Market Commentary 11/19/21

Renewed COVID-related lockdowns in Europe are providing a tailwind for U.S. bonds as equities are trading down in the news. Further supporting lower bond yields is poor consumer sentiment and a weak Labor Participation Rate.  With 70% of the U.S. economy driven by consumption, there is a growing feeling that the economy may have peaked.  With winter approaching and COVID cases rising in Europe and in parts of the U.S., the Fed may not need to raise short-term rates as we previously believed. It is important to remember that the markets are dynamic and that the pandemic can quickly change sentiment, economic output, and overall confidence by consumers and business owners.

The counterargument for higher yields is that the COVID-related supply disruptions and behavioral changes have created rampant inflation with too much demand chasing limited goods.  Fiscal and monetary stimulus are just exacerbating the issue as more money floods into the system, costs of goods and devices will keep going up. Inflation is a problem for many working-class Americans as food, gas, and shelter costs have risen. Next week the Fed’s favorite reading on inflation, core PCE, will be released and closely read by bond traders and economists. 

It would be wise to take advantage of this dip in interest rates. With inflation running well above 4%, locking in a rate lower than inflation is a great example of positive leverage while locking in a real negative rate. 

Market Commentary 10/15/21

Banks kicked off earning season with the major banks reporting positive growth, inspiring the equity markets to move higher. Although inflation is becoming a bigger concern, the market has momentarily put those worries to the side. Interest rates have drifted lower, which is perplexing, as the cost of all goods (food, gas, rent, materials) show no signs of lowering. Supply chains and lack of available workers are delaying the delivery of goods and also increasing costs. Companies are having to pay up for workers and there is some worry that the Fed is being pushed into a corner it will not easily be able to get out of unless it restricts monetary policy in a way that could upset markets. Should the bond market change its feeling about inflation, interest rates will move up quickly. One cannot underestimate the Fed’s ability to buy up the market, impose interest curve controls or other measures to contain interest rate volatility. However, while Fed policy is effective in creating demand, very low rates may actually be creating more demand than the supply side can handle. With no lack of demand in the U.S. for goods and with 11 million job openings, one has to wonder if we have reached the limits of what monetary policy is capable of. There seems to be more money chasing fewer goods (think autos, homes, washing machines, etc) and an increased threat of structural inflation.

China’s property market is of some concern as several trillion dollars of real estate corporate debt are at risk. Most don’t think what is happening in China will have a negative impact on the U.S., but some worry is warranted given the size of the Chinese property market, the size of the leverage, and the unforeseen risks associated with a drawdown on the largest property market in the world may have on the global economy.  

Some parts of the U.S. are starting to see a slowdown in home sales. Interest rates are still cheap so that is definitely a major factor for those who are actively looking to buy a new home. The rise in home prices has been dramatic over the last 18 months, and while there is concern about a market top, ultra-low interest rates have kept affordability at reasonable levels. Also, real estate has served as an excellent hedge against inflation historically with investment properties offering some excellent tax write-offs that help to lower ordinary income. One of many reasons that make California the leading residential real estate market is the diversity of businesses within the state. While an expensive state to operate in, it provides many entrepreneurs with such great opportunities. This is reflected in the housing market and many of the mega-homes sales that we read about weekly. Insignia Mortgage is honored to be part of many of these large sales as our expertise in structuring complex loans is a perfect fit in this type of market.

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Market Commentary 5/29/20

Core inflation is non-existent in the U.S. and for the moment presents no challenges to the Fed.There’s a massive stimulus being pushed out to the debt and equity markets as well as to Main street in response to Covid-19’s biologic shock translating into an economic one.

On Friday, Fed chair Powell reiterated a by-any-means-necessary attitude to support the economy in the event of the second wave of virus-related economic setbacks. Later in the day, the equity markets responded with relief to President Trump leaving the U.S.-China trade deal untouched.

Mortgage rates have remained flat even after Core PCE fell to less than 1%. While we believe mortgage rates will move lower later in the year, we still believe that banks are keeping interest rates padded above their corresponding benchmark U.S. treasury yields while simultaneously keeping an eye out for easing loan deferments and reduced unemployment. 

Americans’ savings continue to increase due to a combination of government assistance and sheltering in place. Evidence is mounting that consumption will rebound as life begins to return to normal. Traffic to websites such as Zillow has surged as prospective home buyers are researching potential new homes. Also, the stay-at-home orders have prompted people to re-evaluate their current housing situations. As a result, many families are deciding that it is time to look for a new home or upgrade their current home. 

In closing, Insignia Mortgage’s brokers are encouraged by the increase of purchase activity in the last few weeks. The coronavirus situation has temporarily stalled action in the real estate market, boosting supply. Buyers are definitely taking advantage of this situation and benefitting from historically low mortgage rates, which make housing payments very manageable.

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Market Commentary 3/6/20

Coronavirus fears have driven interest rates across the developed world to historic lows. Equity markets have reacted violently to the uncertainty around how this new disease may disrupt global supply chains and affect overall economic activity. 

In response to these concerns, the Federal Reserve stepped in earlier this week with an emergency 50 basis point rate cut. This cut was an attempt to promote confidence throughout the financial system and push down short-term interest rates, which will help corporations and individuals attain lower-cost financing.  

There is no way of knowing what affects this virus will have on the globally interconnected economy and if it will send the world into a recession. What we do know is that it will eventually run its course and that disruption will stop once our scientific community develops remedies to combat the virus. It is important to note while the virus is very contagious, it does not appear to be extremely deadly for most healthy individuals. As a result, travel and leisure businesses will be hit hardest should the virus spread. On the other hand, the U.S. service economy (70% of the U.S. economy) is derived from service) may adjust better than currently being forecasted in the equities market given all the technology tools that permit employees to work remotely. 

In other news, the February jobs report was a good one with a better than expected job creation number, while unemployment remained at 3.500%. However, even a good jobs report didn’t matter as the equity markets shrugged off the good news. 

Government-guaranteed interest rates have touched levels most of us believed we would never witness unless we were in a full-on depression.  The 10-year Treasury ended the week at .78%, which is remarkable, but also a bit scary. While banks lowered interest rates, it is important to note that as rates approach zero, it becomes increasingly difficult for banks to earn a net margin. The result is that mortgage rates remain higher than what some customers believe mortgages should be priced at. Should interest rates remain low, we would expect mortgage rates to continue to slide lower. However, we do expect that rates will move up once a clearer picture on the coronavirus emerges. It is our belief that rates will remain low for quite some time.

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Market Commentary 2/21/20

The 30-year U.S. Treasury bond hit an all-time low on Friday as investors fled riskier assets and sought the safe haven of U.S. government-guaranteed debt. The causes for concern were weak overseas manufacturing data and ongoing uncertainty in handicapping how the coronavirus (now named “COVID-19”) will affect economic growth in the coming months. Should this virus become more of a problem, interest rates will plunge. For now, no one knows how this virus will evolve, but to date, it appears to not be as deadly as biologically similar infections.

Earlier in the week, bond yields held firm even after hotter than expected PPI and Core PPI inflation readings.   

Home buying season should be a good one with interest rates remaining low for the foreseeable future. Supply and affordability will be the bigger issue, especially in the more expensive coastal markets. Building permits surged but housing starts fell which should put even more pressure on short term supply concerns. 

With rates near historic all-time lows, we continue to believe that locking-in is the right course of action. The wild card is the potential threat that the coronavirus will have on global productivity. For now, that risk is low, but it may change. If the virus becomes an international pandemic, expect the U.S. 10-year Treasury to touch 1% or lower.  

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Market Commentary 2/7/20

A strong January jobs report reinforced the strength of the domestic economy. However, after a 4-day surge by equities earlier in the week, stocks sold off Friday and bond yields pushed lower. On Friday, bonds took comfort from muted wage inflation and U.S. equities sold off as a response to renewed fears of a coronavirus pandemic still low, but hard to handicap. Equities rallied earlier in the week in response to stronger than expected manufacturing and service sector reports. 

The January jobs report was impressive with 225,000 jobs created versus 164,000 expected. The unemployment rate ticked up to 3.6%, but for good reason, as more people entered the workforce. The Labor Force Participation Rate (LFPR) rose to 63.4%, the highest since 2013. Wage inflation rose month over month, but less than some experts expected given the tight labor market. Bonds rallied (yields moved lower) as wage and overall inflation remain persistently low. 

Keep an eye on China and the coronavirus as unknown risks remain but for the moment appear to be contained. How this virus will affect global growth is yet to be determined, but handicapping this virus is nearly impossible and risk-on/risk-off trading could changes daily as more cases are discovered worldwide, and as scientists gain a deeper understanding of the virus.

Homebuilders remain optimistic and with unprecedented wealth creation in the U.S., this year’s home-buying season is shaping up to be a good one. Affordability and availability of home supply are top concerns. Mortgage rates are compelling and we continue to advise prospective borrowers to consider locking-in interest rates at these historically low levels.

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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.

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Market Commentary 1/17/20

U.S. equities charged higher spurred on by low-interest rates, solid consumer sentiment, low unemployment, good corporate earnings, and the signing of the U.S.- China phase 1 trade deal. With the Dow likely headed to 30,000 and home builders accelerating construction starts, it appears the spring buying season should be favorable. Consumers feel flush as retirement plans swell and wages also move higher. All of this is positive for this year’s new and existing home sales. Keep an eye on prices. With such tight supply, we hope sellers don’t price new buyers out of the market given the strong consumer sentiment we are seeing.

The U.S. economy continues to be the best house on the block and with the Fed holding steady on its accommodative monetary policies we expect this Goldilocks environment to carry on for the near term. The presidential election could create volatility, but that won’t come in to play until the back half of the year. Interest rates remain attractive as the developed world is awash in low or negative-yielding debt, which has helped keep our own interest rates capped back home. However, inflation, which has been non-existent for the last decade, is showing signs of reviving. Should inflation move past Fed targets, we could see bond yields move higher and quickly. For now, most strategists have the 10-year Treasury yield pegged between 1.900 – 2.500%.

With that in mind, we continue to advise locking-in interest rates at these levels. It is a call we have been making for quite some time, but given the abundance of positive information hitting the markets, and the fact that the market has shrugged off negative-market-moving news so quickly, our feeling is interest rates have a greater chance of moving higher than lower.  One interesting point: a study was recently completed that showed that negative interest rates have done little to boost economic activity in Europe and Japan. While I am not an economist, I have always thought that lending one dollar to get back less than the principal does not make much sense.

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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.

Nov-22-blog

Market Commentary 11/22/19

Bonds continue to trade in a sideways trend as more positive news is circulating from the White House on a possible trade deal with China. it’s anyone’s guess how the protests in Hong Kong will ultimately affect those negotiations.

With a U.S. election less than a year away, and with the Chinese economy slowing, our thinking is that both sides need a deal. 

With the near-term fear of a recession off the table, equities are trading well and were boosted on Friday by upbeat manufacturing data from the November readings. A strong holiday spending season is forecast, which will benefit the economy while consumers, who make up 70% of the U.S. economy, gear up for the biggest spending season of the year.

Mortgage rates remain appealing and potential borrowers should take advantage of this ongoing low rate environment. In a speech this week, the Fed resisted the idea of “negative rates” as an effective monetary policy.  Negative rates in other countries with developed economies have seen mixed results. We have often questioned the rationale of lending out a $1 today to only receive 90 cents in the future.

With the 10-year Treasury under 1.75%, our advice remains to continue to lock-in interest rates at these near all-time lows.