Market Commentary 7/14/2023

Posted on July 14, 2023 by Damon Germanides

Mortgage Rates Rally On Cooling Inflation Readings

The latest CPI data indicates that inflation appears to be moving in a favorable direction. The Producer Price Index (PPI) also experienced a decline, which was well received by both the bond and equity markets (PPI measures production costs). Although another 25 basis point rate hike in July is widely anticipated, further increases in the near term seem unlikely. Nonetheless, given the persistent nature of current inflationary pressures, there is concern that a thriving equity market could spur increased spending… Which would potentially lead to a resurgence in inflation. It is worth noting that speculative areas of the equity market, such as Crypto and AI, have performed exceptionally well. Such positive performance suggests the Fed may believe more action is necessary to curb inflation. While higher rates may not be imminent, it is our belief that the Fed will maintain higher interest rates for an extended period, considering that equities have nearly recovered most of the losses incurred in 2022. Additionally, we expect the Fed to continue with quantitative tightening until a significant crisis emerges.

JP Morgan’s better-than-expected outlook for the second quarter has set the tone for earnings season. Wells Fargo, among other banks, also reported earnings and increased loan loss reserves for its commercial portfolio. In the coming weeks, we predict more write-downs of office loans from regional banks, given their significant exposure to commercial office loans. A 2008 redo appears unlikely even as some parts of the commercial real estate market experience growing stresses.

There is a noticeable uptick in purchase money loan activity, potentially driven by added inventory within certain areas. This observation is based on local market assessment, including discussions with realtors, monitoring real estate websites such as Zillow and the MLS, and the presence of more “for sale” signs in the neighborhood. Pre-approval activity is escalating, with a majority of pre-approvals falling within the $1 million to $3 million price range. In terms of refinances, we are seeing a growing number of requests. The majority of these refinance requests are coming from self-employed borrowers who aim to consolidate higher-interest business debt, credit card debt, or commercial debt through a home loan refinance.

Market Commentary 7/16/21

Posted on July 16, 2021 by Admin

Refinances Surge As Bond Yields Drop

Bond rates continue to dip even as inflation readings run hotter than expected. It is true that some inflation appears to be transitory as evidenced by the expected drop in used car prices and the dramatic fall in lumber costs. However, other costs such as wage inflation are stickier and probably here to stay. Finally, housing costs, which have yet to fully appear in inflation readings yet, will begin to affect the report in a bigger way and should keep inflation readings elevated.

Another factor to consider is that the global central banks have pumped unprecedented amounts of liquidity into the market which has distorted all price discovery, including bond prices. Also, the U.S. interest rates remain some of the highest in the developed world. It is ironic that a country such as Greece has lower bond yields than the U.S. while being a much worse credit risk. Should the markets become untethered from the Fed’s belief in inflation being transitory, rates will move up quickly. The next couple of months will be very interesting and could lead to much more volatile markets. Potential borrowers who have not taken advantage of these ultra-low interest rates should do so while the window is still open. It is hard to imagine with such strong economic growth that the Fed keeps short-term rates pegged at zero for as long as originally projected.

As we move into the middle of summer, purchase and refinance applications remain robust. Low-interest rates continue to drive purchase-money business, but there appears to be a pause in-home price increases as we have seen a very healthy increase over the past year that is not sustainable. Lenders remain eager to lend and non-QM programs are helping borrowers who do not fit inside traditional banks.

Market Commentary 7/9/21

Posted on July 9, 2021 by Damon Germanides

Rates Fall Then Rise As Markets Await Key Inflation Data

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

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

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

Market Commentary – 1/29/16

Posted on January 29, 2016 by Conrad Juliá

Interest Rates Lowered. Excellent Refinance Opportunity.

Slow growth in 2015 now looks like no growth in 2016. The U.S. 4th quarter Gross Domestic Product (GDP) reading came in Friday morning at a very anemic .7% register with a forecast of only 2.40% for 2016. These numbers, while backward-reading, confirm some of the suspicions that both the U.S. and the world economy are slowing. Interest rates responded favorably to this poor GDP number (remember that bad news is good for bond yields) with the 10-year U.S. Treasury touching 1.94%, WOW. Bonds were further stoked by the surprise move from the Bank of Japan to move short-term interest rates into the negative in its effort to kickstart the economy by forcing banks to lend, and consumers to spend.

There was one bright spot today. The Chicago Purchasing Manger Index (PMI) reading was 55.6 reading, which indicates manufacturing expanded and is an encouraging sign for the U.S. economy.

The Fed spoke earlier in the week and announced no change in short-term interest rates. Given the poor start to 2016, most forecasters do not believe there will be another rate hike by the Fed this year. Given that the Chinese economy has slowed, the dollar continues to surge and oil has remained lower than expected, it is hard to imagine a significant rise in interest rates. The world economies seem to be addicted to low interest rates with Central Bankers willing to provide the juice needed to propel equities higher and push yields lower. How this all ends is anyone’s guess.

Given the 10-year U.S. Treasury is below 2.00%, we are biased toward recommending locking in interest rates at these levels.