Tag: inflation

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 12/10/21

Posted on by Admin

Interest Rates Hold Steady As U.S. Inflation Hits 39-Year High

Inflation readings rose to levels unseen in almost 40 years, with the CPI index clocking in at 6.80% annually. We don’t expect these readings to cool off anytime soon, as the slow housing-related component of the inflation calculation has risen dramatically.  As an example of how bad the supply chain really is, the local Starbucks I usually go to was out of all breakfast items this morning except for one or two of the less popular foods. The manager informed me that they simply can’t get the food on time or consistently from their suppliers. This is holding true for so many goods, leaving companies scrambling.

Further complicating matters is the imbalance between job openings and job seekers which currently stands at over 5 million. Companies are scratching their heads as the promise of higher wages, signing bonuses, and more flexible hours isn’t filling the void. The dynamics of employment have changed since COVID.  Employees have pricing power for the moment and this will lead to still higher inflation. As wages and fixed costs are elevated, companies will do all they can to pass those costs to customers. Supply chain issues will also force companies to bid up inventory. These factors will keep inflation as a key concern for the U.S. consumer through the foreseeable future. 

Bonds curiously took the hot inflation reading in stride.  The reasons for this are many, but, perhaps long-term bond traders know that these soaring input costs and wage increases will lead to an economic slowdown.  The equity market was unconcerned with the news as well.  Equity traders are working hard to keep the year-end rally intact after a quick but violent shake-out at the start of the month.  Rest assured if inflation stays at these levels or higher, volatile days are ahead. The impact probably won’t start to be felt until early next year.

Housing and real estate remain a great hedge against inflation. Low long-term rates are helping borrowers pay for houses, but with low fixed interest expenses. There is something for everyone in terms of mortgages- from private banking with extra-low rates for the ultra-rich, to the community bank who is eager to gain market share, to the alternative doc mortgage bank who is willing to support customers with or without income verification.  Thankfully, Insignia Mortgage has access to all of these products which are keeping us very busy finding solutions for our many clients.

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 10/29/21

Posted on by Admin

The upcoming weeks are developing into an interesting time for the financial markets. While the argument can be made that all things are transitory, the Fed’s definition of transitory has been a few months. Core inflation is at a thirty-year high with no sign of abatement. Inflation appears likely to linger. Many of America’s best companies have commented about the supply chain and labor shortages. Numerous companies are offering several thousand dollars in signing bonuses to entry-level employees just to attract new hires. Other companies are addressing the employee shortage by finding their own logistics solutions to get goods to their customers. 

Rising inflation is just not a U.S. issue. As the world recovers from the shock and reopening of COVID, the global supply chain has been broken. Some countries have seen enough of rising prices. The combination of surging demand with easy monetary and fiscal policy has created a massive amount of money in the global financial system. 

To combat run-away inflation, some foreign central banks have begun raising short-term interest rates. It is not believed the U.S. is ready to raise interest rates, but the Fed has been signaling its intention of slowing the pace of purchases of bonds and mortgage-backed securities, a measure known as Quantitative Easing.  By signaling the market of this intention, the Fed is hopeful the markets will take the news in stride. So far, so good. But there is no doubt that policymakers will be monitoring the markets very closely should the taper become official.

The Biden infrastructure, social welfare, and taxation plan are still not a done deal. Odds are that the plans will be implemented. There has not been enough time to adequately review the policy and how it might affect the U.S. financial and real estate markets.  However, as we have opined previously, we don’t like the idea of increased taxes on capital gains on investments, especially if not inflation-adjusted. If taxes are raised too high on speculative investments, the desire to take risks will diminish. 

The bond market remains sanguine on inflation but the yield curve has begun to flatten as future rate hikes seem more likely. As a result, slowed economic growth is probable. Remember, the Fed can control the short end of the curve but not the long end of the curve (unless the Fed implements yield curve control). Many banks price corporate bonds off of the 5-year Treasury so as this yield rises, so will corporate interest expense.  With mortgage rates drifting higher, loan volume has slowed. This should come as no surprise. Alternative mortgage products are leading the charge for many of Insignia Mortgage’s clients. Many new home buyers and refinance applicants are not bankable with traditional lenders as many applicants have opaque financial structures. This segment of applicants tends to have hard to understand income, be from a foreign country, or are quite substantial from an asset standpoint. Real estate has been a great hedge against inflation historically. The combination of low-interest rates and rising real estate values continue to keep transaction activity high.

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Market Commentary 7/9/21

Posted on by Damon Germanides

Rates Fall Then Rise As Markets Await Key Inflation Data

Bond yields fell mid-week and then recovered Friday. The drop in bond yields appears to be due to technical moves more than concerns about a slowing economy. The more virulent Delta variant of Covid is spreading widely and swiftly, potentially threatening to dampen the global economy.

Some economists are concerned about “stagflation” as a result of falling yields while inflation is rising. For the moment, the economy remains strong and those fears are not justified. Yet with central banks pumping trillions of dollars into the financial system, true price discovery and market independence have been lost. Therefore, we should be cautious about the unknowns of these never-before-seen policies. With equities and housing at record levels, volatility could pick up in the back half of the year. Next week, all eyes will be on key inflation data. Should the print be hotter than expected, the Fed will be under pressure to do more sooner. This could have a big impact on all markets.  

Mortgage volume in the jumbo sector remains robust. Borrowers are eager to close on either refinances or new purchases, as evidenced by the high volume of SBA loans, commercial building purchases, and high-end residential purchases. Low interest rates locked-in long-term are helping buyers justify the high cost of homeownership. 

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Market Commentary 6/25/21

Posted on by Damon Germanides

Core Inflation Readings Push Yields Up
Core inflation came in hot, but not hotter than expected. Bonds reacted by pushing yields above up. However, within the report, spending slowed a bit in May and incomes flattened. A slowing in spending is good for the Fed. It will also allow them to continue to print money and prevent them from lifting rates quickly. However, assuming that pandemic-related illness rates in the U.S. continue to decline, the Fed will need to pull back on some of the extraordinary policies that were enacted to combat Covid’s impact on the economy.

Equities have responded well to the Fed’s messaging. A new infrastructure plan will create another boost to the economy and will create good new job opportunities.  

Rising housing prices are beginning to create issues for borrowers, especially in the lower-income tiers, as the combination of rising prices and higher interest rates affect home affordability. If rates do move higher, housing prices will need to adjust.  

Interest rates remain low but could move up sooner than expected if inflation is deemed more structural and less transitory by investors and economists. We continue to advise clients to take advantage of these ultra-accommodative interest rates and to lock in long-term financing as a hedge against inflation. 

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Market Commentary 6/11/21

Posted on by Damon Germanides

Mortgage Rates Lower Surprisingly As Inflation Picks Up

It’s hard to make heads or tails as to why bond rates have fallen as of late in response to very hot inflation readings. Bond yields have been driven lower, helped in part by central bankers championing ultra-easy monetary policy and longer QE. The old adage that the cure for inflating input costs and consumer goods is even higher costs, which may have peaked in May. This idea has considerable support and it has become part of the Fed’s transitory inflation thesis. However, the Fed is seeing its desired response on wage inflation take hold (higher wages), but higher wages are not transitory. Once an employer raises wages, it is nearly impossible to reduce them later. The hope is that wage inflation sticks around and goods inflation recedes. The risk is a return to an inflationary world or even worse, stagflation. We are watching unprecedented fiscal and monetary intervention in real-time on a global scale which could have unintended consequences.  

Given the dip in interest rates, there seems to be little room for rates to move lower. With CPI data running at 5.00% year over year, real interest rates are running negative. At the important Fed meeting next week, Fed Chairman Powell will need to provide clarity as to why an improving economy with over 9 million available jobs, needs more stimulus and why interest rates should be prevented from normalizing. We are certainly in crazy times.

With the 10-year Treasury note near 1.500%, many strategists are firming up their belief that now is the time to refinance your mortgage. If prices in your zip code have risen, low rates may still make it worthwhile to buy a new home. We recommend locking in longer-duration mortgages because if trends shift direction, then higher mortgage rates could be here for quite a while.

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Market Commentary 7/10/20

Posted on by Damon Germanides

It’s a tale of two worlds as money on Wall Street floods into COVID-19-resistant sectors such as technology and biotech while Main Street struggles and many retail and public-facing businesses face hard times and tough decisions. With many cities and states scaling back on the re-opening of the economy as COVID-19 cases surge, it is becoming harder to imagine a V-shape economic recovery. Even amongst the backdrop of all the political bickering, more stimulus out of Washington seems baked-in, especially for the hardest-hit industries such as restaurants, fitness, airlines, and hotels, all of which employ a significant amount of folks, and they may be asked to close their doors again. Some positive news from Pfizer and Gilead on treatments to combat the virus is encouraging, but even if these treatments prove to be effective, getting these treatments out to our citizens and the 4 billion global population will be a herculean task. 

With little to no inflation and unemployment rates in the teens, interest rates are going nowhere for a while. It is interesting to see gold run above $1,800 per ounce. With global coordinated central bank stimulus packages in the trillions (and rising), there will be a day of reckoning one day in the future, and inflating dollars to pay a historical debt is one way out of this catastrophe. So it’s not surprising to see the rise in gold as a store of real value. Rising inflation is probably years away, but if and when inflation hits, watch out. 

Speaking of hard assets and inflation, residential real estate made a strong comeback after the initial shutdown. Home sales are on the rise and banks are flooded with loan applications. We at Insignia Mortgage are seeing tremendous demand for jumbo mortgage product as non-QM loans return and as our portfolio of lenders continue to work hard to approve loans during this difficult time. We continue to have access to lenders who do not require a banking relationship from customers and who are offering purchase-money loans with as little as 10% down up to $1.5 million, interest-only loans, unrestricted amounts of cash-out, and attractive interest rates, and terms for investment property transactions. 

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Market Commentary 1/17/20

Posted on by Damon Germanides

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.

May-10-blog

Market Commentary 5/10/19

Posted on by Damon Germanides

U.S. consumer prices rose moderately in April but less than expected.  Low inflation readings will keep a lid on bond yields, as well as reinforce the Fed’s position keeping short-term lending rates unchanged for the rest of the year.  With inflation in check, some are opining for the Fed to lower interest rates. We tend to disagree and believe a wait-and-see position by the Fed is wiser, as there are some indicators that inflation may pick up and that ultimately these low inflation readings may be transitory.

In other important news, trade talks fell apart this week with China.  This resulted in higher tariffs being placed today on Chinese goods imported into the U.S., which will likely lead to retaliation from China sometime in the near future. How these negotiations go is anyone’s guess, but the consensus is that a deal will be struck eventually.  However, there is always a chance that negotiations could fall apart and a full-blown trade war will occur, or that these negotiations will drag on much longer than expected. Those fears, while remote, have helped push long-dated treasury bonds lower in what is known as a “flight to quality.” The trade tensions also dented equities this week as analysts reassess the effects of ongoing trade tensions on future economic growth and corporate earnings.   

Low rates do benefit our borrowers and have spurred both a good home buying season, as well as our clients who have refinanced into lower rates. With the 10-year Treasury note trading under 2.500%, we remain biased toward locking in interest rates. Should the U.S. strike a trade deal with China, we could easily see rates move up from here.