Tag: jobs report

Market Commentary 10/27/2023

Posted on by Admin

Even the Experts Perplexed By Market

10/27/2023 Market Sector Watch, CNBC

If you find yourself puzzled by the current state of the markets, you’re not alone. We’ve engaged in extensive conversations with experts from various sectors over the past week, and here’s a glimpse of their insights.

Hedge Fund Manager & Distressed Debt Manager

The landscape has become perplexing. The economy seems to be slowing down, yet consumers are still spending. Interest rates remain relatively stable, even in the face of adverse news. Surprisingly, positive tech stock numbers have had little impact on the overall market. We’re exploring opportunities in subprime credit, but our bids are struggling to gain traction due to excess liquidity and intense competition. It underscores the tremendous cash influx in recent years, and perhaps the Fed’s restraint hasn’t been stringent enough. Nonetheless, there are signs of an economic slowdown, with consumers depleting their savings. Subprime auto loans are showing signs of significant stress, a concerning development.

Head of Lending at a Large Warehouse Bank

Housing prices have held steady despite soaring rates, largely because a significant number of individuals secured mortgages below 5%. This has limited the housing supply and kept prices elevated, even as mortgage rates have tripled in some cases. While there’s a possibility of rates plummeting due to geopolitical risks, such as a three-front war or escalation, it’s currently more of a low-probability scenario than a base-case expectation. We are carefully watching the market and may pull back on some lending lines should there be more deterioration in the bond market.

Regional Home Builder

We’re witnessing robust activity, but rising input and interest rates, along with increased incentives, have eroded our profitability. We’re now investing in better technology to meticulously manage costs. We were caught off guard by how off our cost estimates were, and this realization came too late.

Plastic Surgeon

Despite continued customer demand for aesthetic procedures, there’s an increasing trend of customers seeking financing for these services. Strangely, September was not a strong month for us.

E-Commerce Marketing Firm

We’re busier than ever, with numerous businesses transitioning to fully automated e-commerce platforms. For many companies still relying on legacy systems, it’s a do-or-die situation, so there’s no sign of slowing down.

Owner of a Large Toyota Dealership

Business is good but not great, but there are indications of a slowdown as inventory accumulates, and supply chains face challenges.

Multiple Realtors

There are deals in the market, but the competition remains fierce, especially in the 1 to 4 million dollar price range in Southern California.

When considering all the perspectives together, where does this leave us?

Consumers continue to spend, but perhaps years of low rates and a robust economy have created a sense of complacency. Yet, indicators like subprime debt and certain high-frequency metrics suggest a slowdown. Inflation has ceased its ascent but remains distant from the Fed’s 2% target. Savings are dwindling. Until now, the real estate sector has been relatively unscathed, with the primary impact felt in office properties. However, with 5% Treasury rates looming, other segments are likely to feel the effects. Equities had a challenging week, even in the wake of a nearly 5% GDP growth report, leaving a somber mood. Our sense, if we were to hazard a guess, is that the economy might be on the brink of a recession. However, it’s worth acknowledging that those who’ve been on recession watch have been premature in their predictions. With two job openings for every job seeker, the job market remains tight.

Market Commentary 10/20/2023

Posted on by Damon Germanides

10-Year Hits 16-Year High as Fed Extends Higher Rates Push  

In these uncertain times, geopolitical risks rightly dominate headlines. However, the expected “flight to quality” trade, where U.S. interest rates typically decrease as investors seek the safety of government-guaranteed bonds during conflicts, has been notably absent. The primary reason appears to be that substantial government spending has overwhelmed the bond market, in addition to major foreign holders of U.S. debt becoming sellers. Currently, the private sector, including businesses, individuals, and funds, has stepped in to fill this gap. Still, without foreign support, it is likely that bond yields will not fall by much if at all. 

Despite the recent poor performance of the equity market, overall economic data remains relatively strong. Retail spending data released earlier this week indicates that consumers are still spending, albeit more cautiously. Additionally, initial jobless claims came in lower than expected, which underscores an increasingly tight labor market. Even so, it is unlikely that the Fed will raise short-term interest rates at their next meeting, even though the data suggests otherwise. This is because the longer end of the yield curve is rising, with 10-year Treasuries grazing 5% before finally settling at 4.91% on Friday morning. The 10-year Treasury note rate serves as the benchmark for pricing all forms of personal, real estate, and business debt. The rapid increase in yields on this instrument is adding pressure to all types of borrowers, so the Fed may allow the market to contribute to slowing down the economy. 

Loans, Rates, and Real Estate

Real estate, which is highly sensitive to interest rates, continues to face challenges. It is difficult to gauge precisely how higher rates have affected prices due to sluggish sales. However, builder sentiment is declining, and new home sales show signs of following suit, despite incentives offered by home builders such as buy-downs and free upgrades. The commercial lending markets are under significant pressure, as a 5% 10-year Treasury rate is expected to push cap rate floors to 6% or even higher. Private debt funds providing bridge loans remain active, while traditional banks are cautious on most deals. With many billions of dollars in loan resets scheduled for 2024, the commercial lending market is shaping up to be remarkably interesting. 

We have said it before and will reiterate that in today’s market, independent mortgage brokers with a wide range of lending options are providing value to potential borrowers. The significant disparity in rates from one bank to another often reflects the bank’s perception of the economy, the housing market, or the local area, rather than market conditions alone. Large banks are keeping their margins healthy, except for their high-net-worth clients. Brokers are once again making a meaningful difference. 

Market Commentary 10/6/2023

Posted on by Damon Germanides

Strong Jobs Market Boosts Equities 

A better-than-expected jobs report had a strong negative impact on both the bond and equity markets Friday morning, with the initial market reaction suggesting that good news might be bad news for bonds. However, a closer examination of the jobs report data reveals that wage increases are flattening, and hours worked are declining. This likely explains the subsequent market reversal, with mortgage bond yields still up but not as much, and the equity markets rallying. On the downside, the probability of yet another rate hike increased after the latest jobs report, with the odds of a hike rising from last week’s 18% to around 30%. 

It’s almost as if the WSJ has been reading our blog (joking), as Friday’s paper featured an article explaining the importance of shopping for a mortgage in today’s lending market. Banks are now offering varying interest rates, with differences of up to 1%. This aligns perfectly with what we do at Insignia Mortgage. Our experienced and dedicated broker team actively seeks the best execution for each deal by matching a borrower’s financials with the best-priced lender. Given our expertise in reviewing complex financials, we’ve noticed significant variations between lenders. Our hard work continues to pay off as clients trust us to secure their unique mortgages. 

Look out for a recap of our recent loan successes for more insight into the complexity of our client financial scenarios. While the market may be volatile, our commitment to creating individualized lending solutions remains steadfast.  

Market Commentary 9/29/2023

Posted on by Damon Germanides

Better-Than-Expected Inflation Readings Fail to Lower Rates 

Although the market welcomed a better-than-expected core PCE report (the Fed’s favored inflation gauge), it had a less-than-desired impact on bond yields. Several factors may have contributed to this subdued response from the bond market. The looming government shutdown, with a staggering $33 trillion in debt, has cast a shadow on any other momentum. In addition, a significant strike by the United Auto Workers is likely to encourage other large unions to demand higher wages. Matters become further complicated by the tight oil supply causing oil prices to push back toward $100 per barrel. 

Speaking of oil, it is worth noting that the PCE metric excludes the more volatile components of inflation, namely food and energy. With energy prices surging in recent months and the cost of living growing larger, this report offers little relief to most Americans. 

Homebuyers Barred from Market Due to Mortgage Rates 

Higher mortgage rates are now dampening demand, making the market inaccessible to many potential homebuyers. Homebuilders try to clear inventory by reducing prices and offering substantial incentives, such as 2-1 buydowns on mortgage applicants. While the tight supply in the resale housing market prevents prices from dropping significantly, an economic downturn could leave people struggling to afford mortgage payments as other costs rise. In California, the soaring costs of health and homeowner’s insurance are becoming increasingly burdensome for small businesses and homeowners. Credit card costs have also shot up, comfortably exceeding 20%. 

Lower-rated credit card borrowers are beginning to make delinquent payments, signaling that the Fed’s substantial rate hikes are starting to take a toll. However, despite some receding, inflation is not rapidly decreasing. Americans are grappling with both higher capital costs and increased expenses. While the economy continues to show resilience, many are beginning to feel the severity of a slowing economy and a higher inflationary environment. 

Prominent figures like Jamie Dimon and Bill Ackman, both Wall Street legends, would not be surprised by higher rates. They foresee rates settling above 5.00% at the long end of the curve. We share this view and are closely monitoring how the markets adapt to a world of elevated interest rates. 

Circling back to mortgages, this market remains difficult and fragmented.  The days of speaking to one or two banks on a deal are gone. Insignia Mortgage provides value by surveying many different lenders on each deal and locating incredibly competitive terms for prospective borrowers, especially those borrowers with more complex or nuanced financial profiles. 

Market Commentary 9/15/2023

Posted on by Admin

Additional Fed Hike by Year End Suggested by High CPI Readings  

Bonds continue their upward trajectory in response to the latest CPI and PPI inflation readings. As we’ve often pointed out, the path from 3% to 2% inflation presents many challenges. Both the Federal Reserve and the average American consumer face escalating home prices, rising food costs, and surging energy expenses. 

While financial experts may attempt to interpret inflation reports in various ways, we believe it’s crucial to focus on food and energy costs. These commodities, although volatile, are indispensable elements of our modern world. Therefore, the persistent high costs of food and energy, coupled with ongoing wage inflation, are likely to keep the Federal Reserve from implementing any interest rate hikes in the upcoming week. Our expectation is that they will project an additional rate hike in November. Furthermore, it’s prudent not to anticipate any rate cuts from the Fed until at least the end of next year. 

In the broader real estate market, office spaces continue to face problems. Nevertheless, there is a growing trend of companies reintroducing return-to-office requirements for employees. This shift could establish a floor for declining office values. In certain cities, office property values have plummeted by over 50%. What was once deemed a prime asset class is undergoing a transformation. Newer, amenity-rich office spaces may thrive, while older, cash-cow office buildings owned by generational landlords might ultimately be more valuable as land than as operational structures. However, there is emerging concern about the multifamily real estate sector, as a substantial amount of multifamily CMBS debt is set to mature in 2024 and 2025. In contrast, the single-family homes market remains largely unaffected by rising interest rates. This is primarily because many potential sellers are holding onto mortgages with rates below 5%. Such favorable rates are discouraging homeowners from listing their properties for sale.  

Our attention is now focused on the 10-year Treasury yield, which recently closed just below 4.35%. Should it breach this level, yields will likely surge past 4.5%. There is currently little evidence to suggest that interest rates will move lower. It’s worth noting that interest rate cycles tend to be lengthy, a point emphasized by the renowned bond investor Bill Gross, often referred to as the “Bond King.” Gross once underscored the significance of the 30-year bull market in bonds, where declining rates are considered bullish in bond markets, as one of the defining features of his career. 

Market Commentary 9/8/2023

Posted on by Damon Germanides

Has Inflation Peaked? Bond Market Yields Suggest Uncertainty… 

Where Does Inflation Go from Here? 

A peak in service inflation may be on the horizon. A noteworthy example is Walmart, one of the nation’s largest employers, which recently announced that new hires will be earning less. This adjustment signifies a potential slowdown in wage inflation, which had surged to unsustainable levels due to the pandemic, supply chain bottlenecks, and substantial government stimulus. Initially encouraged by the Fed, this wave of inflation is unlike anything witnessed in the past 40 years and was largely due to the assumption that inflation would be transitory. 

While we are witnessing some moderation in inflation concerning goods (though still too high by our standards), service inflation remains persistently elevated. This is placing significant strain on businesses of all sizes, as consumers are becoming less tolerant of higher-priced goods and services. This is why the Fed is not rushing to lower interest rates.  

The situation becomes increasingly complex when we consider why interest rates remain high despite indications that inflation might be cooling off. Two key factors come into play. Firstly, the price of oil, hovering around $90 per barrel, is preventing a more significant drop in inflation. Although the Consumer Price Index (CPI) has declined from over 9% to roughly 3.2%, moving from 3.2% to 2% will be a lengthy process for the Fed. Secondly, the massive budget deficits of many developed nations are no longer being disregarded by bond traders (this includes the United States). Our government’s debt burden has led bond buyers to demand higher yields to compensate for the perceived risks associated with holding such bonds. 

Lastly, it is important to recognize that interest rate cycles are lengthy, whether on the ascent or descent. We are currently on an upward trend. Unless significant adverse events occur, this trajectory is likely to persist.  Assuming a 3% long-term inflation rate, it is not inconceivable that longer-dated bonds trade between 4% -5%.   

In the Next Two Weeks… 

Keep a close watch on next week’s inflation readings and the subsequent week’s Federal Open Market Committee meeting. In the current climate, everything revolves around inflation and interest rates. Additionally, pay attention to the 10-year Treasury bond, which is teetering at the 4.25% mark. If it breaches 4.35%, the markets could face a challenging remainder of the year. 

Market Commentary 9/1/2023 

Posted on by Damon Germanides

Bonds Can’t Catch A Break Amidst Unemployment Rate Increase 

The July Jobs Report brought encouraging signals for both the bond market and the Fed. However, the workforce saw an influx of more workers than could be absorbed, resulting in the unemployment rate rising from 3.50% to 3.80%. While wages are still growing, they are beginning to moderate and show signs of trending lower. This shift might provide the Fed with justification to hold off raising rates at its next meeting. Although the futures market indicates around a 40% chance of a November rate hike, we anticipate that this might mark the last rate increase of the cycle (if it does occur). On the other hand, mortgage bonds and Treasury yields oddly increased, potentially influenced by a weakening dollar and surging oil prices. 

Nonetheless, it’s important to avoid drawing broad conclusions from a single report. Commodity price inflation and service inflation remain high, and the Fed would likely want to see more substantial declines in these numbers. Conversations with local business owners reveal that input costs are eroding profits. Passing these increases on to customers is becoming increasingly challenging. The persistent difficulty business owners have in finding staff is keeping wages elevated. Notably, a major national retailer catering to lower to middle-income consumers, Dollar General, has reported that its customers are feeling financial pressure and adjusting their purchasing habits. This demographic has been hit hardest by elevated prices and could be a significant concern for the Fed. This context supports our belief that even if the Fed stops raising rates, a downward shift in interest rates might be a prolonged journey. Fed Funds rates could remain potentially elevated well into 2024 or even 2025. 

Loan Success Takes Grit 

Navigating the mortgage landscape is no longer a straightforward endeavor. While we maintain access to excellent products and lenders and are successfully closing loans, the path can be turbulent. Underwriting guidelines at banks are tightening, debt funds and mortgage banks are grappling with an illiquid secondary market, and limited housing supply in major cities complicates loan qualification. Financing costs have surged while housing prices have remained stagnant, particularly affecting higher-end home purchases. In this landscape, experienced mortgage brokers are proving invaluable by sourcing better-priced loan options, exploring more nuanced alternatives like interest-only or investment property loans, and connecting with smaller banks that embrace innovative thinking. Our broker team at Insignia Mortgage, for instance, achieved over $40 million in closings in July, while our fix-and-flip and bridge lending arm, Insignia Capital Corp, closed over $12 million in business. It was far from effortless. What matters most is that all our clients successfully completed their crucial transactions. 

Market Commentary 8/5/2023

Posted on by Damon Germanides

Bonds & Equities Shaken By Fitch Downgrade Of US Credit

This week was filled with noteworthy economic developments. The bond market experienced significant fluctuations following Fitch’s downgrade of the US credit rating from AAA to AA. The latest July Jobs Report, though weaker than expected, provided some relief to the bond market (which experienced a notable climb earlier in the week). Nonetheless, persistent wage growth and a tight job market continue to challenge the Federal Reserve. As a result, inflation remains a concern at the forefront.

Amidst these developments, other factors are contributing to inflationary pressures. These factors include rising commodity prices, geopolitical tensions, and potential labor strikes. While the immediate impact of the Fitch downgrade may be limited, it serves as a vital reminder that addressing long-term spending issues is important for our nation’s prosperity.

The Future Of Rates & The Impact Of Inflation

The path of interest rates remains uncertain. Some potential scenarios range from further rate hikes due to wage inflation to a soft-landing recession narrative. All outcomes necessitate careful navigation of the Fed’s interest rate and QT policies. While we observe signs of falling inflation, wage inflation persists, leaving room for at least one more potential rate hike (if not two) in the future.

On the other hand, the consequences of the Fed’s substantial rate hikes over the past year and QT policies are gradually seeping into the financial system. As interest rates rise, lenders are tightening their loan offerings. Narrowing such loan options could impact economic growth in the coming months. Even so, it is worth noting that the American consumer has demonstrated remarkable resilience, readily accepting higher interest rates and loan payments.

The normalization of mortgage rates on a historical basis is apparent, but when combined with soaring home prices, the overall cost feels steep. As a result, the existing home sale market has experienced a slowdown in activity. At the same time, some market segments have witnessed odd price increases due to a lack of available housing supply. Despite these challenges, the adaptability of consumers underscores their ability to weather economic fluctuations.

Market Commentary 7/21/2023

Posted on by Damon Germanides

Markets Party On As Risk Appetite Grows Amidst Discounting Higher Rates

The investment landscape remains complex, as it has always been. With the constant influx of daily reports and updates, it’s easy to be distracted by market movements and opinions. In the equity markets, big tech companies have led to significant gains for some investors. Conversely,  a more balanced approach has yielded only moderate returns or worse for others. The risk-on trading sentiment seems to be prevailing, even as interest rates rise and the Fed indicates a prolonged period of higher rates.

In the housing market, although new home builders are thriving, existing home sales face challenges in major cities due to limited inventory.  As many banks pull out of the mortgage market and layoffs have become more common, the mortgage world shows it is not immune to its share of challenges. Smaller banks and credit unions step in to fill the gap, providing opportunities for boutique firms like ours to match borrowers with lenders who prioritize community growth, common-sense underwriting, and personalized service.

New Standards On The Horizon: Inflation, Debt, & Consumer Spending

Equities surge and multiple offers continue to be prevalent in the more affordable section of the housing market. We can’t ignore the broader economic concerns of these behaviors becoming almost the standard as they relate to the inflation fight. Unemployment remains ultra-low and the employment pool tight, commodity prices are on the rise, the 2-year Treasury rate is nearing 5%, and consumers continue to spend (even if by way of debt). It is hard to model how the massive Covid-related money spray and multiple Government stimulus programs will affect inflation. However, there is a greater than zero probability that inflation readings show signs of acceleration come the fall. This may be one reason the Fed is expected to raise rates next week and possibly again in September.

While the markets and consumers seem comfortable with the Fed’s rate hikes, we remain cautious. Powell’s warnings about potential pain may not have materialized yet, but we believe it’s essential to monitor the situation closely.

Market Commentary 7/7/2023

Posted on by Damon Germanides

Yields Rise As Strong Wages All But Ensure Fed Rate Hike

The ADP report this Thursday marked a significant week for the bond market, as both Treasury and Mortgage rates exhibited a notable increase. Fortunately, Friday’s employment report met expectations, easing some pressure on bonds. The probability of the Fed raising rates later this month is now nearly 100%, with elevated wage inflation and the strong job market. In addition, bond traders are realizing that interest rates will remain high for an extended period, due to persistent global inflation and forecasts of potential interest rate hikes in other countries (like the UK).

Some argue for the Fed to exercise patience and assess the long-term effects of their rate hikes on the US consumer and the economy. Despite this pushback, there are signs that the rate increases are making an impact. Banks are becoming more cautious with their underwriting box, consumers are exercising caution in their purchases, manufacturing data is declining, and credit card balances are rising as stimulus funds dwindle. One might wonder where we would be if the AI investment theme didn’t re-ignite animal spirits. Additionally, large apartment investment firms are facing challenges as floating rate debt reaches a tipping point, where monthly interest expenses exceed property cash flow. The pain of higher interest rates is gradually spreading beyond the office sector to other real estate asset classes.

An illustrative example demonstrates the risks of buying at very low cap rates:

  • 2021 Investment Environment Net Operating Income: $100,000 Cap Rate: 3.75% Value: $2,667,666
  • 2023 Investment Environment Net Operating Income: $100,000 Cap Rate: 5.75% Value: $1,739,130

This example equates to a loss of almost 35% on the property due to the movement in cap rates. While we don’t anticipate a systemic crisis in commercial real estate, buyers who relied on aggressive assumptions and maximum leverage may face difficulties ahead.

Rate Hikes & Real Estate: What’s Next?

Higher interest rates are influencing the existing housing market, resulting in continually elevated home prices, despite interest rates returning to 7%. This situation may limit what potential buyers can afford. Furthermore, the potential for an increase in housing supply seems plausible if equity markets reverse course in response to ongoing Fed rate hikes. Sellers may choose to sell their homes while existing home market inventory remains tight, rather than waiting for a recession or other negative events. Notably, the Southern California superluxury market is experiencing a swell in inventory as ultra-wealthy individuals are less inclined to expand their home portfolios. It will be intriguing to observe what factors will entice these buyers back into the market. Only time will reveal the answer.