Pascale’s Perspective

  • Fed Minutes Set Up “Big Friday” in Jackson Hole

    Pascale’s Perspective

    August 21, 2019

    Today’s Fed phrases of the day is a tie between “midcycle adjustment” and “part of a recalibration” which were descriptions of the recent rate cut contained in today’s release of the Fed minutes. Another sentence indicating the rate cut was not part of a “pre-set course” piled on to the realization that the Fed is still watching the data and has not planned a series of rate cuts. The bond market “spoke” by re-inverting the yield curve (the 2 year and 10 year inverted again), indicating fear that the Fed may not act fast enough to ward off a potential recession. Every word and mannerism of Fed Chair Powell’s speech Friday at the annual Jackson Hole symposium will be parsed and analyzed. The bond and stock markets have priced in a September rate cut. However, the bar may be low: if he doesn’t rule out further rate cuts that may be dovish enough to keep markets “off the edge”. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Yield Curve Inverts and “Un-Inverts”, Inflation is Ignored (For Now)

    Pascale’s Perspective

    August 14, 2019

    The classic and most watched measure of yield curve inversion (the 2 year T higher than the 10 year T) occurred this week for the first time since 2005. The 10 year was at 1.623%, the 2 year at 1.634%. Worldwide stock markets plummeted and investors rushed into bonds, sending yields lower and actually bringing the 10 year slightly above the 2 year as of tonight. The 10 year T dropped to 1.58% as of today (note this is only 22 bps above it’s all time low). Markets seem to be painting central banks into a corner – forcing further rate cuts.  The expectation that the Fed will cut 0.25% at its September meeting is now being superseded by thoughts of a 0.50% cut or a “surprise” cut before the next meeting. Interestingly, no one seems to be concerned that CPI posted its strongest 2 month gain since early 2006. This inflationary news should have sent bond bulls running for the exits and dampening Fed rate cut expectations. But scenes of social unrest in Hong Kong (a critical bond trading city) and Argentina are fueling bond rallies in a very “risk off” market. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • The New Normal has Devolved Into A “Race to the Bottom” For Rates and Currencies

    Pascale’s Perspective

    August 7, 2019

    Worldwide bond yields are plummeting as fear grips the market.  The 10 year T is at 1.71%, after dropping to a 3 year low of 1.60% today.  Last Tuesday it was at 2.08%, the day before the confusing and market disappointing Fed announcement.  That seems like ages ago after a tumultuous week featuring one of the market’s worst fears: trade disputes both actual and threatened.  A pillar of the post Cold War world economic order has been free trade and unmanipulated.  Interestingly, the last time the 10 year was below today’s yield was in the aftermath of the Brexit vote.  The specter of major economies manipulating currencies was triggered this week as China allowed the yuan to drift beyond a key level in relation to the US dollar.  Today, 3 significant central banks (Thailand, India, New Zealand) cut rates significantly ranging from 0.25% to 0.50%.  This will devalue those currencies as smaller countries feel they need to keep up with China and the US.  Will a worldwide devaluation of currency finally trigger inflation? Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Markets Roil on Expectations Unmet

    Pascale’s Perspective

    July 31, 2019

    Today’s quarter point rate cut (the first since 2008) was expected and already priced in to the markets. However, markets had priced in more than just one cut. During Fed Chair Powell’s press conference, equity markets plunged, reminiscent of the 2013 Taper Tantrum. Why? Fed Chair Powell strongly implied “one and done” by stating that this is a “mid-cycle rate adjustment”, as opposed to one in a series of rate cuts. The prospect of no more rate cuts this year sent markets reeling. It seems that asset values are very likely overpriced and the thought of pricing “mark to market” spooked markets that are clinging to the punchbowl and hoping that another rate cut is forthcoming. The 10-year Treasury closed at 2.01% and the 30 day LIBOR is at 2.23%. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Debt Ceiling Agreement Pushes Reckoning Out To?

    Pascale’s Perspective

    July 24, 2019

    Washington is not known for making tough financial decisions and this week was no exception. The 2 year suspension of the debt ceiling definitely will increase the supply of Treasuries in coming years. The lack of fiscal discipline seems like a de facto embrace of Modern Monetary Theory. So, are Treasury yields spiking? Not yet. Global growth worries remain, along with more extraordinarily accommodative central bank stimulus. Today’s alarm signal was German manufacturing PMI at a 7 year low, prompting the ECB to most likely cut rates again tomorrow. Negative yielding bonds in Japan and Europe make a 2.00% 10 year T look good. Next week should be interesting with the senate vote on the debt ceiling on Tuesday (assuming the House passes this week), followed by the most telegraphed rate cut in recent history next Wednesday, July 31. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Promises Kept? Markets Hope So

    Pascale’s Perspective

    July 17, 2019

    The Fed has spent the last six weeks telegraphing a rate cut to occur at the July 30-31 meeting. The markets have priced in the expected cut; the “Powell put” is in effect. The rationale is the usual: prevent slowing growth and stimulate inflation closer to the 2.0% target. The 10 year treasury has traded in the 2.00% range since Powell and other Fed officials described the cut as “insurance” against further slowdowns and trade uncertainty. The problem with the Fed’s timing is that the latest economic data indicates strong growth (manufacturing output, retail sales, employment) and signs of inflation (CPI, PPI). It’s part of the contrarian news cycle: A vote of confidence by the Fed (no rate cut) will create market volatility. Debt Ceiling Update: The news last week that the Treasury will reach its debt limit in early September without an increase has created the usual Washington drama with very little time to spare (the House of Representatives recesses on July 26). This has started to disrupt the treasury market with a selloff in short term treasury notes (3-6 months), spiking those yields and creating some inversion. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Gloomy Fed Outlook Rallies Markets

    Pascale’s Perspective

    July 10, 2019

    Today the world’s most influential banker (Fed Chair Powell) testified to Congress about global economic uncertainties including trade tensions, tariffs, and overall weakness in the global economy. Market reaction? The S&P index rallied to 3,000, it’s all time high. Why? We are back to the contrarian new cycle as bad news equals the return of the punchbowl (rate cuts). Powell’s testimony along with St Louis Fed President Bullard’s recent comments regarding a half point “insurance” move against global growth slowing means markets have priced in at least a half point decrease in the 2nd half of 2019. As oil prices spiked on global tensions (US/Iran) and weather (storms off the coast of Mexico), Powell expressed concern over “persistent weak inflation”. He also waved off last week’s positive US jobs report. For our borrowers, the news is good for now: indices (Treasuries and LIBOR) continue to drop, spreads are steady and lots of liquidity.

  • Rates: US Fed, ECB Lead A “Race to the Bottom”

    Pascale’s Perspective

    June 19, 2019

    Today’s Fed statement and press conference by Fed Chair Powell combined with the recent comments by ECB’s Mario Draghi can only be described as a “dove-fest” as another round of easing is upon us. First off, both central banks see little evidence of inflation now or in their forecasts. Both see trade disputes as harmful to long term growth prospects. Yesterday, the ECB announced potential moves including rate cuts and/or quantitative easing. This caused global bond yields to fall, the German 10 year hit an all-time low of negative 0.32%. Other banks are following suit: India’s central bank (the RBI) has cut rates 3 times this year with another rate cut expected in August. These moves have global trade consequences (which seems to be a hot topic these days) as the rate cuts devalue the currencies of those countries. If the US dollar is “too strong” in comparison, our products become too expensive overseas. This ratchets up pressure on Powell to “fall in line” and keep the dollar “affordable”. The Fed today: “the case for somewhat more accommodative policy has strengthened” and seven of the committee members (of the 17) expect a 0.50% rate cut by the end of 2019. If the Fed doesn’t lower rates at next month’s meeting, it will roil markets as a cut is now “priced in” to treasuries and equities. Stay tuned By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • 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

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