Tag: Federal Reserve

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

Market Commentary 2/4/22

Posted on by Admin

Yields Spike On Blow Out Jobs Number 

The Jobs picture proved to be better than expected as November and December payroll data was revised up by a total of 709,000 jobs. The January employment report gain of 467,000 caught many forecasters off-guard. Most believed the combination of the Omicron variant, reduction in seasonal holiday jobs, and decreased travel spending, would prevent such a robust report.  More importantly, bonds spiked due to the better expected report and the increase in average hourly earnings, which rose .7%, above the .5% expected (remember wage inflation is sticky). The January Jobs Report has all but cemented a March lift-off in short-term interest rates.  A 50 BPS point rate increase can no longer be discounted as the labor market is tighter than expected and inflation is proving to be harder to tame.   

Across the pond is the same story as inflation is smashing records.  The Bank of England raised overnight lending rates and the ECB had to walk back dovish commentary on rate increases as fears of inflation threaten to become embedded within their economy.  Rising global rates will put pressure on the U.S. to act as well.  It can be argued that various central bankers waited too long to raise rates and are now embarking on a rate increase path while the global economic recovery is showing signs of possible slowing. A mixed bag of earnings is providing no clear sign of where the economy is headed.  Common themes in earnings reports relate to ongoing issues with inflationary pressures and supply chains. How much cost companies can pass on to consumers will decide which industries do well and which are hit hard in the coming months.  Oil is now above 90 per barrel. Food and basic goods have all increased in price. If this continues it will hit the economy as consumers’ pocketbooks are getting stretched.     

Volatility in both equities and bonds is expected to continue with the Fed’s focus more on main street instead of Wall Street.  How far markets would have to slide for the so-called Fed to be activated is anyone’s guess. However, with 40% of Americans uninvested in the stock market and really feeling the pinch of inflation and two years of lockdowns due to Covid, the Fed will let markets fall as they beat down inflation. A volatile equity market may be a good thing for real estate purchases as it will provide a more level playing field for buyers and sellers. Rising rates, which are still very low but not in the extraordinarily low bucket any longer, will also keep real estate values from ascending at the recent clip. Keeping home affordability sustainable will be key to the housing market going forward.  For those on the fence and worried about monthly mortgage payments, now is time to move as rates seem headed about 2.000% on the 10-Year Treasury note. Careful attention must now be placed on the 2-10 Treasury spread as it flattens. This could be a sign of tougher times if this relationship is compressed further.  Also, Fed speak in the coming weeks will be watched closely. The markets are fragile and a misstep by the Fed could create increased volatility and large price swings in bonds and equities.  

Market Commentary 1/28/22

Posted on by Damon Germanides

Fed Set To Raise Rates Elevates Market Unease

This week’s widely anticipated Fed meeting confirmed to markets that inflation is an ongoing problem. To calm inflation and inflation-related expectations, the Fed is reversing course by running off QE and warning the markets that short-term interest rates will rise this year. They are less concerned about the markets going down, especially given the run-up in asset prices over the last two years.  It is important for investors to understand that the Fed has been very dovish with policy for many years (minus short periods of time that the Fed tried to be more hawkish). It has been understood that the Fed would step in should markets go down. However, with CPI running near 7% and the PCE running near 5%, the Fed is faced with both a mounting inflation problem and a tight employment market, which increases the chances that they will be self-fulfilling.  We believe inflation for goods and services will likely come down, but we are less convinced that wage inflation will cool off. There are simply too many job openings and too few employees willing to fill these jobs. Higher wages will be needed to inspire individuals who have left the workforce back into it. This has pushed the Fed to act on inflation while the U.S. economy is still relatively strong. 

Since the start of 2022, equity, crypto, and bond markets have experienced heightened volatility.  This volatility is probably a good thing in the long term as it will squash speculation (think Meme stocks) and slow growth in asset classes like real estate.  While we all welcome healthy appreciation in the assets we own, outsized year-over-year gains in any market are troubling. Many individuals, especially younger ones, believe markets only go up. That is far from true. 

Volatile equity and crypto markets are positive for the housing market, as individuals seek to buy property for its durability and stability. While rising rates will create more friction between buyers and sellers on an agreed-upon sales price, the stability of owning hard assets cannot be discounted.  Also, lenders remain committed to keeping business flowing. They are taking less of a margin in order to hold down interest rates and lure in prospective borrowers. Keep an eye on the 10-year as it has moved up and is settling in around 1.82%.  A quick rise above 2.22% could be painful for all markets, real estate included. 

Market Commentary 1/14/22

Posted on by Admin

Inflation Tops 40 Year High & Bond Yields Jump

Mortgage rates have risen quickly. As we stated in our previous commentaries, once longer-dated bond yields begin to ascend from historically low levels, the outcome is violent given how quickly interest rates on mortgages move up. This has to do with the way bonds are calculated and the lower level of early payoffs from refinancing transactions as rates rise. The equity markets have also been hurt by rising rates and 40-year high consumer inflation readings. The Fed has admitted inflation is a bigger than expected problem and that it’s time to wind down QE measures by March, as well as start raising short-term interest rates. Thirty-year mortgage rates are now selling well above 3.25%, a dramatic move in percentage terms compared to only a few weeks ago. As inflation outpaces jobs gains, the rise in the cost of goods and services makes our country more vulnerable. From hourly workers to the elderly on a fixed income, inflation is a hidden tax. The Fed is behind the curve due to their extraordinary money printing policies enacted in part with Congress due to COVID-19. Prices in equities and real estate will adjust, but with so much liquidity in the system, we wouldn’t expect major down drifts in value. 

Now, the good news. Inflation on the goods and service side is most likely not structural. Inflation readings should come down over the next 12-18 months. Also, interest rates are still very low. Should bond traders believe the economy is slowing, longer-dated interest rates may not go up that much further. Housing expense remains affordable due to low-interest rates even with housing prices at record highs. A cooling-off of high-risk trading (think crypto and meme stocks) may not be as bad as individuals reassess risk and reward. Finally, the economy remains strong with many millions of job openings. As the Omicron variant (which is more contagious but much less virulent) makes its way through our population, we may finally be able to put the pandemic in the rearview mirror. This should be good for spending and increasing overall economic productivity, as individuals come together again without concern of infection.

However, crosscurrents are everywhere. We are keeping a close eye on the Treasury yield curve, volatility indexes, and consumer confidence readings as signs for where we may go in the coming months. Follow the Fed has been good advice for a long time. We are actively contacting clients and encouraging them to apply for still very attractive loan terms, albeit off the all-time lows. Now is not the time to be complacent. 

Market Commentary 12/17/21

Posted on by Admin

Yields Fall Surprisingly Lower As Fed Acknowledges Inflation Is No Longer Transitory

It was a very interesting week for the equity and bond markets. The Fed Chair, Jerome Powell, finally acknowledged inflation is running hotter than Fed models expected. As employment gains move the U.S. closer to full employment and with inflation running at levels not seen in decades, the Fed simultaneously agreed to start tapering mortgage bonds and Treasury purchases, also known as QE. The Fed also expects to raise short-term rates starting the middle of next year. The Fed Chair stated that if the new Omicron variant creates havoc on the economy, the policy would be subject to change. Long bond yields fell on this news as equities moved higher, anathema to what one would expect on the idea that the Fed would become less accommodative. However, equities ended the week on a low note, and tech was hit particularly hard. The more interesting observation is to understand why long bond yielding is moving lower and why the yield curve flattening. The thought is that bond traders are sensing that a slowing economy is in front of us; possibly a recession. A flattening yield curve must be watched carefully and is now a key indicator used by many economists for guidance as to the health of the global economic recovery. 

We have spoken ad nauseam about inflation not being transitory and we are now being proved correct on this belief. Hard assets such as real estate have long been prized during inflationary periods. That being said, real estate should remain a great hedge against inflation. In addition, low mortgage rates amidst surging inflation is a never-before-seen phenomenon, so while valuations are high, payments remain low. The appeal of paying fixed payment debts with inflating wages creates positive arbitrage and more disposable income as borrowers and businesses continue to lock in low monthly interest expenses.

Why might rates not move up much? The biggest reason is Uncle Sam’s balance sheet is so massive that a rapid rise in rates will create a payment burden. Furthermore, rapidly rising interest rates would put additional stress on the equities market and hurt consumer spending should stock portfolios drop steeply.  No one has a crystal ball, but a mild rise in rates over the coming year seems likely with the 10 year Treasury leveling off around 2.00% to 2.25%, especially if economic activity slows.

Market Commentary 12/3/21

Posted on by Admin

Bond Yields Drop As Markets Cope With New Omicron Variant

Market volatility is back in a big way. While obvious for those monitoring the stock market, the major moves in the bond market are less discussed. The 10 year Treasury dropped from a high of near 1.70% and is now trading under 1.400%. These enormous 2+ standard deviation type moves in the bond market are not seen very often. The U.S. economy remains strong amidst the initial market worries over the Omicron variant. Beyond the obvious, why are the markets trading like this?  Our guess is that it’s a combination of a fully priced market, year-end tax selling, and concerns over too many dollars chasing too few goods. All of these factors contribute to substantial inflation pressures and international supply chain disruption. The Fed also came out this week and stated that inflation can no longer be viewed as transitory- that it is more structural in nature. 

The November Jobs number was a disappointment overall. While the unemployment rate dropped from 4.500% to 4.20% and the labor force participation rate improved, job creation has slowed for the moment. How the variant will affect future job prints is hard to say, although early commentary from experts suggests this new variant is not as virulent. There are many job openings and not enough demand from prospective employees to fill these jobs. It is unclear as to why those jobs are not being filled. Behavioral changes as a result of the pandemic are certainly one reason.  Income gains have continued, but with high inflation readings, those gains are being offset by higher food, energy, and housing expenses. The fact that it’s cheaper to stay at home than to pay for child care, a second car, the need to commute for work, etc., may also be keeping some from re-entering the workplace as it is.

In some markets, housing is slowing as high prices discourage average Americans from being in a position to buy homes. The mortgage market has transitioned to niche lending products in a big way as many traditional buyers and refinance applicants have taken advantage of the almost 2-year ultra-low interest rate environment.  Now, those borrowers with difficult-to-understand financials are dominating purchase money and refinance requests. Due to competition, these products are attractively priced. While terms are not as good as big money center banks, the terms are compelling for those who fall into the category of either being self-employed, a foreign national, or a real estate investor. Programs for no-income verification are also making a comeback in a big way. 

Market Commentary 11/19/21

Posted on by Admin

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 11/12/21

Posted on by Admin

Consumers are starting to voice displeasure with inflation over important items such as food and gas, amongst many other costs. It is hard to say whether inflation will be transitory (the experts keep redefining what transitory means).  Some goods such as used cars and lumber are falling in price, while other goods will come down in price as the supply chains open up. However, with a shrinking able work population, wage inflation is stickier and the cost of hiring employees is rising.  You are hearing stories of businesses offering 20 per hour for entry-level jobs, as well as, investment banks offering over 300,000 for young investment banking associates who graduate near the top of their class. With rents rising and a tight housing market, it feels inflation will be with us longer than the Fed expected.

So why haven’t long bonds risen? Well, that is a tough question to answer. The Fed controls short-term rates by moving up or down the Fed Funds rate. Typically, longer-duration bonds are not controlled by the Fed. However, some bond analysts believe that the Fed is buying long-dated bonds which have kept rates lower than they should be. Others believe that the Fed will need to act quickly in raising short-term rates and in doing so, potentially harm the economic recovery. Therefore the next couple of monthly inflation readings will likely determine where interest rates move. It will be difficult to argue that inflation is transitory should the readings continue to come in “hot.”  This week’s CPI readings were remarkable and at the highest since 1991. There has never been a time where inflation was running this hot and interest rates this low.   

Real estate remains a great hedge against inflation, especially with such limited supply in the market. While prices can’t go up at this clip forever, historically low-interest rates are keeping affordability in the housing sector reasonable. Most people finance home purchases and are comfortable with the monthly debt payments. The growing number of non-traditional banks and mortgage companies are helping the higher-priced markets by accommodating borrowers with unique situations (those with hard-to-understand financials or originating from a foreign country). Insignia Mortgage remains very busy placing jumbo loans for these borrowers who are looking for a piece of the California dream.

Market Commentary 10/22/21

Posted on by Admin

There is a growing sense that the U.S. markets are fully priced. That does not mean that U.S. equities, crypto, and real estate assets cannot go higher, or that bond yields will immediately shoot up. The Fed is making it clear in its messaging that inflation is becoming more of a concern, and that it’s time to begin reducing the extraordinary monetary stimulus that served the U.S. economy well during the Covid pandemic. Many economists believe that the Fed will announce tapering at the next Fed meeting in November. 

By back-stopping the bond market and including BBB-rated bonds, there’s no dispute the Fed’s actions have created inflation. This includes the act of pumping the printing press with transfer payments in a way never before imagined in response to a once in a 100-year pandemic. The big question is determining how the world has changed post-Covid and if we’re entering a new period of sustained inflation. With help-wanted signs everywhere and companies of all sizes paying up for employees, it is starting to feel as if there is a changing dynamic within the workforce. Surprisingly, employees are not being lured in by these higher wages. Perhaps this is due to the incredible rise in home valuation, or in part by how much money has been made trading stocks and crypto. With the pandemic waning, the next few months of economic data will be closely be monitored to determine if employment rates drop as Federal stimulus payments end and Americans continue to get vaccinated; or if something else is at work. Consumer inflation is also at near 30-year highs. We continue to be told that bottlenecks and supply chains are the cause of rising costs but this theory is losing steam as inflation holds firm. 

Home sales remain very active and borrowers remain well qualified. The pace of transactions has slowed a bit, but that may be good for the market and bring in more sellers. Mortgage banks are providing attractive financing options for larger-sized purchases, especially for those borrowers with hard to analyze income. Refinance volume is slowing as expected. It may be a now or never for those borrowers looking to lock in ultra-low interest rates as the 10 year U.S. Treasury touched above 1.700% on Friday before settling in a bit lower.  With inflation running hot and the Fed exiting the bond purchase market, bond traders will begin demanding higher yields.