Category: Market Trends

Market Commentary 4/22/22

Posted on by Damon Germanides

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. 

Market Commentary 4/15/2022

Posted on by Damon Germanides

Economic Worries Intensify As CPI Hits 40 Year High

Central bankers across the globe are raising rates in response to inflation. The world has become increasingly volatile and dangerous with the war in Ukraine, China-Taiwan tension, Israel-Iran flare-ups, Covid lock-downs in China, and rampant inflation globally. The long-term consequences of inflation are quickly becoming a major threat to world harmony.  Rising prices impact the poorest people most, and in any measure of inflation anywhere in the world inflation is at 40-year highs. 

Once thought to be a problem for past generations, the combination of too much stimulus and a Fed that was certain (wrongly) that inflation would be contained even with zero interest rates, has put the Fed Chairman on his back foot.  The Fed definitely has the tools to crush inflation, however, their blunt instruments to combat inflation could also create a recession or worse. Many important economic indicators are flashing warning signs: yield curve inversion, CPI over 5%, and oil doubling in price are major headwinds to the economy.  Consumers are worried while businesses are struggling to keep up with increased costs and a lack of workers. Full employment complicates the story as the economy appears to be healthy, but, inflation readings this high and a Fed committed to multiple rate hikes in 2022 can quickly slow down economic activity (this is what the Fed is desirous of).   

Interest rates have risen dramatically, especially on 30-year fixed-rate mortgages.  With 30-year money near 5%, adjustable-rate mortgages are gaining traction as the preferred product. While ARM products carry interest rate risk after the fixed-rate period ends, the delta between ARM products and 30-year fixed products is wide enough to be the product of choice for jumbo loans. Should rates move higher (which is likely), expect housing demand to slow. There are already signs that housing has peaked as new home builders are sitting on more inventory, and second home sales are slowing. Finally, one important point to ponder is the massive amount of homes bought by investment companies such as Black Rock.  These institutional buyers may flood the market with homes at the first sign of a slowing down. While a major downdraft in housing is unlikely, it is quickly turning into a buyer’s market in certain areas.  Southern California remains supply-constrained. To date, the rise in rates has not materialized into a major slowdown as of yet. Caution remains the word of choice.

Market Commentary 4/1/2022

Posted on by Damon Germanides

U.S. Economy Complicated By War, Inflation, Yield Inversion & Strong Jobs Data

Nonfarm payrolls added close to 500,000 new jobs in March in an already tight labor market.  The unemployment rate dipped to 3.600%, a tick above the 50 year low of  3.500% back in February 2020. The long-term jobs picture is concerning as there are many more job openings than jobs available. The large number of job openings relative to the population actively seeking work could cause wage inflation to rise faster than economists prefer. Wage inflation is both sticky and a big component in overall inflation readings. Should companies have to pay even more for new hires, those companies will do all they can to raise prices to offset the higher employment cost. This in turn raises all prices, and so on and so forth.  It becomes clear how inflation can become embedded throughout the economy as you game this out, and why the Fed is talking up rate hikes to cool off the economy and lower inflation expectations. 

The PCE, the Fed’s preferred method of inflation came in at 6.40%, a 40 year high. PCE strips out volatile food and energy costs. Many forecasters see a 9% plus CPI number for March. Inflation is real and probably not going away any time soon. Using the PCE as an example, the Fed funds rate in real term is -6.15% when measured against inflation. This is destructive to savers and imposes a hidden tax on the population. Caution is warranted as the Fed’s policy shift stands for the benefit of main street, which may very well come at the expense of Wall Street.   

With the Fed moving away from QE and intending to initiate both higher rates and QT, there is an increasing probability that the Fed may put the U.S. into a recession. This may not occur in the immediate moment, but prior to the end of 2023. The flattening and momentarily inverted 2-10 yield curve is supportive of this thought. How far the Fed will be able to raise short-term rates is unknown, but bond trading supports not much more than 2.00%-2.500%, which still leaves short-term rates negative when measured against present inflation. Fed hikes much higher than this level could be quite destructive given the absurd amount of U.S. debt. The Fed is truly embarking on a journey “where no man has gone before” when it comes to Fed policy. 

Now, a few general observations. The war in Ukraine remains an international concern, but the markets for the moment seem to have moved past the troubling headlines. Also, the oil markets are trading better which will provide some relief to consumers over time. Mortgage rates are no longer cheap and the rise in interest rates will slow the pace of refinances. There are approximately 6 million homes that can still benefit from a refinance, down from 14 million not too long ago. However, the purchase market remains active. The dream of homeownership has not cooled as of yet. On the higher end, many potential buyers we speak to are looking to make gains from the stock market, or crypto market, to buy real estate. The recent volatility which saw many asset classes get crushed early in the quarter and then resurge probably has a lot to do with the desire to move into the safety of real estate. Moreover, lack of supply (as we have spoken about in many blog posts) will provide a natural floor to how low housing in markets such as Southern California may go down, even if the overall housing market is slowed by rising rates.

Market Commentary 3/25/22

Posted on by Damon Germanides

Flattening Yield Curve Worrisome As Economic Growth Slows

I feel as if I have seen this movie before. With that thought in mind, the idea that this time may be different is what makes previous patterns in markets hard to handicap.  But, make no mistake, a flattening yield curve is a worrisome sign. This is especially concerning, given how hot inflation is currently running and where low-interest rates are at present.  The bond market had a terrible week as 30-year mortgage rates hit near 5.000%, which is a dramatic increase from the 3.25% or so rates were at the beginning of the year. I also find it strange that the equity markets are surging on a week when bond yields have risen to levels not seen in several years. The erratic behavior of the market is one reason why it’s so difficult to both predict the future or place big investment bets in one direction or the other. Even when all signs point to an outcome, that outcome may not happen.   

Take housing as an example. Given the lack of housing supply, the way in which rates will affect housing demand remains uncertain. I do expect sales to slow as the combination of very high inflation and much higher mortgage rates are not favorable. Yet, at the moment, many real estate brokers remain very busy and our office has a near-record amount of purchase volume.   

One of the great joys of my job is speaking to so many people each and every week. One client who is in the online retail business informed me that as soon as gas hit $6 per gallon, the business fell off a cliff.  Disposable income is getting eaten up by life’s necessities in a way unseen in over 40 years. Gas prices, food, rent, you name it, and the price is higher.  There is much talk of the strong possibility of a 9%-10% CPI print.  Should this happen, the Fed will need to act quickly and strongly with at least a .50 bp increase in rates and perhaps even do so sooner than their next meeting.  Inflation is beginning to erode economic growth. Bond guru, Jeffrey Gundlach, said recently that he is on recession watch. He looks at the 2-10 and 5-10 Treasury spread as one of his main predictors of a recession. Should both of these spreads go negative from very flat, he fully expects a recession.  A steepening yield curve will give the all-clear. 

Now for the positives. One, real estate has historically been an excellent hedge against inflation. This means that should the markets swoon, investors may want the security of a hard asset such as real estate. Two, a more downbeat mood opens the door to better negotiations between buyers and sellers.  As the market normalizes, there is a chance there will be more homes for sale or that sellers will be willing to work with potential buyers in ways that have not been seen over the last two years. Finally, rates are still attractive from a historical perspective (real rates are deeply are negative when measured against inflation), especially adjustable-rate mortgages (ARMs).  While it seems likely the 30+ year bull market in interest rates has been broken, let’s not forget the 10 year Treasury is still only at 2.48%. 

Market Commentary 3/18/2022

Posted on by Admin

Inflation Is Real As Fed’s Hawkish Signals End Of Ultra-Low Interest Rates

Inflation is real. Consumers are getting hit at the pump, in the grocery store, and beyond.  Don’t be fooled, inflation will not magically go away any time soon. The reality is that the Ukrainian-Russian war will keep oil high as well as, some other key commodities. China and South Korea are in lock-down due to a surge in cases that will add more disruption to the global supply chain. Pile on the other disruptions over the last year and it seems virtually impossible that inflation will cool anytime soon. The Fed will continue to act as it has moved its focus from Wall Street to Main Street. With employment next to full and inflation anywhere from 5% – 8% (and probably going higher), there is a minimal political will to keep interest rates low. Although equity and real estate investors love low-interest rates, Fed inaction has caused inflation to become embedded in the economy. As a result, inflation will be harder to tame. I was happy to hear the Fed admit some error with inflation and offer a stance on rate hikes and balance sheet tightening.  The old saying of “don’t fight the Fed” applies not only when interest rates fall, but also when those same rates rise. Be careful of more volatile markets as the Fed raises rates and all investments become re-rated based on higher discount rates. This will lower the present value of all investments.

Mortgage rates are up dramatically. The 30 year fixed rate touched a low of about 2.500% during the pandemic. That same rate is now near 4.000%, which is a 60% rise. This impacts the demand for housing and the pool of available refinances. The one wild card is the low level of new and existing inventory (which I have spoken about) as a natural floor to prices dropping by much, even in the face of higher interest rates.  Nonetheless, higher rates will hurt economic growth as everything from home loans, to corporate, auto, and personal loans will come with higher interest rates.  This will limit the amount of money available to consumers to buy other goods and services. Luckily, our office is still seeing strong demand for purchase money loans, a sign that the higher rates have not cooled the market just yet.  We are witnessing savvy buyers negotiate better prices. 

The overall global market remains very hard to handicap. There remain several headwinds that could create a “flight to quality” scenario into U.S. Treasuries including escalation by Putin, a new variant of COVID, or shutdowns in China and throughout Asia. This could further complicate Treasury yields.  The world is also experiencing geopolitical tensions at a level not seen since the Cold War. I am keeping an eye on the flattening yield curve as a recessionary signal, as well as the VIX index as a sign of bullish/bearish sentiment as the equity markets work through varying degrees of concern. I will also be monitoring consumer sentiment and housing demand in the coming months. 

Market Commentary 3/11/22

Posted on by Damon Germanides

Spreads Widen On Mortgages As Inflation & War Weigh Down On Markets

The global economy remains on edge with the war in Europe and surging inflation. Many of us are worried about the state of the world, our savings, and the cost of living; especially after two years in a pandemic. Consumers are very concerned about the rising costs of food, gas, as well as other goods and services. Too many headwinds remain to write with any conviction about where the economy or the markets are headed. It certainly feels eerie, but may encourage some greater risk-taking for those who can stomach the volatility. Fearful times usually present opportunities. However, no one can say for certain if this time will be different. 

I remain of the mindset to look for good quality investments which require digging into financial statements and determining if the business has an investible moat around it and a good balance sheet. The meme stocks have been crushed and unfortunately many people have learned the hard way how challenging investing can be. The same thought process applies to buying real estate when volatility picks up and sentiment sinks. The combination of more fear and higher interest rates should be a tailwind for new buyers. Also, with no more easy money being made perhaps buyers will be less excited about bidding up houses. However, the limited supply of homes in big cities such as Los Angeles will provide a floor to prices. This will keep home valuations steady even as the major U.S. indices flirt with bear market drawdowns. 

Interest rates should go higher near term. Regardless, the flattening yield curve must be watched closely and could limit how tight Fed policy may become. Recession talk has picked up as of late. High commodity and food prices along with ongoing supply chain issues do not bode well for GDP growth.  Consumer confidence, the best form of stimulus there is (when we feel good about the world we spend more) has languished. The war in Ukraine touches many emotional nerves and should keep consumer confidence low until it ends (hopefully soon).  Put all of this together, on top of our massive deficit, and it makes one wonder how far the Fed will be able to go with rate increases.

Market Commentary 3/4/2022

Posted on by Damon Germanides

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. 

Market Commentary 2/25/22

Posted on by Damon Germanides

Russian Invasion Slows Pace Of Fed Tightening Plan

The Russian invasion into Ukraine sent global markets on a wild ride with globally traded public securities, bonds, commodities, and crypto trading.  Wednesday evening was a sad day as I witnessed the first invasion of Europe in my lifetime.  The last few years have certainly been challenging for everyone due to the pandemic. The destabilization of a European country will continue to create additional known and unknown risks throughout the world at a very delicate time. While our economy is doing well overall, it is also slowing as inflation inhibits consumer spending ability. The Russian invasion of Ukraine will add more pressure to food and oil prices. While we hope sanctions move Putin to negotiate, he is simply unpredictable.    

The U.S. being the safe haven in the world witnessed a quick drawdown on equities this Thursday morning, which turned into “a rip your face off” type of rally. The old trader’s adage of “buy on the sound of cannons” certainly played out.  Bond yields sank but then reversed higher and gold and silver traded down as well, which I found to be curious.  The reason bonds yields rose is due to unprecedented global inflation.  Ultimately, the bond markets quickly overcame their concern about what Putin may do to Ukraine and beyond.  Personally, I believe we have yet to see the worst of Putin’s intentions. There could be very troubling days ahead in the market.  Make no mistake, China is watching all of this very closely, as its own ambitions to take control of Taiwan cannot be forgotten. Additionally, the relationship between Russia and China has been growing more established over the last few years.

As the world has become more dangerous overnight, real estate should benefit as a less volatile asset to own.  Good solid real estate holding at a reasonable price will continue to be sought after.  Also, as many investors have had a great run in the equity portfolios, I am hearing anecdotally from several financial advisors that those investors with big gains are looking to cash out their winnings for either a new home or a cash flow producing property. 

The demand for U.S. bonds during more unstable periods should keep a lid on high bonds as yields may go. However, as inflation is running at the hottest rate in over 40 years, rates will need to rise (but probably not as much prior to the conflict).  This will be good for tech stocks who were very worried about the 10 year Treasury quickly moving north of 2.500%. While rates can move higher over time, the pace will be more gradual now.  Borrowers should take note that there is still time to lock in favorable interest rates. This opportunity could quickly change if there is a pullback by Russia over Ukraine. For the moment, this seems unlikely, but still cannot be totally discounted.   

Market Commentary 2/18/22

Posted on by Damon Germanides

Yields Dip As Ukraine & Fed Policy Weigh Down On Market

Ukraine-Russia tensions, inflation worries, a more restrictive Fed, and a slowing economy weighed heavily on the equity markets this week. Bond yields surged and fell in very volatile trading, while credit spreads widened. These are all signs that the economy may be headed for tougher times. Although the Ukrainian conflict is scary, the bigger concern is the expectation of rising interest rates that affect consumer confidence, with the calculus on discounting long-duration equities (think unprofitable tech) and housing.  While housing now has a natural floor due to such limited supply, other asset classes such as tech have been crushed by changing opinions on risk.  As the stock market is viewed as a store of wealth, consumer spending could be discouraged if equity losses continue to mount.

It seems as if the Fed has lost control of inflation as members of the FOMC appear on television to express their ideas on how inflation should be tackled.  Aggressive rate-hiking has been discussed and has played a big role in increased volatility in global markets. There is now talk amongst analysts of up to 7 hikes next year.  This may be too aggressive, especially as the equity market cools off.  However, the more conservative estimate of 5 hikes seems more likely. The increasingly important bond market has not been watched very closely over the last two years, due to the ultra-accommodative Fed policy.  The 10-year Treasury yield, as well as the slope of the yield curve, are now being closely watched. The flatter the yield curve, the less of a possibility of additional rate hikes.

Mortgage rates are very volatile and Insignia Mortgage team members have a big advantage over bank loan officers at the moment. Our mortgage brokers have access to many different products and lenders. Our community-based banks and credit unions are holding the line on interest rates as they are focused on keeping production volume healthy rather than raising interest rates. 

Market Commentary 2/11/22

Posted on by Damon Germanides

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