Tag: economic trends

04_17_2020_blog

Market Commentary 4/17/20

damon Damon Germanides
April 17, 2020

The details of reopening our economy are still in flux. State governors are taking the lead and will coordinate their efforts for optimal results in that arena. Equity markets responded positively on Friday to some positive news from our biotech sector on cutting-edge coronavirus treatments. While we are a long way from a normally functioning economy, any and all positive news on how we can start to get back to work is welcomed. Expect April economic data to be horrific. The hope remains in a May re-opening of the economy safely and gradually. Look for a tick up in auto sales both new and used as a signal that we are returning to normalcy.

A national shutdown is a black swan event that is rarely accounted for in investment or lending assumptions. The pandemic has caused great suffering with unemployment expected to hit somewhere between 15% and 30% near-term, with a recovery thereafter. It is no easy task for lenders to navigate an environment where income is on hold, liquid reserves have been hit hard, and appraised values are expected to be lower, not higher in the foreseeable future. This is why lending rates are priced higher than what borrowers are expecting, which seems contradictory in this environment. The link between U.S. government and mortgage spreads has untethered as portfolio lenders (the only lenders in the jumbo mortgage space) demand a higher premium for elevated risk levels.

Portfolio banks are where deals can be done quickly and with certainty and this is where Insignia Mortgage shines. Our lending relationships for residential transactions are fully functional and while guidelines have been pulled back, you can expect reasonable purchase and refinance applications to close. Interest-only loans are still available as are cash-out up to 60% to 70% loan-to-value deals. We anticipate interest rates to gradually move lower as economic activity is ramped up along with the assumption that the virus curve declines as the economy opens.

01_24_2020_blog

Market Commentary 1/24/20

damon Damon Germanides
January 24, 2020

Stocks dipped and bond yields fell in a light economic news week, but nonetheless, it was a week filled with plenty of market-moving events. The fears of a new coronavirus out of China moved money from riskier assets into the safe haven of government bonds. Also, soft global PMI data helped to lower bond yields, which remained flat but may have bottomed. 

Back here in the U.S., on the one hand, the consumer remains bullish as equity and real estate asset prices are at historical levels supported by a dovish Federal Reserve interest rate policy.  While on the other hand, business leaders are skeptical and large scale purchases are soft. 

With the U.S. economy expected to grow between 2.00% and 2.50%, the consensus is that it will continue to hum along and equity indexes will continue to reluctantly move higher. Some recent positives supporting that narrative include the Phase 1 U.S. – China trade deal and the expected signing of the USMCA agreement. 

The strong consumer should bode well for a strong spring homebuying season so long as sellers don’t push prices back up in response to a very accommodative interest rate environment and strong demand. Interest rates are also spurring refinances as refinances lower monthly debt service payments and or cash-out refinances tap home equity to pay down more expensive debts. 

With the 10-year Treasury bond set to close below 1.700%, our continued view is to take advantage of these near historically low rates. However, a “Black Swan” event such as this new virus that broke out in China could temporarily push U.S. bond yields much lower if government health officials cannot contain the spread of the virus. For perspective, very few people to date have been infected with this new virus, and the fears of widespread contagion are remote, as of this writing.

Blog Banner 12.6.19

Market Commentary 12/6/19

damon Damon Germanides
December 6, 2019

Jobs, jobs, jobs, and more jobs! The November jobs report crushed expectations Friday morning, with job creation growing at the fastest clip in 10 months. The jobs report reinforces the thesis that the U.S. economy is on good footing, the U.S. consumer remains bullish, and that the recession fears have abated. The report followed other positive reports earlier in the week on housing, big-ticket purchases, and trade. 

On the jobs front, the employment rate dropped to 3.500% with the addition of 266,000 new jobs blowing past the estimate of 182,000 new jobs. The U-6 reading, or total unemployed, fell to 6.90% from a reading last year of 7.6%. Wage growth grew year over year above inflation.

This combination of low rates, a strong consumer, and a strong workforce has created a “Goldilocks” environment. These numbers will keep the economy chugging ahead and work as a tailwind for the housing market heading into next year. As we have opined previously, interest rates remain attractive which provides more buying power for potential borrowers. For refinances, reduced mortgage payments free up money for other purchases. Our position on interest rates at these levels is to grab ’em while they are hot! 

July-26-blog

Market Commentary 7/26/19

damon Damon Germanides
July 26, 2019

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.

2nd 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.

July-12-blog

Market Commentary 7/12/19

damon Damon Germanides
July 12, 2019

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.

June-28-blog 2019

Market Commentary 6/28/19

damon Damon Germanides
June 28, 2019

In what has become a tale of two different forecasts on the state of the U.S. economy, bond yields continue to test multi-year lows as stocks continue to climb the wall of worry. With all eyes on the G-20 summit and if a trade deal or path to a trade deal can be worked out, interest rates are stuck and equities grind higher.  The outcome of this summit has the potential to move bond and equity markets in a big way, as well as the structure of our global economy. Also of concern is the slowing of corporate earnings, the decline in manufacturing data, and the move lower in consumer and business confidence (although readings still are high but off of higher levels). 

Lack of inflation, as indicated by the Fed’s favorite inflation reading, the May core PCE reading, was unchanged at 1.60%. Low inflation serves as a benefit to bond yields and is yet another reason the Fed may bring down short-term lending rates at their next meeting. However, it is important to note that future price reductions in short-term lending facilities have already been priced in by “Mr. Market.” With the middle of the yield curve beginning to steepen from recent levels (although parts of the curve still remain inverted and should serve as a warning sign of heightened recession risk), absent a very big unforeseen negative event such as major bank default or big slowdown in economic activity, interest rates may be near the bottom in the U.S and both individuals and corporations are taking advantage of these lower rates via the surge in loan application and corporate bond deals.

The savings in monthly mortgage payments is a positive sign for consumer spending as those savings can be used to buy other goods and services. Lower rates also make home buying more affordable assuming it is not offset by a price increase. Considering the health of the U.S. economy in relation to the plunge in bond yields, we continue to be biased toward locking-in interest rates at these extremely accommodative levels. 

May-3-blog

Market Commentary 5/3/19

damon Damon Germanides
May 3, 2019

A better than expected April jobs report is further evidence of the “Goldilocks scenario” that our economy continues to flourish in – albeit one that complexes many financial experts. With no near-term threat of inflation as well as improving data on productivity and manufacturing, the U.S. is experiencing the greatest recovery in many of our lifetimes.  Today’s job report supported the current administration’s belief that the combination of lowered taxes and less restrictive regulation would stimulate the entrepreneurial spirit of American business owners. It is hard to argue against this position at the moment.

There were 263,000 jobs created in April, well above estimates of 180,000 to 200,000. The unemployment rate fell to an almost 50-year low at 3.60% (WOW!).  With wage inflation coming in lower than expected, bonds reacted favorably to this report and stocks surged.

Setting aside the myriad of potential issues impacting the market, which include Brexit, the 2020 election, and China-US trade tension, the talk for the moment is the near-perfect market conditions of the U.S. is economy right now.  As a rising stock market is a strong vote of confidence for U.S. consumption, we are seeing an increase in home buying activity as well as other financing activity.  With rates still not too far off historical lows, it should be a good home buying season.         

With the 10-year Treasury range-bound, we are biased toward locking in rates given the positive economic reporting and comments from the Fed this week about their concerns that inflation may be transitory.

Apr-26-blog

Market Commentary 4/26/19

damon Damon Germanides
April 26, 2019

A strong GDP reading of 3.2% for the first quarter of 2019 has allayed concerns about a slowing U.S. economy. This result was well above the expected reading of 2.8%. Report highlights include a decline in inflation, which pushed bond yields lower, as well as strong economic data and retail sales. One point of caution within the report regarded built-up inventories. This first quarter build-up may be followed by a decrease later in the year, possibly creating a drag on later GDP readings.

In further good news this week, housing has picked up. This was expected given the time of year and the nice drop in interest rates.

With continued good news on the U.S. economy, important inflations readings next week, and the 10-year Treasury note trading at around 2.500%, we remain biased toward locking-in rates at these levels. However, we do acknowledge that there are many geopolitical and economic issues around the world that could push yields lower in the coming months. 

Apr-19-blog

Market Commentary 4/19/19

damon Damon Germanides
April 19, 2019

The U.S. economy continues to chug along, at least that’s the consensus for the moment. With consumer and business sentiment still going strong, along with a recent surge in retail sales, low inflation and near full employment, the overall picture of the economy is good.  

The Fed hitting the pause button earlier this year on raising rates and running off the balance sheet has certainly helped investor confidence as evidenced by the rise in equities. In addition, mortgage applications amongst other finance activities have improved due to the pause in short term rate increases by the Fed. Finally, the steeping of the yield curve has put to rest rumors of recession talk as several top bank economists see no signs of a recession, near-term.

For the moment, we are in a “Goldilocks Environment” with an economy that is neither running too hot nor too cold. As a result, the spring home buying season should be a good one.

Even as other parts of the world are experiencing a slow-down, it is hard to bet against the U.S. and all of the opportunity that this country has to offer its citizens. However, risks remain in Europe, and in our negotiations with China and North Korea, as well as the massive government debt burdens.  These economic and geopolitical risks are capping our rates back home as the German 10-year Bund is trading in negative territory juxtaposed to US Treasuries which are trading above 2.50%.

Given the drift up in the 10-year U.S. Treasury from around 2.39% to 2.54%, we believe rates are range-bound.  We can see rates continue to drift higher if the U.S. economy continues to stay strong and stocks continue to rise.

Mar-28-blog

Market Commentary 3/29/19

damon Damon Germanides
March 29, 2019

Declining mortgage rates have spurred refinance activity, as well as increased the probability of a strong spring home buying season. With inflation in check and the Fed on pause, interest rates should remain attractive for the foreseeable future. However be on the alert as rates may have bottomed and hit resistance in moving lower after rallying greatly since the beginning of the year.

Fears of global economic activity slowing continue to weigh on bonds. The recent drop in rates has pushed several wealthy nations debt to trade at zero % or below. In the U.S., the 10-year Treasury bond briefly dropped below 2.4% this week and the 3 month to 10-year Treasury yields inverted, a potential ominous signal of a looming recession should the inversion hold. An inverting yield curve has predicted most recessions and the inversion is the result of fears of economic growth globally as well as a lack of inflation.  These fears will keep investors on their toes and may create a more volatile rate environment in the coming months.

Given that we believe most of the concerns we’ve mentioned are priced in, we are biased toward locking in rates at these very attractive levels. Any unexpected good news could move rates up higher quickly.