Market Commentary 3/4/2022

Ukraine Weighs Down On The World As Bond Yields Drop

The Ukrainian-Russian conflict is top-of-mind for global markets. Volatility has soared with the VIX index, a.k.a. the fear gauge rising above 30. This number is important because it represents a more fearful market, as investor sentiment has been trashed by the recent wild market moves. While contrarians would argue to buy when fear is high, this time may be different. It is hard to handicap Mr. Putin. For the moment, neither sanctions nor the threat of being banned from Western nations’ economies has deterred his desires over Ukraine. 

The February Jobs report was solid. Unemployment fell to 3.80% and wage inflation was moderated, which is helpful for bond yields. While oil prices have broken through 100 per barrel and other food sources and commodities linked to Ukraine have also risen greatly, the reason can be explained away due to the Ukrainian conflict.  Wage inflation is the most sticky type of inflation. As those numbers came in below expectation, the Fed has more time to raise rates in the coming months.

These are truly scary times. It feels as if the world has become much more dangerous in just a matter of days. While good for U.S. bonds and to a lesser extent U.S. real estate and U.S. equities, should this conflict drag on, markets may experience continued draw-downs and in effect shake consumer confidence. Real estate has tangible qualities that make it attractive in this type of environment and may hold up better than other types of assets.  However, the odds are increasing that a recession may be on the way, so caution is warranted.  Also, lenders are slowly lowering rates even though our Government debt has dropped precipitously.  The overall market remains near impossible to handicap. 

02_28_2020_blog

Market Commentary 2/28/20

The fear surrounding the rapidly emerging COVID-19 threat has pushed U.S. Treasury yields to an all-time low. Worldwide equity markets plummeted in the worst week for equities since the 2008 financial crisis. With this biological event creating both supply and demand economic shocks, it is not clear how fiscal stimuli will help soothe the markets, but it appears likely that a coordinated international central bank package may be introduced next week to help stop the bleeding in equities. Furthermore, there are rumors that pharmaceutical companies in Israel and around the globe are racing against the clock to rapidly develop a vaccine and/or other anti-viral therapies.  

From an economic standpoint, the virus has disrupted international supply-chains and hurt travel and leisure businesses. If the virus continues to spread or becomes a pandemic, it will affect consumer and business spending patterns. The virus is having a trickle-down effect on our economy and is hurting stocks as companies scale back earnings guidance/ Economists are lowering growth prospects. Keep in mind, these “black swan” types of events are impossible to handicap and the markets will remain volatile until there is a clearer understanding of the virus.

From an interest rate standpoint, government-guaranteed bond yields are now at historic lows in the U.S and may even go lower as the 10-year U.S. Treasury bond sits at 1.16% and may be headed to under 1.000%. However, mortgage rates are not at all-time lows, yet remain incredibly attractive. Many lenders we are speaking to are instituting a hard floor on interest rates and are not interested in lowering mortgage rates further for the moment. 

Therefore, our posture which for the last many months has been biased toward locking in rates has now changed to floating rates in anticipation of a major internationally coordinated central bank coronavirus stimulus package. Should rates plummet further, banks will be forced to move interest rate floors to stay competitive.

01_31_2020_blog

Market Commentary 1/31/20

The coronavirus fears continue to weigh on the global financial markets after having been declared a global health crisis. For the moment, this has pushed yields lower in the U.S. and slammed equities. We are keeping tabs on how this outbreak plays out and how it may affect global economic growth. 

The bull case for equities and real estate acquisitions is supported by low unemployment and low inflation, a dovish Federal Reserve, and a vibrant consumer. The bear case for equities and predictions of an economic slowdown are spurred by uncertainty surrounding the coronavirus, mixed corporate earnings, and softening manufacturing data. Fears of recession remain remote but keep an eye on short-term rates which inverted the other day.

With respect to mortgage rates, we are back to near historically low-interest rates. It remains very hard to argue against locking-in rates at these levels, but rates could potentially drop further if the world comes to a halt while international health officials try to contain the spread of this new virus. However, we remain biased toward locking-in interest rates at these ultra-low levels.

Dec-20-blog

Market Commentary 12/20/19

The U.S. equity markets traded at all-time highs on the last full trading week of the year. The market’s soaring prices were propelled to record levels by accommodative monetary policy, positive news on the U.S. – China trade deal, a strong consumer, and unwinding of recession fears. Final GDP 3rd quarter numbers were also released on Friday and were not revised, showing economic growth growing at a respectable 2.1%. Overall, the U.S. economy is in good shape and the recent stock market gains are a vote of confidence, supporting that narrative.

Homebuilders remain confident and housing starts surprised to the upside earlier in the year. Most economists had predicted the 10-year U.S. Treasury would end 2019 at above 3.000%. The plunge lower in rates (10-year U.S. Treasury currently at ~1.92%) has been a big factor in spurring home purchases and refinances, as well as underpinning the surge in equities and other asset prices. If rates remain low, we would expect the consumer to remain bullish and continue to spend on autos, homes, and other high-cost durable goods.

Banks remain aggressive on pricing and mortgage banks continue to serve the demand by self-employed borrowers who face challenges documenting their income. Rates are low and should be locked-in. Continued positive data both in the U.S. and abroad could lift rates higher. Then again, maybe they won’t.

Market Commentary 10/25/19

Market Commentary 10/25/19

Stocks rose this week following good earnings news from America’s best companies, as well as some positive news on the China-U.S. trade issues. News can change on a dime on this issue so please take this into consideration when reading this post. While durable good orders were down slightly and the China trade conflict has created challenges for U.S. companies doing business in China, feedback from third-quarter earnings supports the slowing economy here in the U.S. and removes the recession narrative for now. Also, with over a 90% probability of a rate cut next week by the Fed, the yield curve has steepened. This is another good indicator that there is no near-term recession on the horizon and that the Fed has gotten out in front of the threat of recession.

New housing purchases slowed as interest rates rose from near-historic lows which put more pressure on borrowers to qualify. Rates are still very attractive and have definitely helped to spur purchase and refinance activity. With the 10-year now at ~1.80% from below 1.500% not too long ago, we continue to advise locking-in interest rates. 

In closing, the U.S economy continues to be in a “Goldilocks” trend as inflation is muted, unemployment rates are low, and businesses are doing fairly well. Keep an eye out for results of the Fed committee meeting along with numerous other economic reports which will be trickling in next week. 

Weekly Blog Image 10/11/19

Market Commentary 10/11/19

Positive comments about trade negotiations with China from the White House on Thursday and Friday sent the equity markets on a tear at the expense of bonds. Rates rose as optimism for a trade deal increased. The markets seem to think at least a partial trade deal may be in the works this time. If a deal is inked, it will be an ongoing positive for stocks and will certainly push interest rates higher. 

Earlier in the week, the Fed Chairman spoke about his committee’s view on the economy. While the Fed sees the economy slowing, for the moment there are no signs of a recession on the horizon. The Fed reiterated it will do whatever necessary to keep the economic expansion going.

Mortgage rates have also risen this week. As we have written previously, our position continues to be that loans should be locked in when the 10-year Treasury is below 2.00%. We continue to hold this view, especially as the 10-year Treasury yield has moved off of 1.500% and is trading near 1.800%.   

July-12-blog

Market Commentary 7/12/19

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.

Apr-5-blog

Market Commentary 4/5/19

The highly watched Monthly Jobs Report put to rest concerns about a slowing economy as the report beat estimates with 196,000 jobs created versus 177,000 expected.

This data should put to rest for now fears on a looming recession and thus help boost stocks and slightly lower bond yields. Unemployment remained at a multi-decade low of 3.80% and hourly earnings rose to 3.20% year over year from February (which is bond-friendly as wage inflation remains tame). The Labor Force Participation Rate (LFPR) remained unchanged at 63.20%.

In other good news,  the yield curve steepened. The potential flattening of the curve was a major concern just a few weeks ago, as that would be a sign of impending recession. However, a positive sloping yield curve is an indicator of a healthy outlook for the economy. Also, China and U.S. trade talks appear to be going well for the moment which has also helped stocks move higher. However, concerns remain as global economic growth has slowed in Europe, China, and Japan as central bankers continue to provide massive stimuli to their respective economies to spur growth. Finally, a Brexit deadline is looming in what is turning out to be a very complicated matter. So far, the markets have not been spooked by a no-deal Brexit, but that could change as the deadline approaches.

Here in the U.S., low rates have spurred home buying and refinances. We recommend taking advantage of the low interest environment because if the U.S. economy continues to surge, the Fed rate hike conversation will be back on the table. With this thought in mind, we remain biased toward locking-in interest rates at these very attractive levels, especially with the strong jobs report confirming no recession and the positive chatter regarding U.S. and China relations coming out of Washington.

Mar-21-blog

Market Commentary 3/22/19

The highly anticipated Fed meeting this past Wednesday did not disappoint.  The Fed went “max dovish” in their policy statement by stating no more rate hikes for 2019 and possibly only one rate hike in 2020. Many market watchers actually believe the next Fed move in interest rate policy will be lower, a far cry from just this past December where the Fed believed that two more rate hikes were likely for 2019.  Less understood but equally important was the Fed’s timeline on the end of the balance sheet run-off, which will be ending later in the year.

Bonds responded as expected as both government and mortgage bond yields fell precipitously.  Stocks responded with caution, falling Wednesday, rallying Thursday, and as of the time of this post, falling hard on Friday.

What’s next?  The big question being asked is what does the Fed see that others don’t with such a quick shift in policy.  Low rates will help borrowers buy new homes, cars, refinance debt, and also aid corporations, but the return of low rates due to the fear of either a brewing U.S. recession or quickly slowing European, Japanese, and the Chinese economies is quite worrisome.  Longer-dated German bunds have gone negative for the first time in quite a while, and our own 10-year U.S. Treasury bond is trading at 2.45%, well below the 3.25% seen just a couple of months ago.

For those who qualify, low rates are another bite at the apple, which will help boost the spring buying season, as well as spur refinances, which will result in more savings or more disposable cash flow to buy other items, so in that sense we are grateful to the Fed.

Should the U.S. avoid recession (keep an eye on the flattening yield curve), rates at today’s levels are very attractive, but should the U.S. slip into a recession, expect rates to fall lower.  At the moment, we are in a wait-and-see mode on rate direction and would not be surprised if rates were headed lower.

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.