Tag: global economy

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 10/15/21

Posted on by Admin

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.

08_20_2021_blog

Market Commentary 8/20/21

Posted on by Damon Germanides

Bonds Market Eyes On Jackson Hole For Direction On Interest Rates

It was a dramatic week of market swings, surging covid hospitalizations, international conflict, and conflicting messaging by the Fed on the course of monetary policy. The equity markets were very choppy and a look at the averages was not representative of the draw-down many equities experienced this week. Volatility rose, retail sales softened, and the prospect of continued QE increased as the Delta variant continues to create havoc. While a full shutdown of our economy is unlikely, the virus is slowing down certain sectors of the economy. Economists have lowered GDP estimates and consumer sentiment has waned. Many analysts believe the next few months could see volatility rise as the modern world struggles to normalize around Covid. Homebuilders’ sentiment also dropped. How long the Fed can be ultra-accommodative? Inflationary pressures have squeezed margins on everything and as a result, we’re seeing increased pricing across the country. Housing prices are at peak levels and are outpacing income growth. 

All eyes will be on the Jackson Hole economic symposium next week in Wyoming when Fed chair Jerome Powell takes the stage to speak on monetary policy. There have been fairly strong sentiments supporting the reduction of QE support of our economy. However, the combination of a poor sentiment reading, international tension, and advancing Covid infections may conspire to reshape the Fed’s view to wait longer. The downside of waiting is inflation. While the inflation readings do show some signs of inflation leveling off, most Americans across the country are feeling the pinch. Small businesses are also hurting as wage inflation eats into profits.

On the mortgage front, the volume has moved to more niche products. Interest rates have been at near historically low levels for over 19 months, and by now many Americans have either purchased or refinance their homes. This has shifted the focus of loan origination to more complex, non-traditional lending. This aligns well with Insignia Mortgage’s expertise working with specialized local lenders, boutique banks, and credit unions to provide these types of complex loan packages for our clients.

Insignia-blog-3-20-20

Market Commentary 3/20/20

Posted on by Damon Germanides

Mortgage interest rates continue to increase as these instruments diverge from U.S. Treasury in the face of unprecedented uncertainty due to the biological shock to the global economy induced by the coronavirus. Economic data is meaningless at the moment as the sole focus remains on viral infection rates and whether and how quickly the U.S. can flatten the curve on the number of people infected. 

China and South Korea are showing real promise as the number of infections has subsided. Our hope is that the devastation we are witnessing in Italy is not repeated in our big cities here in the U.S. Both California and New York have paused their economies to help suppress the spread of the virus. We prefer to be optimistic that these drastic measures will work, but only time will tell.

With the government and Federal Reserve pumping unprecedented funding at this problem, we believe that our economy will recover and that the probability of the world seeing its first global depression of the 21st-century remains unlikely. However, significant economic pain is assured, and the recovery will not be without cost. We expect to see unemployment rates skyrocket and many businesses fail.

On the mortgage front, we are seeing the more creative loan products put on hold. These are the programs designed to accommodate the self-employed and real estate investors. Our primary bank and credit union lending sources continue to lend and to offer attractive terms, albeit with interest rates a bit higher than the public is expecting due to the intense uncertainty surrounding the mortgage market at the moment. 

03_13_2020_blog

Market Commentary 3/13/20

Posted on by Damon Germanides

All global financial markets have experienced max volatility as the novel coronavirus has reached pandemic levels. This has increased the odds of a global recession. U.S. government bonds sold off on Thursday as investors fled to cash. The market rebounded on Friday afternoon as a response to the White House’s declaration of the outbreak as a national disaster. We hope with this announcement can institute responses that will start to get ahead of this disease.

Economic data is not relevant at the moment. However, the U.S. economy was in a good place prior to this pandemic so the hope is that the economy will recover once the virus has abated. In addition to the White House declaring this a national emergency, the Fed and Congress will be pumping in fiscal and monetary stimuli at unprecedented levels to help ease the blow to business and individuals affected by the virus.

On the lending front, our lending sources are operational, have contingency plans in place, and are actively working on both purchase and refinance transactions. Interest rates are at historical lows which is important for those looking to buy a home or refinance debt. It is worth noting that the 10-year Treasury has moved from a low of under .500% to back near 1%. This is actually a positive as rates going to zero would be problematic for our nation’s banks and for the insurance companies which collectively finance our debt. 

l956oPsq6sN6Sz4R4l1y1dX9gP4t7

Market Commentary 8/9/19

Posted on by Damon Germanides

Wow! Bond yields around the world plummeted as fears of a full-blown trade war with China escalated creating volatility in all markets. The U.S. China trade war has increased the odds of a U.S. recession as the deterioration in trade talks will add additional stress to decelerating global factory output.  This prompted central banks around the world to cut interest rates further as the race to zero, or negative rates goes on. Gold also surged as a safer-haven investment. How this all will end is anyone’s guess.

Back in the U.S., the economy remains strong but slowing as the Trump tax cuts wear off and U.S. companies reconfigure global supply chains due to uncertainties with China. Recession concerns have increased as GDP forecasts have been cut and corporate earnings are slowing. This is what the inversion of parts of the U.S. yield curve is suggesting.  An inverted yield curve is one of the best indicators of an oncoming recession. All of this activity pushed U.S. bond yields to levels thought not possible just a few months ago.

On the plus side, one group that is happy see rates plummet are borrowers. Refinance applications have skyrocketed and while the home purchase market has been stalling, the hope is that lower interest rates will spur buyers into action. While we have been cautious about locking in interest rates once the 10-year Treasury note touched 2.00%, the huge surge in loan applications may affect bank pricing so we continue to advise to lock-in. With interest rates so low, for some borrowers, the real cost of funding is near zero which should help consumers make additional purchases and lower monthly expenses.

June-28-blog 2019

Market Commentary 6/28/19

Posted on by Damon Germanides

In what has become a tale of two different forecasts on the state of the U.S. economy, bond yields continue to test multi-year lows as stocks continue to climb the wall of worry. With all eyes on the G-20 summit and if a trade deal or path to a trade deal can be worked out, interest rates are stuck and equities grind higher.  The outcome of this summit has the potential to move bond and equity markets in a big way, as well as the structure of our global economy. Also of concern is the slowing of corporate earnings, the decline in manufacturing data, and the move lower in consumer and business confidence (although readings still are high but off of higher levels). 

Lack of inflation, as indicated by the Fed’s favorite inflation reading, the May core PCE reading, was unchanged at 1.60%. Low inflation serves as a benefit to bond yields and is yet another reason the Fed may bring down short-term lending rates at their next meeting. However, it is important to note that future price reductions in short-term lending facilities have already been priced in by “Mr. Market.” With the middle of the yield curve beginning to steepen from recent levels (although parts of the curve still remain inverted and should serve as a warning sign of heightened recession risk), absent a very big unforeseen negative event such as major bank default or big slowdown in economic activity, interest rates may be near the bottom in the U.S and both individuals and corporations are taking advantage of these lower rates via the surge in loan application and corporate bond deals.

The savings in monthly mortgage payments is a positive sign for consumer spending as those savings can be used to buy other goods and services. Lower rates also make home buying more affordable assuming it is not offset by a price increase. Considering the health of the U.S. economy in relation to the plunge in bond yields, we continue to be biased toward locking-in interest rates at these extremely accommodative levels. 

May-31-blog

Market Commentary 5/31/19

Posted on by Damon Germanides

The “Sell in May and Go Away” theory is on full display as stocks endure a tough week of trading to the benefit of lower bond yields. The main culprits are ongoing trade tensions with China and strong rhetoric from President Trump concerning Mexico. The U.S. will begin imposing tariffs on Mexican goods coming to the U.S. until Mexico applies stricter measures to help halt the illegal immigration crisis. This surprised the market on Thursday.  Adding to the volatility is a slower growing global economy, negative interest rates on German and Japanese government debt, and fears of a potential recession. All of these factors have helped push U.S. Treasury yields to a many months low even against the backdrop of strong consumer confidence, a 3.1% GDP 1st quarter reading, and a fairly decent first-quarter earnings season. For the moment, it certainly is a tale of two stories with the “fear trade” winning.

Mortgage rates are also benefiting from lower rates and low inflation readings, but not as much as U.S. Treasuries. We continue to advise borrowers to take advantage of this very low rate environment as it would not take much to push yields higher should some positive comments come out of Washington or Beijing concerning trade talks. 

May-25-blog

Market Commentary 5/24/19

Posted on by Damon Germanides

Bond yields dropped precipitously and global stocks were volatile as tensions rose over the U.S.-China trade talks, which has dampened investor expectations of a near-term resolution between the world’s two biggest economies.  Further pushing yields lower was the ongoing Brexit non-resolution which has forced Theresa May’s resignation. Finally, Europe continues to stall under a huge debt burden and the unintended consequences of negative bond yields which have done little to spur economic growth.

The U.S. economy remains strong, so part of the low-interest rate story has to do with how low bond yields are across the pond and in Japan. Many European bonds trade at or below zero. With unemployment near a 50-year low, tame inflation readings are the other major story that has placed a ceiling on domestic yields. Bonds traded this past week at a near a 17-month low.

Housing has rebounded from a poor 4th quarter, but high prices continue to weigh on prospective buying decisions. Locally, our own real estate market has seen a strong increase in applications as the busy season is upon us and interest rates on multiple product types are very attractive. 

With the 3-month 10-year Treasury curve inverting, we will continue to monitor the bond market closely for recession clues. A prolonged inversion of short-term against long-term yields is a respected indicator of a looming recession. However, for the moment, we believe the U.S. economy is performing well and interest rates this low should be locked-in at these levels; the 10-year Treasury is trading under 2.30% as of Thursday, May 23, 2019. 

May-17-blog

Market Commentary 5/17/19

Posted on by Damon Germanides

In a volatile week on Wall Street, bonds have traded well with the 10-year Treasury note touching 2.350% for the week. Market strategists have had to react to both tough trade talk on China by the Trump administration, as well as elevated tensions with Iran in the Middle East in directing trades this week. Traders flight to quality investments benefited high-quality bond yields such as government-guaranteed and A-paper mortgage debt with yields moving slightly lower but within a tight band.

Back home, the U.S. economy is humming, job growth is robust, and inflation is tame as evidenced by GDP expanding at a 3.2% annual pace in the first quarter. Unemployment touched a 50-year low and year-over-year CPI is running at 1.9%. This begs the question “why are rates so low?” The answer probably lies in long-term economic growth forecasts as well as fears of a looming recession given the potential for an elongated trade negotiation with China and anemic economic growth out of Europe and Japan.  Continue to keep an eye on the 2-10 Treasury spread as signs of looming trouble ahead. For the moment, the spread is around 19 basis points and rebounding from the 9 basis point spread just a short while ago.  Treasury inversions are one of the most reliable indicators of a recession and need to be taken seriously when they occur.

Home sales have rebounded due to both the time of year as spring is an important home buying season enhanced by the low-interest rate environment. Our feeling remains that the economy is strong and rates should be higher. However, we have no magic ball and so for the moment, we continue to advise clients to lock-in interest rates at these highly attractive levels.