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GSP Insights

  • PCE Release Indicates Slowing Progress on Inflation, Rate Cut Expectations Are Pushed Out

    Pascale’s Perspective

    March 1, 2024

    Yesterday’s release of the January Core PCE Index (the Fed’s preferred inflation gauge), showed a monthly increase of 0.4%. This comes on the heels of December’s 0.1% core reading. The recent trend of “bifurcated” supply/demand metrics continues. Goods prices were lower by 0.2% while services were up 0.6%. This closes out the January data releases. The big questions: will disinflation take hold in 2024, spurring the Fed to cut rates? Were January numbers skewed slightly higher due to year end/seasonality factors? The next two months of releases of the February/March data will be closely watched, starting with next Friday’s jobs report. Note that the Cleveland Fed’s “Inflation Nowcasting” site shows predictions of February core PCE of 0.23% and March 0.22%.

    Expectations were put on hold the last month. Thirty days ago, the Fed futures market indicated a 94% chance of a rate cut at the May meeting. Today those chances are at 25%. The 10-year Treasury spiked from 3.87% to 4.25% in those 30 days. Note, however it’s rallying today down to 4.20% on manufacturing data. Purchase Managers Index is indicating contraction for the 16th straight month. Best case scenario (aka today’s dialed back expectations) seems to be 3 (or 4) rate cuts this year starting in June. Multiple Fed officials have recently said “in the summertime” to telegraph a June start at the earliest. We may see more “telegraphing” by Fed officials as any moves during the heat of the 2024 election campaign are by definition, controversial.

    Treasury supply issues were in focus this week as the biggest 5 year note auction ever ($64 billion of new issues) saw “tepid” demand. Rising budget deficits and slow inflation progress spurred bond giant PIMCO to predict that “term premiums” in long term treasury bonds (5, 10 and 30 years) may come back to levels seen in the late 1990s and early 2000s (the term premium is presently negative). This is a reminder that fixed rates (treasuries) may fluctuate independently from floating rates (Fed Funds, SOFR, Prime). Stay tuned…

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

  • Rates Are Up On Hotter than Expected Data

    Pascale’s Perspective

    February 22, 2024

    Optimism for early 2024 rate cuts has been tempered by recent data releases and Fed comments. Last week’s CPI and PPI price reports came in above expectations along with continuing unexpected strength in the jobs market (lower than expected weekly jobless claims for the past 2 weeks). Meanwhile the release of the Fed minutes yesterday revealed policy makers were optimistic but cautious. “Participants generally noted that they did not expect it would be appropriate to reduce the…fed funds rate until they had gained greater confidence that inflation was moving sustainably toward 2 percent.” They also mentioned that they view some of the recent data on lower inflation is “idiosyncratic” and could bounce back. They were also wary of cutting rates too early.

     

    All this has changed futures markets rate cut expectations over the last month. May 2024 cut odds went from 85% likelihood (30 days ago) to 20% (today). The 10-year Treasury has spiked from 3.87% on Feb 1 to 4.33% today. What’s going on? It could be that the so called “last mile” from 3% CPI down to 2% will be bumpy and slow. Goods prices have come down as supply chains and scarcity premiums have abated, but labor/services costs continue to be sticky. That sector is subject to macro social and demographic trends including labor participation, baby boomer retirements, etc. On the other hand, it is also possible that the December and January data reports are skewed due to a boom in holiday shopping, annual pricing adjustments and other seasonal factors. And don’t forget the lagging shelter cost component (33% of CPI) is expected to drag the headline number down in coming months (we hope). Stay tuned…

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

  • Talk: Powell Gives Semi Tough Remarks at 2024’s First Fed Meeting…Data: Markets Rally on Signs of Labor Slack

    Pascale’s Perspective

    February 1, 2024

    After the November/December rate rally that saw the 10-year Treasury drop from near 5.00% to 3.79%, 2024 started with a partial reversal as the 10-year spiked to 4.18% in mid-January. It seemed like markets had “gotten ahead of themselves” with the rally and some correction was in order. December’s PCE report showed strong consumer spending (up 0.7% in December), but the spending was not matched by income growth. Rising credit card balances and lower personal savings rates fueled the holiday splurge, implying it is ultimately unsustainable. Annual Core PCE showed a 2.9% increase, still above the Fed’s 2% target. The 3-month moving average is 1.5% annualized and the 6 month is 1.9%.

    Yesterday’s Fed announcement left rates unchanged as expected, all the action is in the statement and Powell’s presser. The statement was simultaneously dovish (it removed language about the Fed’s willingness to keep raising rates) and tamping down expectations (no plans to cut rates with inflation running above the Fed’s target). The current data indicates that we might be there now, but the Fed is still haunted by the early 80s “whoops, we cut too soon and had to raise again” rollercoaster. So, Powell dutifully remarked that “rates are still too high” and that a March rate cut was not likely. Future markets adjusted and now indicate a 95% chance of a rate cut on May 1 (90 days from today but who is counting?). Powell indicated the Fed is “data dependent” and “meeting by meeting.” More semi dovish talk from Powell, “The committee intends to move carefully as we consider when to begin to dial back the restrictive stance that we have in place.”

    This week’s data indicated that time is coming; higher jobless claims, higher worker productivity (employer wage dollars being stretched), lower ADP payroll growth, etc. These are signs of long awaited “labor slack” which is closely watched by the Fed. The 10-year Treasury has rallied from 4.13% to 3.85% this week. CMBS spreads are compressing as bond buyers return with fresh allocations and a bullish rate sentiment. All eyes will be on tomorrow’s January employment report. Will the “slack” continue? Stay tuned…

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

  • 2023 Interest Rate Wrap Up…Year of the Pivot?

    Pascale’s Perspective

    December 21, 2023

    George Smith used to enjoy reviewing the previous year’s interest rate predictions at year end. Last year’s Bloomberg survey of the top investment bank analysts indicated an average prediction of 3.48% for the 10-year Treasury at year end 2023. With one week to go the 10-year sits at 3.88% today, exactly where it closed at year end 2022. It dropped as low as 3.26% in April (flight to quality in the wake of the big regional bank failures) and then peaked at about 5.03% in October (as inflation seemed “entrenched” and “higher for longer” Fed speak spooked markets). It looks like Barclays and Deutsche Bank are pretty close with their predictions.

    Speaking of the 10-year Treasury, Fed governor Goolsbee expressed “confusion” by market reaction to last week’s Fed meeting. He commented that markets “hear what they want to hear” and not “what the Fed Chair says.” Markets actually weren’t phased by his comments (these type of Fed comments lately are perceived as mandatory “more bark than bite” hawkish smoke screens). The futures market is predicting an 83% chance of a rate cut by the March 20 meeting (89 days from now but who’s counting?). As we say goodbye to a volatile year in capital markets, we wish everyone a safe and happy holiday season. Stay tuned…

     

    END-2023 TREASURY YIELD FORECASTS 
           10Y   
    Bank of America      3.25%   
    Barclays        3.75%   
    Citi        3.25%   
    Deutsche Bank        3.65%   
    Goldman Sachs        4.30%   
    JPMorgan        3.40%   
    Morgan Stanley        3.50%   
    MUFG        3.375%   
    NatWest Markets        3.35%   
    RBC        3.45%   
    Societe Generale      3.25%   
    TD      3.25%   
    2022 Closing Level      3.87%   

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

  • Powell Goes Into “Full Dovish Pivot Mode” As The Fed Predicts 3 Rate Cuts in 2024, 10-year Treasury below 4%

    Pascale’s Perspective

    December 14, 2023

    Yesterday’s Fed Policy Meeting had a self-congratulatory feeling as Fed Chair Powell remarked, “The era of this frantic labor shortage is behind us. Overall, the development of the labor market has been very positive. It’s been a good time for workers to find jobs and get solid wage increases.” Powell has always stressed the Fed’s altruistic mandate, especially after the pain caused by the rate hikes. He cheered the long-sought “labor market balance” and cited increased labor-forced participation as extremely positive. “Recent indicators suggest that growth in economic activity has slowed substantially and that higher rates are slowing investment.” He noted that the Fed is now seeing progress on inflation across the three main core areas. Translation: we don’t have to raise rates further. The Fed’s new “dot plot” of interest rate predictions indicates they expect 3 rate cuts in 2024 (the last dot plot in September predicted 1 rate cut in 2024). The Federal Reserve is willing to cut rates even if the U.S. economy doesn’t dip into a recession in 2024, Powell said.  “It could just be a sign that the economy is normalizing and doesn’t need the tight policy.” Powell feels the Fed will accomplish the rarely seen “soft landing.” Of course, he had to add the “disclaimer” to demonstrate his inner hawk. “We are prepared to tighten policy further if appropriate,” he said at the post-meeting press conference. That mandatory quote must be taped to his podium.

    Did you ever wonder how to say, “Let’s Get This Party Started!” in Fed speak? Here you go. “The question of when it will become appropriate to begin dialing back the amount of policy restraint in place…and is clearly a discussion topic…out in the world and…for us at our meeting …I would say there’s a general expectation that this will be a topic for us looking ahead.” Bam! Equity and bond markets immediately went on an epic rally. Dow hit a new closing high (above 37,000) and the 10-year Treasury dropped to 3.91% (down from 4.30% on Monday). The 5-year went below 3.90%. The 3 rate cuts predicted in the dot plot are about half of what the market now expects. Fed Futures indicate the market expects 6 rate cuts in 2024. There are 8 Fed meetings next year. Assuming there is no rate cut at next month’s meeting, that’s about 25 bps per meeting. 2024 being an election year (have you heard?) may be pushing Powell to “telegraph” rate cuts in advance and possibly front-load them earlier in the year to avoid the appearance of political meddling. The dovish pivot is causing some to wonder. What does the Fed know? Stay tuned…

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

  • Labor Market “Slack” Returns to Pre-Pandemic Levels, Fed Definitely on “Hold” (Next Week), Bond Market Rally Continues

    Pascale’s Perspective

    December 7, 2023

    Over the past year, the Fed has been highly focused on labor market dynamics as they look to (hopefully) ending the hiking cycle.  This week’s data continued the cooling labor market narrative: factory orders down more than expected (Monday), lower than expected job openings (Tuesday), ADP report showing lower than expected private sector jobs added (Wednesday), and Initial jobless claims increased slightly (today).  The 10-year T is now at 4.11%.  Also, note that September and October payroll numbers were revised downward – continuing a stream of several downward revisions in employment statistics.   The Fed is hyper-concerned with wage inflation and labor market tightness coming out of the massive Covid fiscal stimulus.  When job openings per unemployed worker approached 2 to 1 (see chart), any chance of price increases moderating was slim to none.  The Fed is expected to keep rates steady at next week’s meeting with all of the action in the commentary, Powell’s presser and a new “dot plot” of predicted economic conditions for 2024. Stay tuned…

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

  • Financing Senior and Stretch Senior Loans for Ground-Up Construction and Development of High-Quality Self-Storage Facilities

    Hot Money

    December 7, 2023

    George Smith Partners has identified a capital provider financing senior and stretch senior loans for ground-up construction and development of high-quality self-storage facilities. They offer a fixed-rate, interest-only program with rates in the low to mid-teens. Additionally, they will lend up to 95% of total approved hard and soft cost incurred or advanced commencing at loan closing. Terms are 36 months plus one six-month extension subject to satisfaction of defined milestones including issuance of certificate of occupancy (typically within 18 months). This capital provider lends in the United States and Canada. To close, land must be contributed by the builder with all necessary zoning and entitlements in place.

  • Cool PCE Report, Dovish Fed Remarks, Treasury Rally Continues

    Pascale’s Perspective

    November 30, 2023

    Today’s PCE release indicated monthly core PCE increasing 0.2%, which puts the 3-month annualized average at 2.4%. That’s getting closer to the Fed’s target of 2.0% (remember this average was over 7.0% in mid-2022). The 10-year had another big week of moves. Starting at about 4.50% on Monday, rallying to 4.25% yesterday and up to 4.32% this morning.

    Hawkish and influential Fed Governor Waller moved markets this week as he is “confident that policy is positioned to…get inflation back to 2%.” The “higher for longer” narrative that dominated the recent months has receded. Waller added he could imagine the Fed lowering rates after seeing continuing disinflation over the next 3 months. Watching the data (labor market, consumer strength), continuing jobless claims hit a 2-year high, and big Black Friday retail sales were aided by a big increase in “buy now pay later” purchase plans. Inside the PCE data, goods were down 0.3%, and services were up 0.2%.

    Fed Futures markets indicate no rate increase at next month’s meeting. That will mark 3 straight pauses and (hopefully) mark this as the “pause before the pivot.” July was the last rate increase and the last few tightening cycles have averaged about 9 months between the last increase and the first cut. Could the pivot come at the May 2024 meeting? 150 days from now, but who’s counting?…

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

  • Wild Week in Bond Markets as Rates Plummet on “Cool” CPI, Weakening Jobs Market

    Pascale’s Perspective

    November 16, 2023

    Tuesday’s release of October CPI indicated prices were unchanged for the month – the first time since July 2022. The previous month saw a 0.4% increase and market analysts were expecting a 0.1% increase.  Core CPI has now climbed to 4% for the year, the lowest yearly increase since September 2021. Energy prices were down month over month. Food price increases moderated significantly as annual food inflation of 3.3% is the lowest since June 2021. This is significant as the Fed has been concerned about inflation becoming “entrenched” with consumers growing to expect daily needs expenses to climb. These trends are definitely mitigating that concern (for now). Treasuries saw their biggest rally since the March flight to quality in the wake of the regional bank failures. This was a welcome “bullish” rally that saw the 10-year T drop from 4.65% to 4.42% in about 10 minutes. Rates jumped about 10 bps yesterday even after a PPI report (manufacturers’ prices) DECREASED by 0.5% last month (the lowest since April 2020 during the pandemic, analysts were expecting a 0.1% increase). The rates jumped due in part to some profit-taking after the big rally Tuesday.

    Markets instead focused on revised retail sales numbers that showed a 0.9% increase in September. Retail sales actually dipped 0.1% for October. This actually fits in with the booming 3Q GDP numbers that aren’t expected to last into 4Q. Today’s initial jobless claims report of 231,000 was 9,000 more than expected. Bond markets feeding on the “contrarian” news cycle (economic bad news is good news) rallied again today with the 10-year now at 4.43% (60 bps below the 10/23 high).

    What about the Fed? Fed futures markets reacted positively to this week’s data – markets are now convinced that rate hikes are “done” and rate cuts are coming: the chances of no increase at next month’s meeting are now 100% (up from 85% last week) and they show a 68% chance of a rate cut in May 2024 (up from 35% last week). UBS analysts made news last week predicting 275 bps of rate cuts in 2024. That’s an outlier; note that Goldman Sachs’ projections call for 0.25% rate cuts in each quarter starting in late 2024. One thing for certain is that the Fed will keep “talking hawkish” until the job is done. Stay tuned…

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

  • Yields Spike on Weak Demand for Treasuries and Powell Remarks – Moody’s Cuts US Debt Outlook to Negative

    Pascale’s Perspective

    November 10, 2023

    The 10-year treasury market started the week strong after last week’s big rally. The treasury held auctions of 3- and 10-year treasury notes that showed strong demand, especially considering the volume was larger than last month’s auctions. The 10-Year was sitting at 4.50% Thursday morning (down over 50 bps from the recent high). Then came Thursday’s $24 billion treasury auction of 30-year bonds. It did not go well. Primary dealers (money center banks) stepped in to purchase 25% of the issuance- meaning there weren’t enough bids from the market to clear all the bonds. The auction also was disrupted by a hacking/ransomware attack at the Industrial and Commerce Bank of China’s US Division. This was followed by Fed Chair Powell’s remarks: Fed officials are “not confident” rates are high enough to finish the battle with inflation and that the inflation battle “has a long way to go.” Perhaps he is being overly hawkish after last week’s drop in yields after the Fed meeting as he worries about overconfidence. The 10-Year Treasury spiked to 4.63% in hours and now sits at 4.65%.

    Moody’s has cut the US Credit Rating Outlook from “stable” to “negative – citing polarization in Washington as driving large deficits (note that the government is 7 days away from a shutdown unless an emergency bill is passed).  Moody’s did affirm the US’s top rating of Aaa. If Congress and the White House can’t help, who can? Will the Fed be forced back into Quantitative Easing (buying Treasuries)? Stay tuned…

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

  • Synthetic Ground Leases

    Hot Money

    November 10, 2023

    It is tricky for sponsors and developers to find financing in today’s challenging capital market. We are focused on creative capital stacks to help our clients execute in uncertain markets.

    Lately, we have been working with several clients on synthetic ground leases. These can offer a very low relative cost of capital and can, in essence, replace much costlier capital. We’ve seen GL’s work on deals ranging from construction, to bridge to permanent and in deals from $30,000,000 – $300,000,000.

  • Yellin and Powell Deliver the “1-2 Punch” to High Bond Yields… “Cool” Jobs Report Keeps, 10 Year Rallies to 4.50%

    Pascale’s Perspective

    November 3, 2023

    Wednesday’s unanimous Fed decision to keep rates unchanged was significant. This marked 2 consecutive meetings with no rate increase – the first “double pause” since early 2021 (before the current hiking cycle). Fed Chair Powell delivered the usual “warnings” that the Fed stands ready to increase rates if inflation perks up (aka “policy firming”). But, the comments seemed obligatory, more of the usual “Hawkish signaling.” There’s a growing consensus that if there is no increase at the next Fed meeting, they are “done” for this cycle. The bond rally started in the morning as Treasury Secretary Janet Yellin released the long awaited funding schedule for the next round of Treasury sales. Markets had been apprehensive in recent months about supply issues as growing budget deficits have expanded debt issuance. Markets cheered the release as the auction levels were lower than feared – spurring a “relief rally” as the uncertainty was eliminated. Powell’s “dovish tilt” at the meeting continued the rally. And don’t forget “the data” – this week has seen more signs of a softening economy: lower than expected job creation, a drop in manufacturing activity, productivity increases (lowering wage pressure), and an unexpected drop in labor costs. Today’s release of the October jobs report indicated a cooling jobs market: 150,000 jobs were created, less than half of the previous month’s gain. Significantly, the economy saw less broad based hiring as healthcare, government, and leisure/hospitality accounted for nearly all of the increases. This means that several sectors of the economy saw near zero job growth. The overall narrative is now focused on the Federal Reserve’s commitment to pausing rate increases as the economy cools with possible rate cuts occurring in mid-2024 (see chart above on future rate expectations yesterday and today). Stay tuned…

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