Pascale’s Perspective

  • Fed Rate Cuts? Yes…Only Question is “How Many?”

    Pascale’s Perspective

    June 12, 2019

    Recent statements by Fed Chair Powell and other Fed officials have telegraphed rate cuts “sooner rather than later”. Markets have priced in the cuts: stocks rallied, treasury yields dropped and gold prices are rising. The futures market is predicting two rate cuts, most likely in July and September. Next week’s June meeting should “set the stage” for the cuts, as Powell has a press conference scheduled. In fact, if he signals no cuts, look for some market volatility. This means that LIBOR should be down to around 2.00% by mid-September. Spreads: CMBS spreads have widened about 10 bps in recent weeks, mostly due to the drop in Treasuries. Fannie and Freddie have also widened slightly. All-in loan rates are still in the 4.00% range as the “perfect storm” scenario continues: low treasuries due to dampened inflation expectations and tight spreads. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Central Banks Bust Out the “Punchbowls”, Do They Have Enough?

    Recent uncertainty and volatility surrounding tariffs and trade disputes is worrying central bankers tasked with maintaining growth and stability. With “trade talk” dominating the headlines (Are they talking? Not talking? Deal? No Deal?), its easy to overlook that the “regular” economic news has been tepid during the past few weeks (Manufacturing activity, factory orders, etc.) has been tepid. The fear is that the boost from the tax cuts is waning and economies are flagging and being hit by the major trade uncertainty. The major central banks are springing into action: Australia’s Central Bank cut rates to a record low on Tuesday, India may follow suit soon and the economies neighboring China are highly affected. The ECB is rolling out new ultra cheap loans to banks and may cut rates soon. And, yes, the US Fed is now ready to cut rates, the only question is how many rate cuts? Monday’s hint from Fed Official Bullard started the chatter, but Fed Chair Powell’s statement yesterday that the Fed was prepared to “sustain the expansion” immediately jolted markets to the upside. This week, the 10 year T dropped to 2.03% this week, touching the lows last seen in Sept 2018 during the North Korean aggressive missile test and market panic. Some key analysts are dropping their 10 year 2019 year end predictions to about 1.75%.Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Wordwide Bond Yields Plummet, 10 Year T at 2 year Low

    The “risk-off” trade accelerated this week as the US-China trade rift accelerated with ever more heated rhetoric. The recent threats by China to limit exports of critical rare earth minerals fueled stock market selloffs and helped drive investors into “safe haven” government bonds. The 10 year T hit a low of 2.21% today, a near 2 year low. Japanese and German 10 year bond yields are negative, so again, the US is trading at a yield premium. The 3 month Treasury yield is a full 10 bps higher than the 10 year yield, a case of extreme partial yield inversion, often a harbinger of a recession. CMBS spreads are widening in the secondary market by about 6-8 bps on AAA paper with further widening in the lower tranches. Life companies may institute higher floor rates. All-in loan rates are still strong as they are benefiting from lower indices (being driven by anticipation of future slowing) along with spreads still hanging tight as present economic conditions are still relatively strong. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fed Minutes are Already “Old News”, Credit Spreads Steady

    Today’s Fed Minutes release indicates Fed officials’ continued comfort level with the status quo on interest rates. It has the feel of a “victory lap” as rate policy, inflation and growth all seem to be in balance (for now). The minutes reveal the board’s feeling that there is less risk and uncertainty regarding Brexit, global economic outlook, etc. Note that the minutes were taken 3 days before the recent tariff escalations and breakdown in trade talks. With this new uncertainty (and some predictions of a long drawn out trade war with a permanent reordering of the relationship of the world’s two largest economies), a possible rate cut is more likely than an increase. Again the term “idiosyncratic factors” was used to describe the low inflation numbers, suggesting that there is a higher “normalized” inflation rate lurking in the data (but still not high enough to warrant Fed actions such as a rate increase). The 10 year T is at 2.39%. Now that indices have dropped and spreads remained tight, there has been an uptick in lending and issuance of debt backed securities (Fannie, Freddie, CMBS, CLO, etc). Spreads are widening slightly in the secondary market, but lenders competing for business are holding spreads tight, taking less margin for now. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Tarriffs Dominate the Economic Landscape

    Up until last week, markets had priced in some kind of US-China trade agreement boosting the economy. The recent breakdown in talks, renewed tariff threats and potential escalation has caused major market volatility. Daily updates from both sides on the status of negotiations are drowning out the regular economic reports that typically set the agenda (unemployment, CPI, manufacturing indices, etc). The 10 year T dropped to 2.36% yesterday, it is testing a key technical lower level. Today’s report that China’s economic data has weakened before the implementation of tariffs reignited the “global slowdown” narrative as Europe also is stagnating. The Fed Funds market indicates a 70% chance of a rate cut this year.
    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • “Transitory” Inflation Shuts Down Rate Cut Talk

    Today’s Fed announcement and press conference came in the wake of the latest Personal Consumption Expenditure report indicated a slowing rate of inflation (1.6% vs the 2.0% target). Which begs the “macro” question: Is the long standing (pre-crash) relationship between “full” employment and inflation broken? And if so, is it appropriate for the Fed to cut rates during a period of full employment? The Fed is in the spotlight with recent speculation and high profile pressure on them to do just that. The Fed did not cut rates today and Chairman Powell mentioned “transitory” factors artificially lowering the inflation stats. He cited anomalies in the calculation such as apparel prices (new methodology and unusually low prices) and financial services/portfolio management. This is reminiscent of Fed Chair Yellen’s discussion of “temporary” low cell phone fees dragging down inflation in early 2017. Powell also indicated “no reason to raise or lower the rate”, he may feel that we are at the long sought “neutral” rate and we are finally “there”(not everyone in Washington agrees). Stay tuned.
    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Equity and Bond Markets Rally

    Pascale’s Perspective

    April 24, 2019

    This week saw a new all time high in the S&P followed by a big drop in Treasury yields. Huh? Are we in “risk-on” or “risk-off” territory? Maybe it’s a case of stocks rallying on earnings reports and the tail end of buybacks stemming from the tax cut. Meanwhile, bonds are rallying on recent news forecasting a potential slowdown in the world’s major economies. The 10 year T is at 2.53%. Today’s bond market rally was fueled by a weaker than expected German sentiment, Australian price index very flat with their central bank poised to cut rates, a moderating of oil prices. US Treasury yields are low partially due to the relative value of other major industrial nations yields (many of which are negative or below 1.00%). Futures markets indicate no rate increases but rate cuts. It feels like a continuation of a “Goldilocks” period where many major developments are multifaceted and not entirely positive or negative. Example: the China-US trade talks. A deal seems likely (positive) but the details will probably lead to continued conflict in years to come as not all of the issues will be settled cleanly. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • “Static” Low Rates Bringing Borrowers Back to the Table

    Pascale’s Perspective

    April 10, 2019

    Several fixed rate lenders (agencies, Life companies, CMBS) have indicated that the recent drop in fixed rates is spurring increased activity in refinances and acquisition loans.    It’s another “perfect storm” as fears of a global growth slowdown and lack of inflation are keeping treasury rates low and a general “risk on” trade is contributing to relatively tight credit spreads.   Note that spreads have increased slightly in recent weeks in reaction to the lower index, but the increase is more than offset by the drop in Treasuries.   One of the main factors keeping Treasuries low is the abating fear of inflation.   Remember last November, when “inflation was coming back” and a 3.23% 10 year Treasury was just a signpost on the way to 4.00%?   That is now ancient history.   Today’s headline on the CPI report indicated 0.4% monthly headline inflation but markets focused on the 0.1% “core” number excluding the volatile food and energy sectors (but isn’t that the stuff everyone buys? Food and gasoline?)   Regardless the remaining core number may be slightly skewed lower due to new methodology on apparel prices.   The 10 year T is at 2.46%. Stay tuned.
    By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Fiscal Stimulus Fades, Monetary Policy is Taken For Granted, Time for a Trade Deal?

    Pascale’s Perspective

    April 3, 2019

    After Treasuries hit a recent low last week due to Fed and ECB committing to low rates for the time being, markets jumped on Monday as the US and China both exceeded expectations with robust manufacturing reports. The China report was especially well received as it helped assuage global growth concerns. However, today’s ADP employment report indicated that US companies added the fewest workers since March 2017, steepest drop in construction jobs since 2012. It could be an anomaly (seasonal, weather) or a sign that the long hiring boom is slowing as the effects of the tax cuts wear off. So if the big fiscal policy effects are waning and interest rates seem to be low but static, what is the next jolt for the economy? It may be that 2 long simmering issues may be “solved” soon: US – China trade agreement and a softer Brexit. Treasury yields increased today after the disappointing jobs report. Either traders are waiting for Friday’s major employment report or were looking ahead to the trade deal? The 10 year is at 2.52% with all in 10 year loan rates in the 4.00% – 4.50% range. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • ECB Joins Fed, Not Quite Ready to Remove Accomodation

    Pascale’s Perspective

    March 27, 2019

    The 10 year Treasury hit 2.34% today, representing its lowest level since December 2017, as “capitulation” seems to be contagious amongst the major central banks. Last week our Fed and this week the ECB. Draghi comments sound familiar: not worried about inflation, sees growth risks and”substantial accommodation” was still needed to get inflation to their target levels (if ever?). Worldwide sovereign debt yields have plummeted. We are likely in a period of relative inaction by the central banks as they monitor the data. Interestingly, the 10 year Treasury (2.35%) is lower than 30 day LIBOR (2.49%) Regional bank stocks are being hammered due to the inversion of the yield curve, they can’t borrow short and lend long at a profit. But credit spreads are narrowing (corporates, CMBS, etc.), with lots of equity (funds, etc.) sitting on the sidelines. Even with debt costs at such a low level, deals need to pencil, income needs to increase in a low inflation environment. The news/data cycle suggests there is reason to believe in both safety (Negative news in Europe, fears of the slowing global economy) or risk (optimism about trade talks with China, full employment, wage increases) Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • The Fed Tries to “Nail the Landing” (For Once), Yield Curve

    Pascale’s Perspective

    March 20, 2019

    Today’s Fed announcement and subsequent news conference by Chairman Powell made the recent “about face” official.   Not only did the Fed not raise rates today, it indicated (via the infamous “dot plot”) that there are NO increases planned for 2019.    In fact, futures markets now predict a rate cut before any future rate hikes.  The Fed is not afraid of inflation, between steady commodity and energy prices and consumer prices remaining flat, the old relationship between full employment and inflation appears to be officially broken (RIP Phillips curve).  Powell also spoke of slowing growth in the US, China and Europe.  As the effects of the tax cut wane, he noted “slower growth of household spending and business fixed investment”.  Today’s comments had the feeling of an economy in “balance” with Powell again indicating the present Fed rate is, “in broad estimates of neutral”, advocating for patience and (importantly) that the data does not justify a move in either direction.  Past Fed actions (rate increases during expansions) have been blamed for causing recessions and cutting economic rallies short.   Maybe things are different this time?  Maybe the lack of inflationary pressures are allowing this Fed to “stop and smell the roses” while the economy enjoys a plateau instead of a peak? Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners


  • The New Normal Goes On and On, Forever?

    Pascale’s Perspective

    March 13, 2019

    The “new normal” of low interest rates and central bank accommodations (quantitative easing, etc.) was supposed to end when the US and world economies got back on their feet. The “training wheels” could then come off. Recent developments continue to suggest that the training wheels may be on for a while. The Fed has been quite dovish lately with rate hikes on hold and announcements that the balance sheet reduction will end this year. Recent inflation data is very interesting: last weeks jobs report indicated the highest wage inflation in recent years. Today’s PPI report showed a 0.1% rise in producer’s prices and, very significantly, little or no inflation in the “pipeline” which predicts inflation over the next few months. The Fed watches wage inflation closely but will base their rate decisions on overall inflation, therefore, today’s report is dovish. Brexit and China trade agreement uncertainty is also weighing on markets, keeping yields low. The 10 year T hit a recent multi-month low at 2.59% yesterday and today is at 2.62%. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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