remain low and do not foresee a big move up in rates in the near future.