Mar-15-blog

Market Commentary 3/15/19

Easing global monetary policy continues to provide the tailwinds pushing mortgage rates lower and equity prices higher. Recent confirmation from the February PPI and CPI also confirmed that inflation remains in check. As stocks have gained back most of the losses from late last year, risk is back in vogue. 

Reduced mortgage rates have arrived just in time to boost what has been a slowing new market for the new and resale housing market. Recent stories on the glut of high-end homes (those over $10 million) have brought back the conversation as to whether and when housing will reset much lower. Our view is that a glut is unlikely given the strict underwriting guidelines that banks continue to follow. If anything, the return of low-interest rates may ignite a better than expected spring buying season in housing.

However, fears remain in the highly leveraged first world economies, especially in the corporate and government debt markets.  As previously mentioned, QE has created absurdly low rates around the world and true price discovery is difficult to attain.  Geopolitical events such as China trade talks, Brexit, and Italian debt levels are also worrisome, as well as the slowing of the global economy.  Low rates work as a tonic in addressing these issues and central banks realize that.

With the 10-year Treasury dipping below 2.600%, locking is not a bad idea.  However, given where European and Japanese bonds are trading, rates in the U.S. may go lower.  Be careful what your wish for, as lower rates may mean trouble ahead.  For now, all looks to be OK and borrower appear to be taking advantage of renewed low rates for both purchases and refinance. We continue to be cautious and are biased on locking-in interest rates at these levels.

Mar-08-blog

Market Commentary 3/8/19

The highly watched monthly non-farms payroll report was a bit of shocker at first blush with only 20k new jobs created in February versus economists’ estimates of 180k jobs.  However, other details within the jobs report were positive with the unemployment rate dropping to 3.8% and a decline in the U-6 number (total unemployed) falling to 7.3% from 8.1%, which was the largest decline ever.  The Labor Force Participation Rate (LFPR) remained unchanged at 63.2%.  We will await revisions on this month’s report to see if the new jobs created are revised higher. Our hunch is that there were more jobs created then stated in this report as evidenced by the bond market’s muted reaction to the report.  Stocks initially sold off but recovered most of the losses by day’s end. 

Other big news this week was concerns over Europe and China’s slowing economy and the ECB reinstating stimulus. We are concerned about how long the U.S. can expand its economy in the face of global economic deceleration. Global bond yields have fallen again, and the Fed has also stalled on normalizing monetary policy which has capped interest rates globally for the moment.  The fear is that with rates already so low (many bonds yield negative rates in Europe and Japan), central bankers have limited tools to in their toolkit to deploy should the world economy slow further.  Keep an eye on the flattening yield curve in the U.S., especially the short-term treasury bills to 10-year Treasury spread.  While a flattening yield curve does not mean a recession is near, an inversion of the yield curve is an ominous sign and has often properly predicted a recession. 

Not all of this gloom and doom is bad for the consumer, as low-interest rates have spurred home refinances and purchases of both commercial and residential real estate.  With home prices dipping a bit, it appears as if sales are starting to pick up into the spring buying season. 

Given that the 10-year Treasury yield is below 2.62%, we remain biased toward locking-in interest rates, especially on purchase transactions. 

Feb-8-blog

Market Commentary 2/8/19

Global yields continue to move lower benefitting borrowers in a significant way.  Domestically, the so-called “Powell Put” has helped equities rise as traders have greater confidence in bidding on riskier investments.

The 10-year Treasury is trading under 2.65% which is making mortgage rates ultra attractive again and from what we can see, increased loan volume greatly.  While our domestic rates are low, rates are even lower across the pond. In fact, there are hints that the European Central Bank might soon lower short rates in the face of a slowing European economy, Brexit confusion, and looming Italian debt concerns.  Add a deflationary Japan and a slowing China economy to the mix, and therein lies the reason our domestic rates while low are actually quite high in relation to the rest of the developed world.

No big economic news this week, but next week will be important with multiple inflation reports coming out.  If inflation remains tame, we could see rates move lower.  Should we get a surprise higher on inflation, rates will adjust quickly.  The Fed calmed markets late last month as they confirmed rates increases and the Fed balance sheet reduction was not on auto-pilot. A hot inflation reading could challenge those statements, especially with a booming U.S. economy, and historically low unemployment.

Home buyers are taking advantage of these low rates, and with a drop in home prices, we are seeing greater activity from buyers.  We remain biased toward locking-in rates at these low levels (to be fair, levels we thought we would not revisit again for quite some time).