Tag: jobs report

Market Commentary 9/2/2022

damon Damon Germanides
September 2, 2022

Russia Gas Closure Spoils A Goldilocks Job Report

Equity markets were soothed earlier in the day due to an as-expected August Jobs Report. Hourly earning increases fell and more people entered the workforce. This is a sign that inflation is forcing people to accept jobs and re-think life without work.  A volatile stock market has pushed older workers back into employment, as retirement accounts have been jeopardized by the traditional 60% stock/40% bond allocation this year. And, just when you thought the equity markets were gaining some footing… Gazprom, the Russian-controlled gas company, shut down its pipeline to Europe citing an oil leak. This news was not unexpected but took equities and U.S. Treasury yields lower. The markets are in some mood. It is virtually impossible to estimate where the U.S. economy, real estate prices, and interest rates are headed. There are simply too many variables to consider and too many black swans circling

Navigating The Gazprom Effect

Taking the Fed at face value, a 50 bp hike is certain. However, one cannot rule out 75 bp, especially if oil starts surging again in response to the Gazprom news. The Baseline Fed Funds rate is gaining support for settling at around 4.00%. Inflation is starting to show signs of moderating, but it is mathematically improbable that it will fall to the Fed’s target rate of 2% in 2023.  Wall Street has had to reevaluate the higher interest rates for a longer Fed narrative as the interest rates start to do their job. Meanwhile equity and bond prices have fallen, real estate is under pressure, and business confidence remains between cautious to downright negative. The return to a more normal interest rate environment is resetting asset prices. 

I want to say a few words about the manner in which I write this weekly blog. While I am personally inclined to be a little more conservative in my thinking, I do my very best to paint a weekly picture of what I am reading. In addition to the news and other industry sources, everything shared in terms of the economy’s direction is combined with the feedback I receive from our network of clients and bank executives. Lately, the current environment is not too positive. In my opinion, we are already in a recession. That is probably going to get worse before it gets better. However, one must remember it is during times of heightened volatility and turmoil that some of the best investments present themselves. So, while I am not bullish on the economy at the moment, I do believe patience will pay off in the form of lower house prices, and better entry points for non-housing investments. 

Market Commentary 8/12/2022

damon Damon Germanides
August 12, 2022

Inflation Cools As Equity Market Surges

While we continue to err on the side of caution, this week we are a little less pessimistic about the economy, inflation, and the fate of short-term interest rates. A surging equity market masks some real concerns about the state of the economy. Remember, a deeply inverted yield curve must be respected. Although many cheered the slowing inflation numbers, inflation is still stubbornly high and becoming more embedded. The US economy is mostly service-based, so as service sector wage inflation continues to climb, food and rent costs continue to rise. Bringing inflation down to the 2% target will take time and some tough decisions by the Fed. However, for now, the equity markets have discounted this bad news. Instead, they focus on the assumption the Fed will not move as aggressively as feared just a short time ago. The base case is now 50 bp hike in September (although I am still in the camp of getting the Fed’s fund rate up sooner than later, as this may cause some short-term pain but will more quickly kill inflation off).  The odds of a 75 bp hike have come down to 33% from double those odds this time last week.   

Overall, corporate earnings were better than expected but many companies are now reducing guidance.  Revenue growth is misleading in a high inflationary environment, as much of its development is attributable to inflation, which also affects input costs and lowers profit margins. Additionally, the rate at which consumer credit card balances have escalated is worrisome. With wages not being able to sustain the cost of living, consumers seem to be dipping much deeper into savings and credit cards.

Now to some positives. Consumer confidence has perked up from last month. Mortgage rates have come down some with 30-year mortgage money options in the mid-4% range. Purchase volume in our primary market is improving, but make no mistake, applications are down overall. More niche lenders are coming into the market as well. This will be good for the higher-priced homes as a large percentage of buyers in the high-end space are self-employed or have more complicated financial structures. While it remains a rough game, our lending relationships are still making common sense decisions on complex loans, which is encouraging.

Market Commentary 8/05/2022

damon Damon Germanides
August 5, 2022

Strong Jobs Report Boosts Odds Of Fed Rate Increases

Wow! A surprisingly upended July Jobs Report added 528,000 jobs and pushed the unemployment rate down to 3.500%.  Odds of a .75 bp increase in Fed Funds spiked after the report was released and bonds sold off swiftly.  While indications like poor retail earnings reports and lower oil and commodity costs support the notion that the economy is slowing, the Jobs Report does not suggest this to be the case. This will embolden the Fed to raise rates faster and further. How this plays out will be of great debate over the coming months. For now, the equity markets took the report in stride and the Dow Index was actually up (as I write my comments).  

When it comes to the economy, traditional signs of movement now indicate uncertainty. Below are a few observations on how difficult it is to predict what the future of the economy holds.

  1. The yield curve is inverted, quite possibly the most reliable indication that the economy may be in a recession, yet junk bond yields have not blown out.
  2. Wages are not keeping up with inflation, but consumers continue to spend, and defaults on credit card and auto loans remain low.
  3. Housing has slowed as interest rates have risen but supply still remains below demand for now and prices have only fallen mildly in Southern California (Insignia Mortgage lends in CA).
  4. The equity market has ripped higher even as revenue and earnings show signs of deterioration
  5. Many other developed nations are hiking rates as well, and the UK not only hiked but stated with conviction a recession is imminent.

Jobs Report And Mortgages

The Jobs report is not helpful in interpreting the mortgage market, as mortgage rates soared after the report’s release. It may be wise to listen to the “Fed Speak” which has a unified opinion that expecting interest rates to fall by sometime next year is wishful thinking. Inflation remains the primary worry for the Fed as the longer high rates of inflation stick around, the more embedded into the economy it becomes. As housing inventory picks up, buyers will resurge as prices adjust to a more restrictive lending and interest rate environment. One positive this week is the re-emergence of some non-QM lenders, who really help the self-employed borrower or unique borrower scenario (as these types of loans do not have to fix into a specific underwriting box). More on this in the weeks to come.

Some other things to consider…Should bond traders change their tune on the state of the economy, interest rates could move up quickly. It is also important to note that Fed balance sheet reduction goes into overdrive in September, with 95 billion per month of run-off.

 

 

 

Market Commentary 7/22/2022

damon Damon Germanides
July 22, 2022

Treasury Rates Decline As Corporate Earnings Disappoint

Inflation continues to deplete consumer spending power. This trend aligns with some very interesting reports from AT&T on the increase in late payments and rising defaults on smartphones. Since many of us can’t live without our smartphones for work or social interaction, failure to pay smartphone bills is concerning. It also suggests the economy may be worse off than many economists believed. Credit balances rise along with other loan types like non-performing auto loans and BNPL (buy now and pay later). The massive stimulus that was pumped into the market appears to have left the economy to work towards normalization while also battling high inflation and slowing growth. Many layoffs in the banking business are being announced. I expect unemployment to rise in the coming months as companies expand layoffs and banks pull back on lending. The recession is here, in my opinion. The big unknown is the Fed’s strategy to combat persistent inflation in a slowing economy. 

The Fed’s Big Squeeze

The haste with which the Fed has risen and may continue to raise short-term interest rates is squeezing all but the biggest banks. This squeeze is distressing for housing as banks pull back on LTVs, Cash-Out Refinances, and Investment Property Loans. Prices will need to adjust to the combination of higher interest rates and tighter bank guidelines. Mortgage banks that have filled the void on the more niche product offerings are also being affected. The one silver lining in all of this? There is a dramatic increase in housing inventory from very low levels of supply. There are many prospective buyers who have been waiting to buy for quite some time. Their time may be here in the upcoming months.

The ECB raised rates and now short-term interest rates are no longer zero. Personally, I never understand negative interest rates. As an observer, why would you lend money to get less of a return in the future?  As we witness this all in real-time, the winding down of easy money policies and as central banks experiment with negative interest rates, remember the old saying “it doesn’t make sense.”  Should inflation persist and the recession be deeper and longer than forecasted, central bankers in the developed world should remember the damage easy money policies have historically resulted in. While we all loved zero rates (or near zero or negative in some countries), the use of these policies is so destructive that it would be wiser to shelve them for future generations. Basic finance requires a discount rate to calculate risk properly. Ultra-low interest rates increase wealth and risk-taking, while rates remain low. The flip side is what happens when rates rise and inflation becomes unanchored, as we are experiencing today. Wealth is destroyed, confidence is eroded, and the most fragile in our society suffer through the high prices of basic necessities. Free money and zero interest rates have consequences. 

Market Commentary 6/17/2022

damon Damon Germanides
June 17, 2022

Fed Committed To Fighting Inflation With .75 BP Rate Hike…Expect More To Come.

“Don’t fight the Fed” was last week’s theme. Until recently, many of us failed to understand that this statement is tantamount to their management over both easing and tightening cycles.  As stated previously, the Fed’s primary concern is inflation. Their policy decisions will be centered around curbing inflation. Should housing, crypto, or equities continue to get crushed, the Fed will not intervene. The great washout has begun. The Fed is reducing liquidity from the markets by raising short-term interest rates and letting bonds run off their balance sheet. In many ways, the equity market is doing a lot of the Fed’s work. As many equities are down from anywhere between 20% to 80%, we can’t help but feel poorer and less eager to spend. This sentiment will make its way through the economy, and eventually help to bring costs down. This includes costs of goods and services, as well as wages, all of which constitute a large business expense for companies.

Adding Salt To The Inflation Wound: Rates & Real Estate

Mortgage rates are back to 2008 levels. Housing starts are down dramatically.  Consumer business confidence is miserable. The pain load placed on our investments is all part of the plan to crush inflation.  It is disappointing that the Fed and Treasury placed their bets on inflation being transitory. Much of this destruction could have been avoided by slowly removing extra-accommodative policies from the financial system last year.  Now, we face a very turbulent financial period. All this amidst having just a glimpse of a return to normalcy after experiencing a once-in-a-century pandemic. Ouch. 

Part of me never thought we would see 6.00% 30-year fixed mortgage rates again in my lifetime. Yet higher rates are upon us. Housing prices have to adjust in the face of higher rates. Mathematically, you cannot have a doubling of interest rates without an adjustment to home values or cap rates on commercial properties. It will take some time for the market to adjust, but there will be an adjustment. Banks are also tightening credit standards as the fear of a recession increases. Personally, I think we are already in a recession. I don’t believe the recession will be too severe, given the strong balance sheets of businesses and a tight labor market.  However, the Fed is committed to slowing the economy down and they will probably succeed. 

Interest-only loans adjustable rate mortgages (ARM’s) will become much more popular with home buyers, especially with the elevated mortgage rates. It seems fairly certain that short-term rates will come back down if inflation readings abate, but only after the Fed raises rates by as much as 300 bp in the next 12 months. Should the S&P fall by another 20% down to around 3,000, it is hard to imagine the Fed would continue the tightening cycle. Those taking short-term ARM”s may benefit from falling rates a couple of years from now.

Market Commentary 6/10/2022

damon Damon Germanides
June 10, 2022

Who’s Most Impacted By Inflation? All Of Us. 

Things are looking grim. Today’s inflation report came in hotter than expected much to the disappointment of the bond and equity markets. Equity markets are getting slammed, while Treasury yields are rising. Today’s report puts the Fed substantially behind the curve on inflation. A dramatic action might be necessary to provide even the smallest form of relief.  Until today, you wouldn’t hear this from most commentators on CNBC – that one cannot take a 75 or 100 bp event totally off the table. This blog has advocated for rate hikes for quite some time and believed a 75 bp hike a few months ago would have been appropriate.  Signaling from the Fed has been very poor, as well as, from the Treasury. Letting inflation run hot was a terrible mistake. Like most Americans, inflation has been evident in our daily purchases for months. Let’s hope the Fed makes the right decisions soon, to avoid recession. It is becoming an increasingly difficult environment to navigate.  In my opinion, inflation, and not the equity or housing market, remains priority number one. So, there will certainly be more pain ahead.

Although consumer and business confidence remains weak, a combination of stock market volatility, the slowing housing market, and 120 oil may be doing some of the work for the Fed. Anecdotally, this week I happened to be out to dinner more than usual, and I noticed that restaurants are less busy. The gas attendant at the local gas station said fewer people are filling up. Bank management is less eager to lend. All these things suggest the economy may already be in recession.  With unemployment at 3.60%, it is hard to envision a major recession taking place. Nonetheless, I am reading about many layoffs, especially in higher-paying jobs such as technology. 

The Housing Market & Our National Reality Check

There is not much good news to talk about. Rising rates and a cooling economy will lead to lower house prices. Supply-constrained markets such as Southern California probably won’t see a big price dip unless the bond market and equity market do not steady, but home prices will come down as demand wanes. This is a positive note for those waiting to buy, but not so much for those who recently bought.

The one benefit of this reset is that wages, the cost of living, and people’s expectations of what a normal rate of return looks like, have gotten a major reality check. There is no such thing as a free lunch, unlimited debt financing, or continued parabolic returns on investments. You can’t spend your way out of inflation. There is now a return to the mean and that is good news for the next generation. Easy money is never easy. Success is earned and above-average returns require skill and thought. 

Market Commentary 06/03/2022

damon Damon Germanides
June 3, 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. 

Market Commentary 5/6/2022

Insignia Mortgage
May 6, 2022

Fed Chairman Comments Fail To Calm Markets

Fed Chairman Powell

Fed Chairman Powell appeared to be in high spirits after his press briefing on Wednesday this week. His commentary, along with the only a .50 bp hike to the Fed funds rate, was lauded by U.S. equity markets.  Markets appreciated his willingness to take a .75 bp rate hike off the table. They also found relief in the fact that an impromptu FOMC did need to take place to address current economic conditions. Despite the temporary mirth, Thursday’s depletion of markets around the world suggests the Chairman’s comments were flawed.  Critics question the removal of any policy response with so many conditions at play: a tight labor market, aggregate demand greater than what suppliers can deliver, a war in Ukraine, and COVID-induced lockdowns in China. The bond market is skeptical of this rhetoric, as the 10-year Treasury is now above 3.000%. This is an interest rate that many experts believed would not come to light for a long time, if ever.  In addition, mortgage rates are now touching 13-year highs. Equity markets are re-pricing risky assets as speculators are getting crushed amidst fear running high.  

Just How Bad Are The Markets?

The traditional 60/40 stock to bond ratio is down over 10% year-to-date. Ultra-low bond rates have not provided the ballast that higher-yielding bonds would have given in previous down markets. With inflation running above 5%, even as high as 8.5% in some cases, there is nowhere to hide. 

Although investors are worried, it is important to note that the U.S. economy is currently doing well. This is evidenced by the April Jobs report and the fact that wage growth is moderating. The stock market can be irrational and is not always indicative of actual economic health. Inflation does remain a problem. Fortunately, the Fed is doing its job by speaking tough on inflation. High beta stocks have lowered along with other speculative investments.  As consumer and business confidence crumble, prices will eventually come down. The big question is whether the Fed should be tightening more aggressively or continue to proceed with a “go slow” mentality.  Many experts would like to see the Fed move quickly to get in front of inflation and then adjust policy once inflation is tamed. 

Moving Into Creative Financing Options

As we indicated a couple of weeks ago, the WSJ is now writing about rising rates and borrowers becoming more creative with financing choices. Most notably is the move into adjustable-rate mortgage products. ARM loans adjust after a fixed-rate period but have much lower note rates. With 30-year fixed-rate mortgages above 5.00%, ARM products can still be had at rates under 3.00%. While these products are not for everyone, given the escalation in rates, these programs offer lower monthly payments and are becoming quite popular in the current rate environment. This is especially true in more expensive areas like Southern California.  

Watch the full statement from Fed Chairman Powell here.

Market Commentary 4/29/22

damon Damon Germanides
April 29, 2022

GDP Slows As Fed Eyes Rate Hikes

It’s becoming clear to everyone that the Fed failed to act sooner. There is now a 50% -50% chance of a .75 bp Fed hike next week, in addition to the many other indicators that are turning negative on the U.S. economy.  Stagflation is now being talked about as a real threat (stagflation is the combination of slow growth and rising prices). The employment picture remains tight which supports the “no recession” argument, but this time may still be different. The combination of the geopolitical issues in Europe, global inflation, rising energy costs, a zero-Covid policy in China, and general overall unease, may produce a recession quicker than many analysts believe. Big tech names such as Apple and Amazon reported worse than expected earnings and warned of tougher times ahead due to supply chain disruption and margin declines due to inflation. While the major indexes are down from 12% to 23%, many stocks are down 50% or more. Speculation is being sucked out of the equity markets which will affect how investors look at all types of assets: private equity, real estate, and bonds. The risk premium is increasing on investments as both equity and bond markets get hammered. Remember the human psychological component of investing, when every investor runs for the exit, the price is whatever you can get and not what that asset is worth. Watch the VIX index this week, also known as the fear gauge, to blow out as a sign that near-term market capitulation is finally over.

Personal savings is going in the wrong direction as inflation outpaces gains in income.  This speaks to the heart of the issue and why I believe the Fed will let the equity market fall much further than some pundits believe. Why, you ask?  The bottom 40% of the U.S. workforce cannot handle double-digit inflation. The combination of zero interest rates and too much stimulus has now created a massive demand shock, too much money chasing too few goods. While raising interest rates will not solve this issue overnight, the downside volatility in equities will discourage consumers and businesses from spending money. This should quell inflation over time.  The Fed will come to the equity markets rescue at some point (if need be). However, we are a long way away from that conversation. 

The yield curve remains on recession watch as the 2-10 and 5-10 year U.S. Treasuries are flat. This is beginning to affect lending rates across all product offerings since ARM’s vs. Fixed rates are also pricing at nearly the same note rate.  With mortgage rates on the rise, and affordability becoming stretched due to higher interest rates, the housing market appears to have peaked. Unlike 2008, loan underwriting remains robust, so while there could be a drift down in home values, it is hard to see an outright correction on the horizon. There are also many potential homebuyers who gave up the last year and a half on buying a home, who may re-enter the housing market should prices correct slightly. The refinance market is drying up as ultra-low interest rates have pulled forward demand and so many mortgages were written with sub 3.00% debt. As stated previously, caution is warranted as the return of capital becomes more important than the return on capital.

Market Commentary 4/22/22

damon Damon Germanides
April 22, 2022

Fed Speak Shakes Markets As Rate Hikes Loom

Markets remain confused about Fed policy.  The Fed voting committee was out talking up their points this week. Suggestions of a .75 bp increase in Fed funds were discussed, with some Fed members supporting this increase and others stating that this high of an increase was unnecessary. Many investors have found this situation both mystifying and frustrating. I have written previously that the Fed should have raised short-term rates sooner as well as stopped QE earlier.  Many of us did not believe the Fed’s “transitory” stance on inflation as autos, homes, food, and other essential goods have increased dramatically in price over the last couple of years.  Now, the Fed is way behind on inflation and is facing several challenges: a tight labor market, rising prices in oil and food, high rents, and supply chain challenges.  It may be too late for the Fed to slow inflation in a timely manner absent a major drawdown in the equity markets. This drawdown would have ripple effects throughout all segments of the economy.  A few more days like Thursday and Friday in the equity markets, and the wealth effect the equities market creates will be under pressure, ultimately dragging on consumer sentiment and business and consumer spending.

Interest rates are rising quickly. Banks are increasing spreads on rates. There was a recent article on the negative impact floating rate loans (which move up or down based on SOFR + margin) are having on businesses as those loan rates surge and increased debt service payments for companies.  For perspective, the 2-year Treasury was ~.50% in November 2021 and is now ~2.67%.  The bond market has been the first to react to Fed policy as of late after having shrugged off the idea of higher rates for many years. While the long bond has flirted with 3.000%, short-end bonds have shot up in anticipation of several rate hikes in the coming months. The equity market finally got the message this week.  The 2 – 10 year Treasury spread is under .25 bp, suggesting heightened concerns about a recession sometime in late 2022 or 2023. 

Mortgage rates remain elevated.  The 30-year mortgage rate is now above 5.000% from most lenders.  It is becoming harder to qualify borrowers as rates have risen and rates are no longer considered “cheap money.” How this affects the real estate market given the supply constraints in some markets such as Southern California is yet to be determined. It is worth noting that the combination of higher rates, the increased cost of living, and a very volatile equity market, will weigh on the minds of new home buyers.  Home prices may need to come down to adjust for the many households being impacted by the pressure of added costs.  There was not much to celebrate this week. It is starting to feel as if harder times are ahead of us for the coming year.