Tag: market commentary

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. 

Market Commentary 11/19/21

Posted on by Admin

Renewed COVID-related lockdowns in Europe are providing a tailwind for U.S. bonds as equities are trading down in the news. Further supporting lower bond yields is poor consumer sentiment and a weak Labor Participation Rate.  With 70% of the U.S. economy driven by consumption, there is a growing feeling that the economy may have peaked.  With winter approaching and COVID cases rising in Europe and in parts of the U.S., the Fed may not need to raise short-term rates as we previously believed. It is important to remember that the markets are dynamic and that the pandemic can quickly change sentiment, economic output, and overall confidence by consumers and business owners.

The counterargument for higher yields is that the COVID-related supply disruptions and behavioral changes have created rampant inflation with too much demand chasing limited goods.  Fiscal and monetary stimulus are just exacerbating the issue as more money floods into the system, costs of goods and devices will keep going up. Inflation is a problem for many working-class Americans as food, gas, and shelter costs have risen. Next week the Fed’s favorite reading on inflation, core PCE, will be released and closely read by bond traders and economists. 

It would be wise to take advantage of this dip in interest rates. With inflation running well above 4%, locking in a rate lower than inflation is a great example of positive leverage while locking in a real negative rate. 

Market Commentary 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 10/22/21

Posted on by Admin

There is a growing sense that the U.S. markets are fully priced. That does not mean that U.S. equities, crypto, and real estate assets cannot go higher, or that bond yields will immediately shoot up. The Fed is making it clear in its messaging that inflation is becoming more of a concern, and that it’s time to begin reducing the extraordinary monetary stimulus that served the U.S. economy well during the Covid pandemic. Many economists believe that the Fed will announce tapering at the next Fed meeting in November. 

By back-stopping the bond market and including BBB-rated bonds, there’s no dispute the Fed’s actions have created inflation. This includes the act of pumping the printing press with transfer payments in a way never before imagined in response to a once in a 100-year pandemic. The big question is determining how the world has changed post-Covid and if we’re entering a new period of sustained inflation. With help-wanted signs everywhere and companies of all sizes paying up for employees, it is starting to feel as if there is a changing dynamic within the workforce. Surprisingly, employees are not being lured in by these higher wages. Perhaps this is due to the incredible rise in home valuation, or in part by how much money has been made trading stocks and crypto. With the pandemic waning, the next few months of economic data will be closely be monitored to determine if employment rates drop as Federal stimulus payments end and Americans continue to get vaccinated; or if something else is at work. Consumer inflation is also at near 30-year highs. We continue to be told that bottlenecks and supply chains are the cause of rising costs but this theory is losing steam as inflation holds firm. 

Home sales remain very active and borrowers remain well qualified. The pace of transactions has slowed a bit, but that may be good for the market and bring in more sellers. Mortgage banks are providing attractive financing options for larger-sized purchases, especially for those borrowers with hard to analyze income. Refinance volume is slowing as expected. It may be a now or never for those borrowers looking to lock in ultra-low interest rates as the 10 year U.S. Treasury touched above 1.700% on Friday before settling in a bit lower.  With inflation running hot and the Fed exiting the bond purchase market, bond traders will begin demanding higher yields. 

Market Commentary 10/15/21

Posted on by Admin

Banks kicked off earning season with the major banks reporting positive growth, inspiring the equity markets to move higher. Although inflation is becoming a bigger concern, the market has momentarily put those worries to the side. Interest rates have drifted lower, which is perplexing, as the cost of all goods (food, gas, rent, materials) show no signs of lowering. Supply chains and lack of available workers are delaying the delivery of goods and also increasing costs. Companies are having to pay up for workers and there is some worry that the Fed is being pushed into a corner it will not easily be able to get out of unless it restricts monetary policy in a way that could upset markets. Should the bond market change its feeling about inflation, interest rates will move up quickly. One cannot underestimate the Fed’s ability to buy up the market, impose interest curve controls or other measures to contain interest rate volatility. However, while Fed policy is effective in creating demand, very low rates may actually be creating more demand than the supply side can handle. With no lack of demand in the U.S. for goods and with 11 million job openings, one has to wonder if we have reached the limits of what monetary policy is capable of. There seems to be more money chasing fewer goods (think autos, homes, washing machines, etc) and an increased threat of structural inflation.

China’s property market is of some concern as several trillion dollars of real estate corporate debt are at risk. Most don’t think what is happening in China will have a negative impact on the U.S., but some worry is warranted given the size of the Chinese property market, the size of the leverage, and the unforeseen risks associated with a drawdown on the largest property market in the world may have on the global economy.  

Some parts of the U.S. are starting to see a slowdown in home sales. Interest rates are still cheap so that is definitely a major factor for those who are actively looking to buy a new home. The rise in home prices has been dramatic over the last 18 months, and while there is concern about a market top, ultra-low interest rates have kept affordability at reasonable levels. Also, real estate has served as an excellent hedge against inflation historically with investment properties offering some excellent tax write-offs that help to lower ordinary income. One of many reasons that make California the leading residential real estate market is the diversity of businesses within the state. While an expensive state to operate in, it provides many entrepreneurs with such great opportunities. This is reflected in the housing market and many of the mega-homes sales that we read about weekly. Insignia Mortgage is honored to be part of many of these large sales as our expertise in structuring complex loans is a perfect fit in this type of market.

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.

10_01_2021_blog

Market Commentary 10/1/21

Posted on by Damon Germanides

It was another volatile week on Wall Street as bond yields drifted higher and then fell. Inflation remains elevated and Covid-19 continues to wreak havoc on the supply chain and logistical delivery of goods which is a big deal given a great majority of the U.S. economy is consumer-driven.  

There was some very good news on the pandemic this morning as Merck announced very positive results from its oral antiviral treatment for Covid. Perhaps the threat of Covid will soon be behind us we all look forward to a return to a more normal way of life.  

Congress is grappling with two major spending bills: one aimed at infrastructure and the other focused on societal benefits. Both packages are enormous and should be carefully thought out. The debt-to-GDP ratio is already highly elevated. Each side of the aisle bears responsibility for spending through the years, but now, we are talking about trillions upon trillions of dollars of debt. It will be interesting to see how the bond market responds to the bill’s (or bills’) passage. For now, bond traders have not been bothered about these proposals, and some might argue the way bonds are responding, these bills may not pass or they may end up quite diluted. 

Core inflation came in at over a 25-year high this morning. Fed Chairman Powell spoke about his frustration with the ongoing inflation problem but reiterated that the Fed believes inflation will temper in the coming months as the supply chain issues are smoothed out. While we certainly hope inflation does not run hotter for longer, there are some signs that inflation is not going away anytime soon. Once businesses raise prices, these prices remain intact absent a major recession. Also, wage inflation is trending nationwide as many businesses have raised their minimum wages and even offering signing bonuses to attract employees. Powell has the confidence of bond traders still or yields would have spiked this morning after this inflation report came out.  

The alternative mortgage market remains very busy. As a leading broker of niche mortgage products in California, we are helping many self-employed borrowers, foreign buyers, and real estate investors obtain financing with attractive interest rates and terms. Our new CDFI program, which does not require a borrower to provide income or employment records, has been especially helpful. These loan amounts are good for up to $3 million and interest rates start in the low 4-percent range for interest-only.