Pascale’s Perspective

  • The “Old Normal” Remains Elusive – ”Not so Fast Taking That Punchbowl”

    Pascale’s Perspective

    March 6, 2019

    The plan was simple: central banks injecting massive liquidity into the system to bring the world out of the post crash doldrums.  The Fed’s dual mandate of low inflation and high employment would eventually force its hand as low unemployment would lead to increased wages and inflation (aka: a hallmark of the “Old Normal” called the Phillips Curve which posits a “stable and inverse” relationship between inflation and unemployment). During the past few years, it seemed like this scenario was taking hold as the Fed was telegraphing multiple rate increases, the ECB was winding down their stimulus, wage inflation was finally stirring, etc. But, recent developments indicate a slowdown in growth (recent forecasts for China, the US and Europe all trending lower), low inflation (the Fed’s inflation gauge, PCE, remains below the 2.0% target and oil prices unable to sustain recent gains) and very low unemployment still not moving wages significantly, especially for the low wage earners. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Interesting Testimony Today (Not “That” Testimony)

    Pascale’s Perspective

    February 27, 2019

    Was anyone watching the congressional hearing testimony from Fed Chair Powell or US Trade Representative Lighthizer? Powell highlights: Policy is “in the range of neutral”. Wow, the turnaround is complete on “where we are”. Remember early October when he spooked markets by saying we are “a long way from neutral”? Note that the Fed Funds rate was 2.25% at that time, speculation was the target neutral rate was somewhere between 3.25-3.50%, so the expectation was for at least 4 more hikes in the next year or two. Now, we are “there” which indicates the Fed feels no urgency to hike and is watching the data (unemployment and inflation). But today also showed a subtle shift in Fed concerns: financial market volatility, not usually a part of the stated Fed mandate. As Bloomberg pointed out, this concern for market stability is reminiscent of the “Greenspan put”. These developments are contributing to overall bullishness in Treasuries, the 10 year T is at 2.67%.  Meanwhile, across the hall, Trade Representative Lighthizer tamped down some of the recent anticipation of an imminent trade deal with China, which was heightened in recent weeks with the extension of the March 1 tarriff deadline and talk of a signing ceremony in the US soon. He indicated hurdles remain, so it may be a while. This “bad news” of course helps the contrarian bond market. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Markets Usually Don’t Like Uncertainty, But Today They Do

    Pascale’s Perspective

    February 20, 2019

    The old maxim about financial market aversion to uncertainty is well known. However, today’s unusually newsworthy release of Fed minutes from January saw markets cheering uncertainty. It seems that the Fed’s “dot plot” indicating two planned rate hikes in 2019 is by no means set in stone (note that previous dot plots indicated three rate hikes in 2019). As I discussed last month, the futures market has been skeptical of the dot plots. That predictive market has been indicating a probability of zero hikes in 2019. Today’s Fed minutes release put the matter to rest (for now) as a majority of the participants are uncertain about any future rate hikes this year. The statement cited an uncertain atmosphere of risks to economic growth and very little concern about inflation. Of course there is a contrarian aspect to all of this: stocks and bonds rallied based on a more pessimistic outlook on the economy. Very significantly, the Fed addressed the “elephant in the room”, their huge balance sheet and its ongoing program to reduce holdings by selling bonds as they mature. Today’s minutes also showed participants broadly agreeing to announce a plan to stop balance sheet reduction later this year. This is a paradigm shift. It seems the Fed is planning on retaining a very large balance sheet on a near permanent basis. All of this helped drive the 10 year T yield down to 2.64%. With fixed rate loan spreads for agency, CMBS, LifeCo, etc ranging from about 130-200 depending on property metrics and leverage, all in rates range from 4.00% to 4.60% approximately. Again, its not too late to lock in historically low fixed rate financing. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Deadlines Loom, Securitization Markets In Gear

    Pascale’s Perspective

    February 6, 2019

    The 10 year Treasury yield has settled into a range of about 2.65-2.75% in recent weeks as the “Goldilocks” outlook is in vogue: not too hot, not too cold: the economy is strong with potential headwinds and slowing growth with little inflation. With the shutdown now over (for now), Washington deadlines are in the spotlight: February 15 to pass another funding bill, March 1 to finalize a trade agreement with China (or big tariffs ensue), and very important is the March 1 reinstatement of the debt ceiling. This means that the government will have a few months of financial manipulation before defaulting on US Treasury debt. Now comes word that the debt ceiling extension may be rolled into the government funding talks. CMBS/CLO: Floating rate securitizations are going very well after a post crash record 2018 of issuance, some originators are cutting spreads accordingly. The first 2019 CMBS securitizations are pricing soon, but pricing talk is optimistic, about 5 bps inside of the final 2018 pools. Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • “Patience” is a Virtue

    Pascale’s Perspective

    January 30, 2019

    The Fed’s unanimous decision to not raise rates today and subsequent comments from Fed Chair Powell set markets soaring. The “contrarian” dynamic is alive and well: The Fed delivered “bad” news (the case for raising rates has “weakened” due to global growth concerns such as Brexit, China’s economic slowdown, etc.) and markets cheered as that will keep rates from rising. Interestingly, the Fed asserted its independence, denying they are bowing to political pressure and insisting these moves are “data dependent”. An unprecedented separate statement on the balance sheet seemed to be a nod to the market concern that “quantitative tightening” (the gradual selloff of Fed assets such as Treasuries and Mortgage Securities) is not on “autopilot” but is also data dependent. Futures markets now predict no new rate increases this year and even a rate decrease for next year. The 10 year yield dropped to 2.67%, nearing its recent bottom of 2.56%….Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Government Uncertainty May Roil Markets

    Pascale’s Perspective

    January 23, 2019

    The longest Government shutdown in history is by definition “uncharted territory” and may push markets. Potential effects that may begin to “pile up”: no economic reports for markets to interpret, federal agency causing slowdowns in economic activity (TSA, USDA inspectors, etc), consumer/business confidence erosion, potential global investor impatience and avoidance of US dollars/treasuries (ugh! – especially if the shutdown begins to affect the upcoming debt ceiling debate). With no end in sight, the only “ray of light” from Washington has been a potential trade deal with China (who seems to need to make a deal). The 10 year T seems to have settled in a range of 2.70-2.80 lately, today at 2.75%. CMBS: With no pool having been securitized since before Christmas, originators are slightly “flying blind” looking for a level to price off of. Whisper talk on upcoming pools indicates some narrowing may be in the cards (AAAs at Swap + 95 as opposed to over 100 in December). All-in rates for full leverage loans is right about 5.00% (again). Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • The Fed’s New Years Resolution: Be More Dovish

    Pascale’s Perspective

    January 9, 2019

    Fed Chair Powell kicked off the dove-fest last Friday with his remarks at the American Economic Association’s annual meeting. He said all the right things that markets wanted to hear.  Powell’s December statement and press conference spooked markets into believing that the Fed was on a preset path to raise rates twice in 2019, regardless of the economic environment. Last Friday, he indicated that the Fed was “flexible” and could be patient in light of “muted inflation readings”.  Another buzz word is emerging: “Patience” as the Fed will “listen very carefully” to the market. Powell also addressed the issue that many believe triggered the major volatility during his December speech: the pace of balance sheet reduction. Now he “wouldn’t hesitate” to alter the pace of reduction based on current events. Powell stood with past Fed Chairs Bernanke and Yellen at the Friday event. Perhaps he and Bernanke discussed the “taper tantrum” sparked by Bernanke’s remarks in 2013 regarding potential slowing of bond purchasing by the Fed. Markets rallied big on Friday. This week, other Fed participants have reinforced the message, indicating flexibility and patience. Futures markets indicate zero or one increase in 2019 and a possible rate cut in 2020. The 10 year Treasury dropped to 2.55% last Thursday (pre-Powell remarks) and has now settled at 2.70%. Markets are watching Washington: Government shutdown (how long?) and trade talks with China (is a deal imminent?). Spreads have widened during this recent volatility. The CMBS market is looking for guidance from the first few securitizations of 2019 now under way. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Markets Tank on Fed “Vote of Confidence”

    Pascale’s Perspective

    December 19, 2018

    The big question today was “Will the Fed Pause It’s Planned Rate Increase in the Wake of Recent Market Volatility?” The answer: “No” And the reaction: More volatility (which markets hope will make the Fed think twice about next year’s planned increases). The Fed today continued its “march to neutral”. The big long term questions are: “What is the neutral rate? Are we there yet?” Remember that Powell spooked markets by saying “We’re a long way from neutral” in early October. Then markets rallied on his late November comment that we are “just below” neutral. That comment and subsequent rally convinced many investors that the December Fed statement could be “one and done”, ie. an increase today and then a pause. Markets were up this morning pre-announcement on that expectation – hope/hype. But Fed Chair Powell tried to thread the needle today. First off, a unanimous decision to increase the rate, which amounted to a “Declaration of Independence” by the Fed in light of recent pressure from the Executive Branch. The Fed’s independence is critical to its standing in the world. Then the “dot plot” of future increases and Powell’s press conference indicated TWO more increases on tap for 2019, contrary to market expectations as the futures markets indicate zero increases for next year. Today, Powell said that we are at the “lower end” of neutral with the increase of the Fed Funds rate to 2.50% (note that 2.50% – 3.50% is the target range for the neutral rate amongst Fed officials). The Fed lowered their growth projections for 2018 to 3.0% (down from 3.1%) and 2019 to 2.3% (down from 2.5%). A seemingly offhand remark put today’s selloff into overdrive: when asked about continuing to trim the Fed’s balance sheet, Powell indicated no pause. Markets were hoping for a “dovish olive branch” in the form of a pledge to pause selling bonds purchased during Quantitative Easing. The 10 year Treasury yield dropped on the “flight to quality”, now at 2.76% (down 50 bps from last month’s high). Stay tuned  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Yield Curve Partial Inversion Reaction Leads to Some Steepening

    Pascale’s Perspective

    December 12, 2018

    Markets sold off heavily last week as the yield curve partially inverted, the first inversion since before the Great Recession. The sell off immediately spurred a flight to quality, the 10 year T yield dropped a low 2.82% on Monday, the 2 year dropped to 2.69%. The “inversion point” of the 3 and 5 year Treasuries is now less than 1 basis point (3 year at 2.775%; 5 year at 2.699%). Maybe recession fears are “so last week” as the market is now cheering progress in US – China trade talks. But the curve is nowhere near a “healthy” steep curve. Recent statements by ex Fed Chairs Bernanke and Yellen indicate a feeling that this indicator may not be relevant. Bernanke pointed out that “regulatory changes and quantitative easing in other jurisdictions” has distorted the “normal” market signals (by normal he means the “old normal”). The Fed seems set on raising rates next week, despite pressure from the executive branch to leave rates unchanged. The pressure may actually end up convincing the Fed that they must raise rates in order to retain credibility (for a lesson in central bank meddling, see recent economic events in Turkey). The question then becomes how many increases in 2019? Futures markets in Fed Funds and the LIBOR curve have lowered their 2019 rate forecasts considerably over that past few weeks as economic growth expectations continue to cool in China and Europe, and the effects of tax cuts and government spending will be wearing off in the US. Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Yield Curve Partial Inversion Roils Markets, What Happens If and When It More Fully Inverts?

    Pascale’s Perspective

    December 5, 2018

    On Monday, the US Treasury “yield curve” partially inverted as the 5 year T yield dropped below the 3 year T yield.  A typical “classic” inversion occurs when the 10 year yield drops below the 2 year yield, that is the most scrutinized relationship on the range of treasuries. Stock markets tumbled. (Dow dropped 800 points yesterday) as this added to uncertainty. An inverted yield curve is a classic harbinger of recessions (every recession since the 70’s).  Other macro economic concerns helped fan the flames (Brexit, mixed signals regarding the China/US “cease fire” on trade, etc). This is the first inversion in a decade, so it’s a major uncertainty. The major question facing markets: Is this “old school” indicator still valid in the “new normal” era of post Great Recession metrics of massive central bank accommodations, and stubbornly low inflation? Or “are things different this time?” We are again in uncharted territory. The Fed is still holding massive amounts of long dated Treasuries as it is now in its second year of the long slow unwind of its $4 trillion balance sheet. Markets seem to be counting on a very gradual sell off, keeping the long yields down. But most importantly, the lower 10 and 30 year bond yields are a product of reduced growth and inflation expectations for 2019, 2020 and beyond. Potential causes: the effects of US tax cuts fade, Italy weakening the Eurozone, continued trade disputes, etc. Many major economic groups are lowering growth forecasts for the next few years. Inflation is still spotty and not steady, note that oil prices again dropped today (after rising from lows) as the long awaited OPEC production cuts may be “off”. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • Markets Rally as “Neutral Rate” Is Closer Than We Thought

    Pascale’s Perspective

    November 28, 2018

    Fed Chair Powell’s speech today sent stock markets up 2% and immediately halted this morning’s market “correction”.  The big change was Powell’s remark that rates are “just below” the neutral rate. Remember, the neutral rate is the rate the Fed is aiming to reach. The neutral rate is neither stimulative nor restrictive to the overall economy. Markets have been on edge as they feared that the Fed was on an unshakable path of continued rate hikes well into 2019. This sentiment was based on recent Fed statements and the “dot plots” produced at each FOMC meeting. It was assumed that there were four rate hikes on the horizon, one in December 2018 and 3 more in 2019. Today’s comments by Powell immediately changed that consensus to one in December and one in 2019. No doubt, the December 2018 dot plot will be closely watched. So it seems the Neutral Rate is 2.75%. It was once thought to be 3.25-3.50%. A lower neutral rate means a weaker global economy. Perhaps the “new normal” post recession world economy will require some accommodative policy after all. Today’s developments are an example of the “contrarian” economic news cycle: bad news becomes good news, (a grimmer economic outlook leads to lower interest rates in the future and markets cheer).  Powell also stressed that future policy is “data dependent” and not “set in stone”.  He also indicated concerns on the horizon: trade disputes/tariffs, Brexit, Italian bonds, and the IMF has lowered growth projections. Plus, today’s housing report showed new home sales falling to a 3 year low with inventory spiking. Corporate spreads are volatile and widening (pushing some Life Co loan spreads up also). The 10 year T hit a 2 month low of 3.04% today. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

  • “Normal” Inflation Continues But Oil Prices May Put the Brakes On

    Pascale’s Perspective

    November 14, 2018

    Today’s major data points can be interpreted as a look to both the present and the future, and forward looking markets are acting accordingly. This morning’s CPI report showed consumer prices rising at their highest level in 9 months, keeping the “inflation is back” narrative alive. But a closer look reveals that 1/3 of the increase is due to gasoline and other energy components. With worldwide oil markets plunging, the near future may see a cooling of inflation. Oil prices often impact interest rates, as markets view oil demand as a bellwether of global growth. So today saw Treasury yields drop, the 10 year is at 3.12%, after hitting a recent high of 3.25% earlier in the month. CMBS and other Fixed Rates: CMBS bonds stopped their slide (spreads had been widening), a cutback in supply as we approach year end helped. CMBS spreads for full leverage loans are still in the 200 range (about 190-210 over the Swap). Life companies at lower leverage are anywhere from 130-180 over the Treasury. So all-in coupons range from 4.50 to 5.25%, depending on quality and leverage. Stay tuned.  By David R. Pascale, Jr. , Senior Vice President at George Smith Partners

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