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Pascale’s Perspective

  • Talking About Tapering, In December

    Pascale’s Perspective

    September 22, 2021

    After many months of “telegraphing” the first pullback of accommodative policy instituted in the wake of the Covid financial meltdown of March/April 2020, Fed Chair Powell indicated that we should expect a formal announcement “soon” (most likely at the next meeting in early November) and tapering to begin in December. Keep in mind that if the Fed lowers purchases by $10-$15 billion per month, there will still be over $500 billion of bonds purchased during a 6-9 month process. The Fed statement today indicated that, “If progress continues broadly as expected, a moderation in the pace of asset purchases may soon be warranted”. Significantly, the consensus amongst Fed members was unanimous. Inflation continues to be the unknown factor, transitory or sticky? The Fed core inflation projections increased (3.7% this year vs 3.0% months ago, 2.3% in 2022, 2.2% in 2023). So inflation may be a little stickier than estimated early in the summer, with future years at just over the Fed’s target of 2.0%. Powell indicated that economic growth is progressing (although the Delta variant spikes have dented earlier optimism) and conditions warrant tapering. He also said that the economic growth threshold for “liftoff” (raising rates from 0%) is nowhere near being met at this time. However, 9 of the 18 members now predict a rate increase in 2022, with 3 members predicting 2 increases. Projections for 2024 show an expected “neutral rate” of 1.75% or 7 increases in the next 3 years (neutral rate is the predicted “Goldilocks” rate, neither stimulative nor slowing). Markets seem very receptive to the Fed’s plan, no “tantrum” today as the 10 year T yield actually dropped about 3 bps this afternoon, closing at 1.30%. The big question is how will treasury markets react to the expected announcement at the next meeting? Meanwhile in Washington, markets are watching the Congressional debate on the upcoming debt ceiling with trepidation. The US has never breached their obligations (treasury bonds) which are an underpinning of the entire financial system Moody’s has indicated that a default of the US treasury obligations could cost $15 trillion in stock losses and 6 million jobs would be erased. Many expect a solution “just in time”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Data Indicates “Cooling” of Inflation (for now)

    Pascale’s Perspective

    September 15, 2021

    This week’s release of the August CPI report indicated lower than expected inflation. The headline numbers were the annual price increases: 5.3% actual vs 5.4% expected. Markets focused on the monthly increase in core CPI which rose just 0.1% vs 0.3% expected. Supply chain issues are proving to be “stickier” and less “transitory” than previously thought, (example: computer chip shortages which are shutting down major segments of auto production and delivery are expected to continue well into 2022). This report should give the Fed some breathing room to start pulling back on bond purchases near year end and not push tapering to start sooner. The 10 year is at 1.30%.

    The Fed meets next week. Speaking of “the data”, the traditional CPI report from the Labor Department’s methodology does not track prices of goods purchased online. Adobe Digital Insights released a report this week indicating that online prices have risen for 15 consecutive months and increased by 3.1% year over year. This is significant as online prices fell at a 3.9% annual rate from 2015 to 2019. The willingness of online sellers (Amazon) to accept lower margins for greater market share has helped keep inflation in check for much of the post Great Recession era. Also, online purchases grew from 16% of consumer spending in 2017 to 20% today. The pandemic increased this of course as people are now buying a wider variety of goods online. The inflation “sticky” vs “transitory” debate is not settled. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Higher Than Expected Job Openings Data Indicates Employment “Match Up” Imbalance

    Pascale’s Perspective

    September 8, 2021

    Today’s higher than expected job openings report (10.9 million openings, up from 10.2 million in June) and comments from Fed Governor Bullard highlight the dilemma facing policy makers. The economy is still about 5 million jobs short of pre pandemic levels. The Fed’s policy objectives are full employment and low inflation. The Fed has been willing to allow inflation to “run hot” (temporarily) while pursuing full employment. There continues to be a mismatch in demand. Example: there are 3.5 million openings in the hospitality sector but less than 1.5 million unemployed whose last job was in that sector. The pandemic’s societal effects have notably included a “Great Reassessment” by much of America’s workforce. Resignations are over 13% higher than pre-pandemic levels. Yesterday’s NY Fed Labor Market Survey indicated workers are expecting higher wages and feel they have leverage as labor shortages hit certain industries. So maybe the Fed’s continued easy money policies are limited in their effect (another “new normal”). Pouring money into the system will not solve these demand imbalances. Quantitative easing and low interest rates will not retrain workers. St Louis Fed Bank President made that point today as he advocated for tapering bond purchases “this year” and ending those purchases “by the first half of next year”. He indicated that the employment challenge is now “getting the workers matched up” and not creating demand. Meanwhile, major companies (Walmart, McDonalds, etc.) continue to increase wages hoping to attract and retain workers. This is of course inflationary and not transitory. The 10 year T is at 1.34% with a closely watched auction of new 10 year bonds scheduled for this afternoon. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Notes Release, Consumer Confidence, Retail Sales

    Pascale’s Perspective

    August 18, 2021

    Today’s release of the notes from the Fed’s July28-29 meeting reveals the Fed committee members’ opinions reflect the general mood amongst market participants: uncertainty about the future during this time of “uncharted territory” of the Covid recovery. Last week’s historically low Consumer Confidence report and yesterday’s drop in retail sales underline the bumpy path of the recovery. The Delta variant surge is affecting demand.

    The Fed: tapering of bond purchases “soon” looks like it’s happening. The members disagree on how soon and how fast. Some want to announce in the next few months and begin tapering this year, others want to see more data on the recovery and start next year. Interestingly, some members are calling for a quicker deceleration of purchases than the last taper in 2014. Instead of a gradual 12 month period, it could be 6 months. That would mean lowering purchases by about $20 billion a month. Will that disrupt financial markets? Besides the inflation concerns, much of the debate centers on whether the Fed’s employment goals are close to being met. The data is not determinative. Yes, there are still about 6 million fewer jobs than pre-pandemic. But unfilled job openings and labor shortages are being seen in several sectors and regions. The pandemic has possibly created a “great reset” as the labor market is shrinking, many workers are not returning to their old jobs. People are taking early retirement and moving to different sectors. So perhaps “full employment” is an illusory goal that will be difficult or impossible to achieve. The 10 year T is at 1.27% and investors will now look to Powell’s remarks in Jackson Hole next week as for potential policy announcements. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Unanimous Fed “Stays the Course” As Inflation Worries Persist, Jobs Still Lag

    Pascale’s Perspective

    July 28, 2021

    The Fed announcement today was not surprising as to policy: no change in the overnight interest rate and monthly bond purchases will continue. As prices rise (whether transitory or not), inflation is becoming a political issue. Many lawmakers and influential economists are calling for a reduction in bond purchases. Today, Fed Chair Powell continued to stand firm. He emphasized that the ultra accommodative policies will stay in place until full employment: the bond purchases will be maintained until they have achieved “substantial further progress” in the job market. Today’s meeting and announcement basically push off any rate increases until late 2022 or early 2023. Powell again promised to warn markets in advance of any “tapering” of bond purchases. Assuming the warning comes in August/September, that would put the beginning of any tapering at year end. With $120 billion in monthly bond purchases, an orderly non-disruptive wind down would take 12 months, lowering purchases by $10 billion per month. The 10 year T yield ended the day at 1.23%, down 2 bps from this morning.

    Congress in the mix: Today’s announcement of an agreement on a bipartisan infrastructure plan will increase stimulus over the next few years. More pressing is the Debt Ceiling deadline. The US ability to borrow above its present levels expires this weekend. The Treasury will use the now usual “extraordinary measures” to keep the government from defaulting for the next few months. This will affect the supply of treasuries and these technical factors may further keep yields low, until buyers feel that there is a real danger of default. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Market Volatility Whipsaws Treasury Yields

    Pascale’s Perspective

    July 21, 2021

    Stock markets plunged along with Treasury yields on Monday before rebounding yesterday and into today. The 10 year T dropped to 1.14% from 1.30% on Monday as concerns mount about rising Covid cases. The “June narrative” whereby a highly vaccinated society reopens and economic activity booms accordingly is being replaced by concerns about the highly contagious Delta variant. The recovery may be volatile and asymmetrical among regions and sectors. Interestingly, when the 10 year T hit 1.14% on Monday, it was in the middle of the pandemic low (0.50%, July 2020) and high (1.77%, March 2021). For now, inflation fears seem to be ebbing. The next 2-3 months will be fascinating as the “base effects” subside, supply chains return to near normal, and CPI/PCE statistics start to increasingly matter to markets. Next week’s Fed meeting may be the last meeting that Fed officials can claim price increases are “transitory”. Also next week: CPI, core CPI, and PCE announcements. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Rates Drop as Recovery Expectations Settle, Bund Plunges

    Today’s 10 year Treasury actually dropped to 1.28% as the 2nd half of 2021 gets underway. Many industry analysts predicted a 2.00% 10 year Treasury by year end 2021, spurred by robust economic growth coming out of the pandemic. However, the 10 year has been dropping in recent weeks, while very short term Treasury yields are rising slightly. This flattening of the curve usually signals lower growth expectations. The dip in yields may be a perfect storm of multiple factors; (1) Technical short covering of traders covering “bad bets” on treasury yields spiking; (2) Realization that the recovery may be uneven, an estimated 80% of all the stimulus has been spent and the effects may be dwindling; (3) Employment – last month’s new jobs number of 850,000 new hires is impressive, but it will take over a year at that rate to reach pre-pandemic job levels, traders feel the Fed will keep priming the pump until that goal is within sight, even at the risk of running “hot” inflation; (4) Relative value trade, the 10 year German Bund dropped to negative 0.30% after almost breaking above zero in recent weeks, so the US 10 year T at 1.30% is a good alternative.

    What are we telling borrowers? Today is a great time to lock in 10 year fixed rates. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Inflation Fears Subside and Slow Growth Expectations Depress Treasury Yields

    Pascale’s Perspective

    June 30, 2021

    Last Friday’s “blockbuster” Personal Consumption Expenditures Report indicated the highest price increases since 1992. May 2021 prices increased 3.9% (overall) and 3.4% (core). The bond market barely shrugged, the 10 year jumped about 3 bps that day, hitting 1.53%. Today the 10 year is at 1.46%. The markets are increasing believing that inflation is transitory. The May, June and July numbers will be due to “base effects” of low numbers for 2020. The price increases are asymmetrical as certain sectors such as used cars, energy and transportation indices are up dramatically (remember that oil prices dramatically bottomed out in March-Sept 2020, before rising. Car prices are being overly effected by supply chain issues). Some commodity prices are dropping after hitting unsustainable peaks (lumber, copper, etc). Note that the 5 and 10 year Treasury “break even rates” (the difference between actual treasury yields and treasury inflation protected yields) is narrowing, another indicator of inflation expectations amongst investors. A major survey released last Friday showed consumer inflation expectations perceive the present price increases to be temporary. The depressed treasury yields could be an indication that economic growth is expected to sputter after this initial recovery. Also note that the infrastructure bill emerging from Washington will be smaller than earlier anticipated and is not being funded by massive new treasury debt (the compromise bill being discussed relies on unspent funds from other bills and increased IRS enforcement). This narrative fits in with recent statements by Fed officials who are more focused on full employment than price control . Remember that total employment (labor force) is still 8.5 million below pre-pandemic levels. So this Friday’s monthly employment report will be closely watched. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Long Term Treasury Yields Stay the Course In the Wake of Market Volatility

    Pascale’s Perspective

    June 23, 2021

    We saw market volatility in the wake of last Wednesday’s Fed Meeting. Markets were reacting to the perceived hawkishness of the Fed as possible rate hikes in 2023 or even 2022 were being discussed (note that previously the Fed had insisted the first rate hike would be in 2024). The Dow plunged last Thursday/Friday, before rallying on Monday morning. Yet, the 10 year treasury yield actually dropped during the week (no sell off), unlike the infamous 2014 “Taper Tantrum”. Why? First off, there was a sell off in short term treasuries (from 30 days to 2 years) with those yields rising, while long term yields (5 to 30 years) lowered. Markets sold off on the short term because those treasuries are more sensitive to Fed rate increases as the Fed Funds Rate is an overnight rate. Long term rates dropped as markets were anticipating a scenario whereby the Fed rate increase hampers economic growth (10-30 year treasury yields often fluctuate with growth expectations). The yield curve thereby flattened. Fed Chair Powell continued to assuage market fears this week in his congressional testimony. “We will not raise interest rates pre-emptively because we fear the possible onset of inflation”. Today the 10 year closed at 1.49% down from last Wednesday’s 1.56%.


    Spotlight on Washington DC, news for commercial real estate: The Supreme Court ruled 7-2 today that the head of the FHFA can be replaced by the President without “cause”. President Biden is expected to name a replacement for Mark Calabria, the existing head of the FHFA. How does this affect commercial real estate? The FHFA has been the conservator of Fannie Mae and Freddie Mac since 2009. The FHFA was put in charge of the agencies in the wake of the Great Recession and the housing market crash. Since then the FHFA has instituted annual caps on multifamily loan originations by Fannie/Freddie. The caps for 2021 are $70 billion for each agency. Note that the agencies originate about 50% of total apartment permanent loan volume. Today’s news is significant as Calabria was a proponent of privatizing the agencies. That would remove the famous “implied Federal Government guaranty” for Fannie and Freddie bonds. That would result in an uncertain future for the agencies as the private sector may not actively trade Fannie and Freddie’s bonds at the spreads we see today. This would possibly increase borrowing costs for apartment owners. Fannie and Freddie apartment loan rates impact values and cap rates nationwide and interest rates amongst private lenders (banks, life companies, funds, etc). Calabria’s replacement is expected to continue the Federal Government’s involvement in the agencies. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Indicates that “Peak Dovishness” Is Over

    Pascale’s Perspective

    June 16, 2021

    Today’s Federal Reserve meeting, statement and presser from Fed Chair Powell definitely showed the central bank starting to pivot away from the ultra-accommodative policies put in place last year The headline: 13 of the 18 Fed voting members believe the Fed will raise rates in 2023 (this number was 7 of 18 in March 2021), with 7 of them now predicting a 2022 rate increase (up from 4 in March 2021). Inflation hawkishness has been abundant in recent weeks. Statements from Lawrence Summers, Deutsche Bank, various CNBC commentators have accused the Fed of being overly sanguine in policy and rhetoric. Powell acknowledged this atmosphere: “inflation could turn out to be higher and more persistent than we anticipate”. He also prepared the markets for a decrease in monthly bond purchases (now $120 billion per month) by saying “this meeting, is the ‘talking about talking about’ meeting” which referenced his promise to telegraph any decreases in Fed bond buying in advance. Today the telegram was sent! Bond buying will taper probably by year end. This matters to commercial real estate because the Fed is affecting both the index (treasuries) and the spreads (Fannie/Freddie bonds) with these purchases. As these purchases slow, the private sector would have to make up the slack to keep rates low. Also, the Fed increased their headline inflation expectation to 3.4% (up a full point from March 2021). Powell sought to calm markets near the end of the presser. Perhaps he was watching the Dow crash 400 points on a CNBC monitor in the room? Again, he used the “t word” (Transitory) to describe inflation. As far as the projections for upcoming rate increases, he reminded everyone they are projections and should be taken with a “big grain of salt”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Drop As Markets Wait for CPI

    Economists are expecting tomorrow’s CPI report to show a 4.7% increase from a year earlier. Today saw the 10 year treasury yield drop to as low as 1.47%, possibly due to technical short covering in the markets. The big question is – will tomorrow’s big number rattle Treasuries into a sell-off? Or, will the number be tamer than anticipated? Last week’s weaker than expected jobs report calmed market inflation expectations. Tomorrow’s report may rekindle inflation fears.

    Spotlight on Hospitality: During the depths of the pandemic shutdowns in 2020, the hotel industry was hit hard, many hotels were closed for business or operating at severely reduced capacity. The monthly occupancy rate plunged from 62% in February to a multi-decade low of 22% in April. Many market participants were anticipating a wave of distressed property acquisition opportunities in the sector stemming from lender foreclosures. The “wave of distress” did not occur. The pandemic shutdown was vastly different from the credit crisis and Great Recession that began in 2008. This time, vaccine distribution and the 2021 reopening of society was within sight. Most lenders allowed their borrowers to hold on through the crisis. Case in point: the largest distressed portfolio in the US, the Eagle Hospitality Trust included 15 hotels located across the country. The distress in the portfolio stemmed from ownership issues then exacerbated by the pandemic. The auction is going better than anticipated with 5 assets fetching prices in excess of the stalking horse bids and the remaining assets expected to be sold this month. According to STR, May 2021 US Hotel occupancy hit 61.8%. Memorial Day weekend occupancy was nearly 80%. CMBS Hotel loans in special servicing dropped to a pandemic era low of 20.1%, after hitting a high of 26% last summer. Last month’s jobs report indicated that Leisure and Hospitality led the net increases in jobs at 331,000 new hires (#2, Government was at 48,000). Business travel is showing signs of life and even pent up demand. This week, the first major convention post pandemic, the World of Concrete in Las Vegas is well attended. Corporate travel is starting up amongst companies looking to get an edge on their competitors still doing business remotely. Here at GSP we are seeing more capital sources now considering hotel loans albeit at lower proceeds and higher risk spreads, but it’s a start. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Treasury Yields Drop As “Taper Talk” Gets Closer

    This week saw a parade of Fed officials simultaneously calming markets on one hand while preparing for the inevitable reduction in monthly bond purchases. Prices have risen across a broad spectrum of commodities: lumber, steel, copper, aluminum, gasoline, corn, chickens and entry level wages. The officials, including SF Fed President Mary Daly and Vice Chair Richard Clarida are sticking to the view that the recent inflation is transitory. Issues regarding supply chain and labor market bottlenecks need to work themselves out. The thinking is that we need to see sustained inflation with normally functioning supply chains until a true assessment can be made. Only then will the Fed start “removing the punch bowl” in a measured and well telegraphed process. For now, its working as the 10 year T dropped to as low as 1.55% this week after hitting 1.70% in early May. But note that one prominent Fed official is “tolling the bell” as he said, “It’s time to start talking about tapering bond purchases.” Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners