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GSP Insights

  • PPI Data Continues The Narrative, 10 Year Treasury Down 60 Bps in 4 Weeks

    Pascale’s Perspective

    November 17, 2022

    After last week’s big rally on CPI, Tuesday’s PPI added to the “inflation has peaked” hopes. Core PPI rose 5.4% annually and was actually flat month over month (vs expectations of 7.2% and 0.3%), and well off the March 2022 highs. The services component declined by 0.1%, the first decline since November 2020. Consumer durable goods (apparel, electronics) prices continue to soften as inventories pile up. Retailers indicate that consumers are downsizing and/or changing buying habits towards more value oriented. Many are predicting lower-than-expected holiday sales (while travel demand is strong). Interestingly, consumer credit card balances saw its highest annual jump in 20 years. This could be a sign the red hot consumer demand over the past few years is unsustainable: pandemic savings are running low and credit card rates are rising with the Fed increases. Signs that the job market may be slackening: the seemingly non-stop hiring by big tech has abated with layoffs by industry leaders. Weaker demand and job market slack are critical to cooling off price pressures.

    Fed officials are making it clear that the “job is not done” – Yesterday morning SF Fed President Daly remarked that “a pause is off the table.” But “slowing rate hikes” is on the table. The consensus is based on comments and futures markets: a 50 bps increase on December 14, followed by 25 bps at the February and March meetings. A pause at that point would put the “terminal” Fed Funds rate at 4.75%. Daly indicated that the target is “4.75-5.25%.” Then what? The Fed intends to hold that rate for a while and let the cumulative effects of the rate hikes take effect. Daly also pointed out that as the inflation rate declines, the delta between a stable Fed funds rate and inflation will increase and (hopefully) further diminish price pressures. Keeping up the narrative: Before the December meeting, we will get October PCE, November jobs, and CPI. Stay tuned…

    By David R. Pascale, Jr., Senior Vice President at George Smith Partners

  • Bond and Stock Markets Rally on Cooler Than Expected CPI on “Pivot” Hopes

    Pascale’s Perspective

    November 10, 2022

    This morning’s October CPI report: Core CPI increased 0.3% for the month (0.5% expected), overall CPI is 0.4% (0.6% expected). Annual CPI is at 7.7% (7.9% expected and down from the June high of 9.1%). Relief rally: 10-Year Treasury dropped to 3.84%, down from a 4.12% opening; a big intraday move and below the psychologically significant 4.00% level. It’s interesting to note that the major fixed and floating rate lending indices are converging – 30 Day Term SOFR is 3.79%. The Dow jumped 850 points within hours. Fed futures “softened”:  85% chance of a 50 bp increase at next month’s meeting, 15% chance of a 75 bp increase. Yesterday it was 56% for 50 bps, 44% for 75 bps. One report does not “fix” inflation, but markets are ultra sensitive to trending data and anticipation. The rally is big as it assuages the fear that has emerged in recent weeks regarding the great Fed questions regarding the eventual terminal rate or peak rate: “How high and how long? Recent comments by Fed Chair Powell and other officials suggested the terminal rate may need to be 5.00% or higher to tame inflation. Today’s report provides a “hopeful path” to a lower peak and shorter time there.

    Inside the numbers: Prices for “core goods” (homes, used cars, appliances, apparel) have been softening for months, while services costs have spiked. Today’s report indicated medical services prices fell 0.6%, benefitting from the “annual reset” methodology employed by the Labor Department. Another lagging indicator that should start showing softer price increases is shelter. Zillow, CoreLogic, RealPage and Apartment List have all indicated apartment rents (for new leases) softening nationwide over the past 2-3 months. It will take a couple more months for that to be figured into CPI, which counts “renters at large”- aka all tenants. Markets don’t want a repeat of the optimistic rallies as core CPI dropped steadily from April to June, but then leveled off in July and spiked in August and September- which sent rates soaring. Therefore, next month’s CPI report release on December 13, followed by the year’s final Fed meeting the next day is looming very large. Stay tuned…

    By David R. Pascale, Jr., Senior Vice President at George Smith Partners

  • Quick Close Land Financing Starting at 6.21%

    Hot Money

    November 9, 2022

    George Smith Partners recently went into app with a capital provider financing land acquisition with pricing just over 6%. The balance sheet lender can provide financing on all major asset types, provided that the property is within its geographic footprint of NV, UT, OR, and ID. Financing up to $15,000,000 with no prepayment penalties, loans can close in less than 30 days. Interest only options are available.

  • Low Rate Perm Multifamily Financing With Flexible Prepay

    Hot Money

    November 3, 2022

    George Smith Partners is working with a capital provider with a clean balance sheet providing permanent fixed-rate debt financing up to $10,000,000. With multifamily rates starting at 5.60%, this portfolio lender offers loan terms from 3 to 10 years with step-down prepayment options. For 3 year loans, the lender’s prepayment penalty is open after 2 years. Financing only in California, this capital provider can go up to 75% of value on multifamily, self storage, warehouse, industrial, office, and retail (anchored and unanchored).

  • Fed Increases 75 bps, Powell Presser Squashes Rally, “Some Ways to Go”

    Pascale’s Perspective

    November 3, 2022

    First off, a 75 basis point increase for the 4th straight meeting put the Fed Funds rate at 3.75% – 4.00%, the highest since 2008. Prime Rate is 7.00%, 30-Year fixed rate home loans are about 7.30% and 30-Day Term SOFR is 3.79%. Markets rallied on “dovish” comments in the initial statement: “In determining the pace of future increases, the Committee will take into account the cumulative tightening…. (and) the lags with which monetary policy affects inflation.” Many economists note that Fed actions take time to work through the economy. A scenario where the Fed watches and waits while lagging indicators catch up could forestall economy-crushing excessive rate increases, aka the “soft landing.” Hopes of “the pivot rally” jumped as the 10-Year Treasury yield dropped to 3.98 from 4.06 and the Dow rallied over 300 points in 30 minutes… until Fed Chair Powell’s remarks and responses to questions. His opening remarks seemed like a direct response to domestic and international pressure on the Fed to ease off on rate increases. He reiterated that the Fed’s number one job is price stability and that a sustained healthy labor market depends on that stability. The irony in that statement is that fighting inflation will require more slack in the labor market, i.e. higher unemployment. It’s as if the Fed needs to “break employment to save it.” The phrase that really moved markets was: “It’s very premature to think about pausing”, which he repeated for emphasis. Powell recognized that conditions have already tightened in housing, business investments, and other rate-sensitive sectors. He noted that goods prices should have come down faster and that prices for services are rising significantly. Yesterday’s ADP report for September indicated robust hiring continues in the services sector – especially hospitality and leisure.

    Future Direction: Powell indicated that the Fed might “slow the pace” of rate cuts in December and February. But the data point that really shook the markets was his response to the big questions which are: “How high?” and “How long?” – regarding the “terminal rate” or peak and how long before the next rate cut. It seems like the answers are “higher” and “longer.” Powell said that there is now “significant uncertainty” amongst Fed policymakers about the “ultimate level” for the Fed Funds rate. This follows recent comments by Fed President Kashkari that a “terminal rate” in the 5% range may be needed to battle core PCE inflation. Recent assumptions had the terminal rate at about 4.6% and hopefully peaking for a few months. Powell and the Fed are now setting expectations for a longer battle. Rhetoric such as “Some ways to go” and the recent mantra “Restrictive territory… for some time” drove the message home.

    In the weeds: Powell discussed employment metrics he is closely following: job quits, vacancies and labor participation. The Fed is watching for any sign of slack in the labor markets. He also discussed softening rental rates and the inherent housing cost lag in the CPI statistics. CPI continues to count rental costs based on all lease payments, not just newly signed lease costs. This may understate the effect of Fed rate increases on housing costs for months. He noted that this lag is considered when reading the data. The rallies dissipated into negative territory as markets digested Powell’s remarks – the 10-Year jumped to 4.11% and the Dow dropped 1.5%. Stay tuned…

    By David R. Pascale, Jr., Senior Vice President at George Smith Partners

  • “Extreme” Yield Curve Inversion Signals Recessionary Expectations, Bond Yields Drop

    Pascale’s Perspective

    October 26, 2022

    The 2 Year Treasury and the 10 Year Treasury inverted in July and have remained “out of balance” to this day. That inversion is often seen as a harbinger of a recession. Today, the 3-Month Treasury is higher than the 10 Year Treasury – this has occurred only 7 times since 1967. Markets may be saying that the Fed has raised rates too fast, without allowing for enough lag time to gauge the effects (which can be felt for up to a year after any given rate hike). This week has seen earning disappointments from tech companies as companies pull back on advertising. The Case-Shiller index indicated home price gains are dropping at the fastest pace on record as mortgage payments average 75% higher than last year. The Fed’s demand destruction strategy is “working.” Recent quotes from Fed policy makers indicate some concern over raising rates too quickly over the next few months. Bonds have rallied – after hitting a multiyear high of 4.32% last Friday. The 10 Year is down to 4.00% as of tonight’s close. The latest hopes are quantified in the futures markets – a 75 basis point increase is nearly assured at next week’s Fed meeting (94% probability), but the December meeting futures show a 63% chance of a 50 basis point increase, and 37% at 75. This Friday’s PCE report looms large as the final major inflation data point before next week’s meeting. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • 10 Year Hits 4.15%, Highest Since July 2008

    Pascale’s Perspective

    October 20, 2022

    A perfect storm is continuing to hit treasury prices and therefore yields are rising. Markets study every data report hoping for some sign that inflationary pressures are easing/slowing/peaking, hoping for a “pivot” from the Fed. Recent economic data hasn’t provided that hope. The supply/demand metrics in the Treasury market are strained: record debt issuance and major buyers (Japan, China, Pension Funds) are buying less or sidelined. Also, most importantly, we are seeing heretofore untried Quantitative Tightening from The Fed. The central bank regularly purchased $80 billion per month during several extended periods since 2010, but is now selling Treasuries. The Fed was still purchasing Treasuries into March of this year. The process is now picking up as it took months for those recent purchases to “settle” – now the Fed is selling up to $95 billion per month. In fact, the Fed recently sold $37 billion in one week.

    “Bid to cover” ratios are dropping in recent auctions, indicating fading demand. There are signs that liquidity in the Treasury market itself is starting to dry up, causing the normally calm Treasury Secretary Yellen to recently comment on her concerns. Recent Data: Last week’s CPI report continued the recent narrative that price increases are pivoting from goods to services. This is more concerning to the Fed as labor is a critical component of services. Example: travel is especially inflationary due to pent up demand for leisure combined with the return of business travel/conventions. Airline ticket prices and bookings are skyrocketing and the industry estimates there is a shortage of about one million workers in the segment. Note that apparel and appliances are seeing price and demand declines. Many retailers are overstocked as supply chains loosen and demand softens. Fed Speeches: Neil Kashkari referenced CPI reports in comments this week. He indicated that perhaps “headline” CPI has peaked but he is more concerned about core inflation (excluding food and energy). He indicated the Fed was resolute in its determination and if core inflation lingers into next year, commenting “But if we don’t see progress in underlying inflation or core inflation, I don’t see why I would advocate stopping at 4.5%, or 4.75%.” This caught markets attention – as the previously assumed “terminal rate” was about 4.25%-4.50%, and he’s talking about 5.0%. Fed Pivot Watch: Powell has made it very clear that the Fed is willing to tolerate unemployment and significant losses in stock markets without “blinking.” But recent developments like the British gilt crisis and Treasury market liquidity may be early indications of systematic financial risk which would (hopefully) be intolerable to the Fed. Stay tuned….

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Forward Purchase with 95% LTC Financing

    Hot Money

    October 19, 2022

    George Smith Partners is working closely with a capital provider who is actively seeking to grow their build-for-rent portfolio. The capital provider creates an agreement with the developer by entering into a fixed-price purchase contract at any point of the development and funding up to 95% of the total project cost. The interest is 100% accrued until they start purchasing finished homes at certificate of occupancy. They can also purchase all units at final certificate of occupancy. This capital provider has a footprint across the nation.

  • Check out Pascale’s Perspective on LinkedIn

    Pascale’s Perspective

    October 12, 2022

    David Pascale LinkedIn

  • A Tale of Two Demand Cycles

    Pascale’s Perspective

    October 6, 2022

    Is the Fed delivering the crushing demand shock that will stabilize prices and allow them to pause on the rate increases? The answers are “things are easing” for goods, and “not yet” for services. Last week’s PCE release indicated “core” inflation rose 0.3% monthly and 4.9% annually. Last month was 0% monthly and 4.7% annually. Markets reacted with a bond selloff, sending the 10 Year Treasury up to 3.83%. Spending on goods dropped 0.5% but spending on services jumped 0.8%. This could be seen as a “demand rotation” that will eventually result in an overall economic slowdown. This week’s reports continued the narrative: weak ISM manufacturing index: 50.9% (near contraction territory), construction spending down 0.7% month to month, and today’s ISM services index up to 56.7%.

    Today’s ADP report showed businesses added 208,000 jobs in September- surpassing the Dow’s estimation of 200,000 jobs. Note that goods producing industries (manufacturing, mining, natural resources) were down 29,000, but services (trade, transportation, utilities, business services) saw a gain of 147,000. The job increases aren’t necessarily inflationary, it’s the mismatch between open jobs and labor participation. That metric is easing – recent months saw a 2 to 1 ratio of open jobs for each unemployed American. That has dropped to 1.67 in September with increased labor participation and a drop in resignations. With the Fed having raised rates by 3.00% since March, it’s important to point out that the effects may be “lagging indicators.” There’s a case to be made for pausing rate increases to actually quantify the effects without going too far. From recent Fed speeches over the past few weeks, that isn’t happening. A 75 basis point increase in early November is basically a given, with speculation centering on the December and January meetings as slowing (25-50 basis points) or pausing. Stay tuned…

    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fixed Rate Senior Bridge Financing Starting at UST + 3.00%

    Hot Money

    October 5, 2022

    GSP has identified a nationwide capital provider of fixed-rate senior bridge loans with a 2-year term. The program is intended for properties that are leasing up but need some additional runway before a perm loan can be put in place. Pricing starts at 2 Year UST + 3.00%, and the rate can be locked at application. Minimum interest is 12-15 months, after which the loan can be paid off without penalty. Since the loan is fixed, the borrower does not have to buy an expensive cap, which saves over 1% upfront in the current volatile interest rate environment.

  • Construction Financing Starting at SOFR + 300

    Hot Money

    September 28, 2022

    George Smith Partners has identified a capital provider that specializes in financing the construction of build-for-sale (BFS) and build-for-rent (BFR), single-family residential properties. The lender can fund non-recourse construction debt up to 75% LTC. With floating rates starting at SOFR + 300, they can fund loans from $5,000,000 to over $100,000,000. This capital provider lends nationwide and has recently been very active in western markets.