Market Commentary 06/03/2022

Strong Jobs Report Supports More Fed Tightening

Concerns over the Fed’s progress on quelling inflation have been heightened considering May’s solid Jobs Report. The 10-year Treasury Bond is now nearing 3.000%. The Fed has publicly stated they see no reasons to pause rate hikes (even after the expected 100 bp hikes expected in the summer) and the Jobs report has reinforced a tight labor market. Inflation will not come down for some time. It may have peaked, but the slide to lower inflation is expected to linger. Since labor makes up over 65% of corporate expenses, rising incomes will continue to put pressure on companies to raise prices when possible. Additionally, commodities inflation (especially oil) remains high. Case in point, gas prices hit $8 per gallon in California recently. 

Lookout: The June Balance Sheet & Major CEO Premonition

Expect ongoing volatility as the Fed is willing to let markets fall to wring inflation out of the system. This includes equities and housing. I advise you to watch the Treasury market closely. The Fed begins to run off its balance sheet in June, but the real action begins on June 15th. It will be interesting to see the effects of QT after so many years of liquidity support in the financial system by the Fed. This reinforces the need to be a fundamental thinker when buying real estate, a home, or any other security. Price always matters. 

Some major CEOs are beginning to warn of a looming recession. These individuals have access to troves of data and have the best minds in the world advising them. It goes without saying that the economy is too complex to truly predict what could happen. Economists and forecasters get things wrong more often than not. However, all this negativity is causing banks to be more cautious in underwriting.  The need for volume is creating competition for high-quality loans. Rate spreads are tight as banks compete to obtain the safest credit candidates in the jumbo space.  Non-QM and alternative documentation loans have fallen out of favor with the investor community. Such products are not getting a bid in the secondary market. Insignia remains focused on portfolio lending solutions for our customers who are mostly self-employed or foreign nationals.  

The combination of a slowing economy and elevated inflation is a worst-case outcome for the economy.  The Treasury market leads the way as a signpost for where the economy is headed.  In some ways, we must hope for higher long bonds as an inverted yield curve portends recession. Given all the debt in the system, one must not forget that things can still get worse.