Tag: jobs report

Market Commentary 6/10/2022

Posted on by Damon Germanides

Who’s Most Impacted By Inflation? All Of Us. 

Things are looking grim. Today’s inflation report came in hotter than expected much to the disappointment of the bond and equity markets. Equity markets are getting slammed, while Treasury yields are rising. Today’s report puts the Fed substantially behind the curve on inflation. A dramatic action might be necessary to provide even the smallest form of relief.  Until today, you wouldn’t hear this from most commentators on CNBC – that one cannot take a 75 or 100 bp event totally off the table. This blog has advocated for rate hikes for quite some time and believed a 75 bp hike a few months ago would have been appropriate.  Signaling from the Fed has been very poor, as well as, from the Treasury. Letting inflation run hot was a terrible mistake. Like most Americans, inflation has been evident in our daily purchases for months. Let’s hope the Fed makes the right decisions soon, to avoid recession. It is becoming an increasingly difficult environment to navigate.  In my opinion, inflation, and not the equity or housing market, remains priority number one. So, there will certainly be more pain ahead.

Although consumer and business confidence remains weak, a combination of stock market volatility, the slowing housing market, and 120 oil may be doing some of the work for the Fed. Anecdotally, this week I happened to be out to dinner more than usual, and I noticed that restaurants are less busy. The gas attendant at the local gas station said fewer people are filling up. Bank management is less eager to lend. All these things suggest the economy may already be in recession.  With unemployment at 3.60%, it is hard to envision a major recession taking place. Nonetheless, I am reading about many layoffs, especially in higher-paying jobs such as technology. 

The Housing Market & Our National Reality Check

There is not much good news to talk about. Rising rates and a cooling economy will lead to lower house prices. Supply-constrained markets such as Southern California probably won’t see a big price dip unless the bond market and equity market do not steady, but home prices will come down as demand wanes. This is a positive note for those waiting to buy, but not so much for those who recently bought.

The one benefit of this reset is that wages, the cost of living, and people’s expectations of what a normal rate of return looks like, have gotten a major reality check. There is no such thing as a free lunch, unlimited debt financing, or continued parabolic returns on investments. You can’t spend your way out of inflation. There is now a return to the mean and that is good news for the next generation. Easy money is never easy. Success is earned and above-average returns require skill and thought. 

Market Commentary 06/03/2022

Posted on by Damon Germanides

Strong Jobs Report Supports More Fed Tightening

Concerns over the Fed’s progress on quelling inflation have been heightened considering May’s solid Jobs Report. The 10-year Treasury Bond is now nearing 3.000%. The Fed has publicly stated they see no reasons to pause rate hikes (even after the expected 100 bp hikes expected in the summer) and the Jobs report has reinforced a tight labor market. Inflation will not come down for some time. It may have peaked, but the slide to lower inflation is expected to linger. Since labor makes up over 65% of corporate expenses, rising incomes will continue to put pressure on companies to raise prices when possible. Additionally, commodities inflation (especially oil) remains high. Case in point, gas prices hit $8 per gallon in California recently. 

Lookout: The June Balance Sheet & Major CEO Premonition

Expect ongoing volatility as the Fed is willing to let markets fall to wring inflation out of the system. This includes equities and housing. I advise you to watch the Treasury market closely. The Fed begins to run off its balance sheet in June, but the real action begins on June 15th. It will be interesting to see the effects of QT after so many years of liquidity support in the financial system by the Fed. This reinforces the need to be a fundamental thinker when buying real estate, a home, or any other security. Price always matters. 

Some major CEOs are beginning to warn of a looming recession. These individuals have access to troves of data and have the best minds in the world advising them. It goes without saying that the economy is too complex to truly predict what could happen. Economists and forecasters get things wrong more often than not. However, all this negativity is causing banks to be more cautious in underwriting.  The need for volume is creating competition for high-quality loans. Rate spreads are tight as banks compete to obtain the safest credit candidates in the jumbo space.  Non-QM and alternative documentation loans have fallen out of favor with the investor community. Such products are not getting a bid in the secondary market. Insignia remains focused on portfolio lending solutions for our customers who are mostly self-employed or foreign nationals.  

The combination of a slowing economy and elevated inflation is a worst-case outcome for the economy.  The Treasury market leads the way as a signpost for where the economy is headed.  In some ways, we must hope for higher long bonds as an inverted yield curve portends recession. Given all the debt in the system, one must not forget that things can still get worse. 

Market Commentary 5/6/2022

Posted on by Admin

Fed Chairman Comments Fail To Calm Markets

Fed Chairman Powell

Fed Chairman Powell appeared to be in high spirits after his press briefing on Wednesday this week. His commentary, along with the only a .50 bp hike to the Fed funds rate, was lauded by U.S. equity markets.  Markets appreciated his willingness to take a .75 bp rate hike off the table. They also found relief in the fact that an impromptu FOMC did need to take place to address current economic conditions. Despite the temporary mirth, Thursday’s depletion of markets around the world suggests the Chairman’s comments were flawed.  Critics question the removal of any policy response with so many conditions at play: a tight labor market, aggregate demand greater than what suppliers can deliver, a war in Ukraine, and COVID-induced lockdowns in China. The bond market is skeptical of this rhetoric, as the 10-year Treasury is now above 3.000%. This is an interest rate that many experts believed would not come to light for a long time, if ever.  In addition, mortgage rates are now touching 13-year highs. Equity markets are re-pricing risky assets as speculators are getting crushed amidst fear running high.  

Just How Bad Are The Markets?

The traditional 60/40 stock to bond ratio is down over 10% year-to-date. Ultra-low bond rates have not provided the ballast that higher-yielding bonds would have given in previous down markets. With inflation running above 5%, even as high as 8.5% in some cases, there is nowhere to hide. 

Although investors are worried, it is important to note that the U.S. economy is currently doing well. This is evidenced by the April Jobs report and the fact that wage growth is moderating. The stock market can be irrational and is not always indicative of actual economic health. Inflation does remain a problem. Fortunately, the Fed is doing its job by speaking tough on inflation. High beta stocks have lowered along with other speculative investments.  As consumer and business confidence crumble, prices will eventually come down. The big question is whether the Fed should be tightening more aggressively or continue to proceed with a “go slow” mentality.  Many experts would like to see the Fed move quickly to get in front of inflation and then adjust policy once inflation is tamed. 

Moving Into Creative Financing Options

As we indicated a couple of weeks ago, the WSJ is now writing about rising rates and borrowers becoming more creative with financing choices. Most notably is the move into adjustable-rate mortgage products. ARM loans adjust after a fixed-rate period but have much lower note rates. With 30-year fixed-rate mortgages above 5.00%, ARM products can still be had at rates under 3.00%. While these products are not for everyone, given the escalation in rates, these programs offer lower monthly payments and are becoming quite popular in the current rate environment. This is especially true in more expensive areas like Southern California.  

Watch the full statement from Fed Chairman Powell here.

Market Commentary 4/29/22

Posted on by Damon Germanides

GDP Slows As Fed Eyes Rate Hikes

It’s becoming clear to everyone that the Fed failed to act sooner. There is now a 50% -50% chance of a .75 bp Fed hike next week, in addition to the many other indicators that are turning negative on the U.S. economy.  Stagflation is now being talked about as a real threat (stagflation is the combination of slow growth and rising prices). The employment picture remains tight which supports the “no recession” argument, but this time may still be different. The combination of the geopolitical issues in Europe, global inflation, rising energy costs, a zero-Covid policy in China, and general overall unease, may produce a recession quicker than many analysts believe. Big tech names such as Apple and Amazon reported worse than expected earnings and warned of tougher times ahead due to supply chain disruption and margin declines due to inflation. While the major indexes are down from 12% to 23%, many stocks are down 50% or more. Speculation is being sucked out of the equity markets which will affect how investors look at all types of assets: private equity, real estate, and bonds. The risk premium is increasing on investments as both equity and bond markets get hammered. Remember the human psychological component of investing, when every investor runs for the exit, the price is whatever you can get and not what that asset is worth. Watch the VIX index this week, also known as the fear gauge, to blow out as a sign that near-term market capitulation is finally over.

Personal savings is going in the wrong direction as inflation outpaces gains in income.  This speaks to the heart of the issue and why I believe the Fed will let the equity market fall much further than some pundits believe. Why, you ask?  The bottom 40% of the U.S. workforce cannot handle double-digit inflation. The combination of zero interest rates and too much stimulus has now created a massive demand shock, too much money chasing too few goods. While raising interest rates will not solve this issue overnight, the downside volatility in equities will discourage consumers and businesses from spending money. This should quell inflation over time.  The Fed will come to the equity markets rescue at some point (if need be). However, we are a long way away from that conversation. 

The yield curve remains on recession watch as the 2-10 and 5-10 year U.S. Treasuries are flat. This is beginning to affect lending rates across all product offerings since ARM’s vs. Fixed rates are also pricing at nearly the same note rate.  With mortgage rates on the rise, and affordability becoming stretched due to higher interest rates, the housing market appears to have peaked. Unlike 2008, loan underwriting remains robust, so while there could be a drift down in home values, it is hard to see an outright correction on the horizon. There are also many potential homebuyers who gave up the last year and a half on buying a home, who may re-enter the housing market should prices correct slightly. The refinance market is drying up as ultra-low interest rates have pulled forward demand and so many mortgages were written with sub 3.00% debt. As stated previously, caution is warranted as the return of capital becomes more important than the return on capital.

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 4/1/2022

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 3/4/2022

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 2/18/22

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.