Tag: jobs report

Market Commentary 1/28/22

Posted on by Damon Germanides

Fed Set To Raise Rates Elevates Market Unease

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

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

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

Market Commentary 1/7/22

Posted on by Admin

Fed Signals Rates Will Rise In 2022 With Inflation Running At 30 Year Highs

It has been a forgettable start to 2022 for the U.S. financial markets, and more specifically, for many tech companies and bond investors. While the last several weeks of 2021 were quite volatile, Wednesday’s hawkish release of the Fed minutes crushed many stocks and also shook the bond market.

Inflation is now a major concern for the Fed. Friday’s Job Report, which contained both positive and negative elements about the employment picture, reinforces the belief that the U.S. economy is near full employment. The current unemployment rate stands at 3.90% with many million job openings still remaining. Wages continue to increase running above many expectations, but, these wage increases are not keeping pace with consumer inflation and this is what the Fed is worried about.

Housing demand remains robust. Should interest rates continue to rise, housing demand and housing affordability will be impacted. However, with the housing supply still too low, housing demand should not dip too much. Lumber will be important to watch as it has quietly gone back up to a 7-month-high. Increased labor costs for construction workers are also a concern along with supply chain issues. Higher rates will force builders to work on keeping costs down on new home builds. It is too early to tell what could happen but homebuilder stocks have not traded well to start the year even as demand is strong.

Another hot CPI report is expected for December, which is due out next week.  While the market is already pricing in the likelihood of ongoing inflation, interest rates will be under continued pressure as both PPI and CPI inflation readings run at 30-year highs. We don’t recommend sitting around waiting for interest rates to abate or the Fed to pump large-scale stimulus into the economy in response to the Omicron outbreak.  Borrowers who have not taken advantage of the ultra-low rate environment still have some time to lock in very attractive interest rates. For those borrowers with complex financials, Insignia Mortgage has several local banks and credit unions willing to work closely with us to approve loans that larger institutions simply won’t take the time to underwrite. Interest-only products are abundant, as are mortgages for second homes and investment properties.

Market Commentary 12/17/21

Posted on by Admin

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

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

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

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

Market Commentary 12/10/21

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 12/3/21

Posted on by Admin

Bond Yields Drop As Markets Cope With New Omicron Variant

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

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

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

Desk chair in the light - October 8 2021 blog image

Market Commentary 10/8/21

Posted on by Damon Germanides

Today’s poor jobs report was a surprise as Covid cases have been declining for the last few weeks. There is a strange dichotomy that has developed in the U.S. labor market. There are over 11 million job openings, yet there has been a continuous decline in the working population. The Labor Force Participation Rate (LFPR) fell to 61.6% as 183,000 people left the labor force. Businesses across the county are offering higher starting salaries and cash perks to attract workers. Higher up the pay scale, policies such as work from home and flexible work schedules with higher wages seem to favor the employee, yet all types of businesses are struggling to fill open positions. 

The combination of wage inflation and goods inflation remains top of mind for many economists, along with the fear of a slowing economy and rising costs. With major supply chain disruptions, as well as a lack of workers, the busy fall buying season is shaping up to be one for the ages. Cargo ships at the Port of Los Angeles and Long Beach are backed up for weeks. Dry shipping costs are outrageously expensive. Companies that can pass on the rise in the costs of goods and labor will do so. The big concern is that even with rising wage inflation if the prices of goods go up more than the increase in wages it is still a net loss for lower-paid workers. The massive disruption by Covid will take many months to work itself out and the cost to the consumer is higher prices. 

Support for the transitory argument on inflation by the Fed is beginning to wane as the 10-year U.S. Treasury bond is trading above 1.60%. For the moment, the equity market is agnostic to this move higher in bond yields, but should this trend continue, volatility will pick up, especially with high-beta long-duration technology stocks. Rising rates may also cool the red-hot housing market. Even with the rise in housing prices in the last 18 months, ultra-low interest rates have kept payments reasonable and therefore have offset the expensive housing market. With a high probability that the Fed will need to begin tapering its bond purchases by the end of this year, rates could move up meaningfully. Absent Fed QE, time will tell what the market will require for bond and mortgage yields to catch a bid and how other markets will be affected if interest rates drift higher.

05_07_2021_blog

Market Commentary 5/7/21

Posted on by Damon Germanides

Interest Rates Tick Higher As April Jobs Report Disappoints

A surprisingly horrible April jobs report sent bond yields down and lifted stocks higher in early morning trading. This report caught many of us off-guard given that the economy is on fire and many businesses are starting to see a return to normal. It is unclear if this was just a one-off poor jobs report, especially given the strong numbers out of payroll giant ADP regarding the jobs recovery earlier in the week. However, some experts, including folks in the Commerce Department, are asking the powers that be to re-think the extended Covid unemployment benefits. This comes on the heels of many customer-facing businesses complaining that they are finding it hard to entice new workers, even after raising wages and offering other incentives.  

Asset inflation has been seen for quite some time, as has commodity inflation. There is no doubt that goods and services are becoming more expensive, regardless of what official data states. Consumers don’t need to look past the cost of food, gas, or housing to see that for themselves. Business owners can plainly see inflation in their cost of operations. Many businesses with competitive advantages are raising prices. CEOs of major enterprises are seeing inflation pressures that have not been felt in many years. The big question is: when does inflation become a big enough problem to cause the Fed to react. For the moment, the bunk April’s jobs report has given the Fed cover to remain ultra-dovish for longer, especially as the unemployment rate rose to 6.1%.

As the market digests this counterintuitive jobs report, real estate borrowers may have another window to look to lock in extremely accommodative long-term interest rates. Insignia Mortgage has been advocating for months to take advantage of the Fed’s desire to keep interest rates low for longer before the window closes. The pandemic will end eventually and with incredibly robust economic growth at some point, the Fed will need to taper its bond-buying and artificially suppressed normal level of interest rates. However, it looks as if this jobs report will prop open the window a bit longer.

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Market Commentary 7/2/20

Posted on by Damon Germanides

A strong June jobs report pushed equities higher on a shortened trading week. While the economy is still so fragile, back-to-back better-than-expected jobs reports support the premise that quite possibly the worst is behind us on Covid-19. However, new cases have been spiking which is worrisome. The next few weeks will be key as fresh data is released on infection rates, hospitalizations, and deaths. 

If you think of the stock market as a voting machine, the rally higher in stocks and less volatility in the bond market is telling us things are really improving. Yet many customer-facing businesses (retail, restaurants, services) are struggling. Meanwhile, the tech sector rallies based on the explosive growth of services that affect the new normal in the work-from-home economy. How these tech services help or the nearly 20 million unemployed find new opportunities is not yet clear, but never underestimate U.S. innovation and resilience. Pfizer released some very promising Covid-19 vaccination data. It is still early but should a treatment(s) become a reality, all markets (stocks and bonds) would breathe a sigh of relief and economic productivity would surge. 

With the jobs picture improving, the new and resale housing market has improved as well. Supply remains a big issue, especially in tight markets like California. Interest rates are very attractive and the need for more space at home supports a stable housing market and perhaps even one that moves higher in price in certain pockets.  

Local banks and credit unions appear to be picking up the loans the large money center banks simply don’t want to deal with or lack the capacity to close on time. Insignia Mortgage continues to close purchase loans on time and with very attractive rates and terms. Cash-outs without restrictions, interest-only loans, and investment property loans are all readily available through our lending sources. 

05_08_2020_blog

Market Commentary 5/8/20

Posted on by Damon Germanides

The April jobs report was the worst on record with over 20 million of the U.S. workforce currently unemployed. Our hearts go out to each and every person who has lost their job as a result of Covid-19. However, the U.S. equities market is trading up today, so we ask ourselves, “what gives?” Perhaps the market is telling us the worst is behind us. We sure hope so, but we still believe there will be a tough road ahead as our governors and mayors slowly begin to re-open up the economy.

Interest rates remain pegged near zero on U.S. T-Bills and the 10-year U.S. Treasury bond has traded within a tight range over the last couple of weeks as volatility has subsided. However, mortgage rates have untethered from the U.S. Treasury rates as banks have raised interest rates and tightened guidelines, understandably. We expect mortgage rates to trade better if and when the U.S. economy can re-open without significant spikes in Covid-19 infections. 

Commercial lending, including multi-family, so far has been hit the hardest due to so many tenants or renters unable to pay their rent. Despite this, we are starting to see some relief as lenders slowly re-enter the market. Expect several months of payment reserves as part of the loan request, also known as an interest reserve, and reduced loan-to-values and risk-based pricing.

On the residential lending front, there has been no better time in my career to be a mortgage broker. Insignia Mortgage’s many long-term relationships are paying off as we are customizing loans for our clients day in and day out. Our suite of lenders all have different risk appetites, so having optionality and pricing power with different lenders has resulted in our ability to place loans that other large money center banks have declined. 

We continue to offer the loans for the following scenarios with very fair rates and terms:

  • Interest-only purchase loans, refinances, and cash-out loans for primary residences, second homes, and investment properties.
  • Non-occupant co-borrowers.
  • Foreign national loans.
  • Cross-collateralized loans and Asset consumption loans.
  • 1031 exchanges and loan structure with LLC, LP, or corporation as borrowers.
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Market Commentary 5/1/20

Posted on by Damon Germanides

Economic pain caused by Covid-19 deepened this week as the unemployment numbers hit 30 million people. Expect next week’s April jobs report to hit 20%. With consumer spending down, and so many people out of work, it was no surprise that Q1 2020 GDP contracted by – 4.80% and will likely be followed up by a much larger drop in Q2 2020. The Fed and the federal government are implementing a “by any means necessary” approach, which is echoed by the European and Japanese central banks and governments as well. These trends continue to backstop our economy. It’s hoped that the approach will boost economic recovery once the U.S. economy is turned on again, as well as support asset prices. We sure hope this is the case but are also aware that consumer and business behavior has changed due to the pandemic and the recovery could take much longer than anticipated. 

Regarding housing and lending, Covid-19 hit the spring buying season hard. However, interest rates remain low and may drop further over time, enticing more buyers into the market. There are also signs that the non-QM market is slowly reviving, which is a positive sign, especially for cities such as Los Angeles which have many self-employed borrowers. Big banks continue to pull back from the marketplace. Our office has received an unprecedented number of requests for financing the past few weeks as borrowers look for alternative financing options. We are happy to report that for the most part, our partner lenders remain committed to pulling out all the stops to help borrowers refinance or purchase homes. In our opinion, there has never been a better time to be a broker with long-term lending relationships and that is proving to be a great benefit for our clients during this very difficult time.