Tag: economic trends

Market Commentary 2/11/22

damon Damon Germanides
February 11, 2022

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

Admin
February 4, 2022

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

damon Damon Germanides
January 28, 2022

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 1/14/22

Admin
January 14, 2022

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 12/17/21

Admin
December 17, 2021

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

Admin
December 10, 2021

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.

Market Commentary 11/12/21

Admin
November 12, 2021

Consumers are starting to voice displeasure with inflation over important items such as food and gas, amongst many other costs. It is hard to say whether inflation will be transitory (the experts keep redefining what transitory means).  Some goods such as used cars and lumber are falling in price, while other goods will come down in price as the supply chains open up. However, with a shrinking able work population, wage inflation is stickier and the cost of hiring employees is rising.  You are hearing stories of businesses offering 20 per hour for entry-level jobs, as well as, investment banks offering over 300,000 for young investment banking associates who graduate near the top of their class. With rents rising and a tight housing market, it feels inflation will be with us longer than the Fed expected.

So why haven’t long bonds risen? Well, that is a tough question to answer. The Fed controls short-term rates by moving up or down the Fed Funds rate. Typically, longer-duration bonds are not controlled by the Fed. However, some bond analysts believe that the Fed is buying long-dated bonds which have kept rates lower than they should be. Others believe that the Fed will need to act quickly in raising short-term rates and in doing so, potentially harm the economic recovery. Therefore the next couple of monthly inflation readings will likely determine where interest rates move. It will be difficult to argue that inflation is transitory should the readings continue to come in “hot.”  This week’s CPI readings were remarkable and at the highest since 1991. There has never been a time where inflation was running this hot and interest rates this low.   

Real estate remains a great hedge against inflation, especially with such limited supply in the market. While prices can’t go up at this clip forever, historically low-interest rates are keeping affordability in the housing sector reasonable. Most people finance home purchases and are comfortable with the monthly debt payments. The growing number of non-traditional banks and mortgage companies are helping the higher-priced markets by accommodating borrowers with unique situations (those with hard-to-understand financials or originating from a foreign country). Insignia Mortgage remains very busy placing jumbo loans for these borrowers who are looking for a piece of the California dream.

10_01_2021_blog

Market Commentary 10/1/21

damon Damon Germanides
October 1, 2021

It was another volatile week on Wall Street as bond yields drifted higher and then fell. Inflation remains elevated and Covid-19 continues to wreak havoc on the supply chain and logistical delivery of goods which is a big deal given a great majority of the U.S. economy is consumer-driven.  

There was some very good news on the pandemic this morning as Merck announced very positive results from its oral antiviral treatment for Covid. Perhaps the threat of Covid will soon be behind us we all look forward to a return to a more normal way of life.  

Congress is grappling with two major spending bills: one aimed at infrastructure and the other focused on societal benefits. Both packages are enormous and should be carefully thought out. The debt-to-GDP ratio is already highly elevated. Each side of the aisle bears responsibility for spending through the years, but now, we are talking about trillions upon trillions of dollars of debt. It will be interesting to see how the bond market responds to the bill’s (or bills’) passage. For now, bond traders have not been bothered about these proposals, and some might argue the way bonds are responding, these bills may not pass or they may end up quite diluted. 

Core inflation came in at over a 25-year high this morning. Fed Chairman Powell spoke about his frustration with the ongoing inflation problem but reiterated that the Fed believes inflation will temper in the coming months as the supply chain issues are smoothed out. While we certainly hope inflation does not run hotter for longer, there are some signs that inflation is not going away anytime soon. Once businesses raise prices, these prices remain intact absent a major recession. Also, wage inflation is trending nationwide as many businesses have raised their minimum wages and even offering signing bonuses to attract employees. Powell has the confidence of bond traders still or yields would have spiked this morning after this inflation report came out.  

The alternative mortgage market remains very busy. As a leading broker of niche mortgage products in California, we are helping many self-employed borrowers, foreign buyers, and real estate investors obtain financing with attractive interest rates and terms. Our new CDFI program, which does not require a borrower to provide income or employment records, has been especially helpful. These loan amounts are good for up to $3 million and interest rates start in the low 4-percent range for interest-only.

06_12_2020_blog

Market Commentary 6/12/20

damon Damon Germanides
June 12, 2020

Stocks sold off hard this week following a strong rally last week which had been ignited by a better than expected May jobs report. Thursday of this week (June 11, 2020) was a risk-off day that shook the equity markets as the market digested sobering comments by the Fed chair regarding the economic recovery combined with regional upticks in Covid-19 infection rates. Yet there is a positive takeaway in yesterday’s brutal pull-back. After a dramatic rise over the past several weeks in stocks, sharp sell-offs washed out speculators and may help prevent a bubble. Lately, there has been a lot of chatter about speculators profiting by betting on de facto bankrupt companies whose prices in some instances have surged more than 100% in a single day.  

Friday morning provided some relief to equities with a partial rebound. This is a welcome sign that Thursday’s sell-off was not the beginning of a deep sell-off. Treasury and mortgage rates fell as money moved into the safe haven of government-guaranteed bonds. The Fed’s stimulus operations will continue indefinitely which will keep interest rates very low and will also entice investors into more risky assets such as stocks, high yielding debt, and real estate. 

The Fed is committed to propping up the markets as we work through the process of getting our economy back on track. No doubt this will take time but there are some encouraging signs of a nascent economic recovery. However, the economy remains very fragile.

Currently, mortgage rates are low and may go lower. Lenders are slowly gaining the confidence underwriting files a bit more generously. Housing supply is in our main market, Southern California, and buyers are re-entering the market. These are all welcome signs that the worst may be behind us. Continue to expect mortgage rates to be priced favorably, especially on higher loan-to-value loan transactions, but perhaps not quite as well one would expect. Once banks have a better handle on the direction of deferred payment, we believe pricing overall will improve even further. Keep an eye on infection rates, manufacturing data, and consumer confidence. If these data points move favorably, interest rates on mortgages will price sharper in the coming months.      

04_24_2020_blog

Marketing Commentary 4/24/20

damon Damon Germanides
April 24, 2020

This week saw better performing U.S. equity and public debt markets as day to day volatility subsided. The Fed and Treasury continue to step up to provide liquidity as Covid-19 has put most of the country on a standstill. Mortgage rates remain elevated against their historical benchmark of U.S. treasuries, and underwriting standards continue to tighten. Despite all this, our lending relationships are working very hard to close transactions. The job picture is awful, but that is expected as are poor earnings reports from U.S. public companies. There is no fixed or agreed-upon timetable for a return to normalcy, but we are seeing some U.S. cities and foreign countries start the process of normalization with a focus on social distancing. Oil fell below zero as demand for this commodity is low and storage is full.  We are watching auto sales, oil prices, and weekly unemployment for clues as to what to expect next. The only thing for sure is that no one knows for sure.

It is vital in this market to have strong lending relationships and that is what Insignia Mortgage was built around. Whether borrowers are looking for non-QM loans, bridge loans, investment property loans, or traditional financing, our team members are structuring transactions with our lenders day in and day out and securing financing for our borrowers on purchases and refinances. Rates are fair, and turn-times are manageable.