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Market Report: Questioning the Fed’s decision on interest rates

In the wake of the Federal Reserve’s decision to keep interest rates unchanged, here’s a roundup of how the development is being digested across the real estate and financial markets.

Nikki Vasco

Vasco

“Some are questioning the decision of the Fed to keep borrower rates unchanged due to global concerns. With employment and inflation near targets, if the Fed would have raised rates, it would have given a level of confidence to the market that would likely have led to a rally. Instead, the market fell flat and volatility continues.” — Nikki Vasco, Chief Investment Officer at FullCapitalStack.com.


Jeff Lee

Lee

There was a lot of speculation over the rate decision and many of our clients wanted to avoid closing in and around the Fed announcement.  Many accelerated closings for last week or earlier this week, while some chose to push off into next week and roll the dice post rate decision and post digestion of Fed Chairman Janet Yellen’s commentary. We did have a few defeasances that priced on Thursday and the clients who elected to buy defeasance securities in the morning were rewarded with higher yields/cheaper defeasance costs.” — Jeff Lee, Chief Operating Officer, Commercial Defeasance LLC


Rehling

You had a window, and you risk that between now and December you have things deteriorate, or you have some new and unexpected source of volatility. If something happens and they are not able to go in December, there is a credibility issue.” — Brian Rehling, fixed-income strategist at Wells Fargo Investment Institute. 


Paul Krugman

Krugman

“The Fed did the right thing last week: nothing. And the howling of the bankers should be taken not as a reason to reconsider, but as a demonstration that the clamor for higher rates has nothing to do with the public interest.” — Paul Krugman, New York Times columnist


Jeffrey Lacker

Lacker

“I dissented because I believe that an increase in our interest rate target is needed, given current economic conditions and the medium-term outlook. Further delay would be a departure from a pattern of behavior that has served us well in the past. The historical record strongly suggests that such departures are risky and raise the likelihood of adverse outcomes.” — Jeffrey Lacker, President of the Federal Reserve Bank of Richmond (the sole dissenter in the Open Market Committee’s recent vote)


Market Report: Looking for Positive Signs in Jobs Number

QuietStream Financial is an incredible place. We celebrate successes big and small.

What does that have to do with the market? Those of you who have stopped by our office in Charlotte know that we ring a bell every time we defease a loan. The bell invigorates the office, as we know that the market is active and value is being traded. Lately, bells have been ringing a lot!

Given the recent defeasance activity, real estate owners either believe what half the economists are indicating — rate hikes are coming in September — or they just realize that all-in rates, valuations and opportunities to redeploy look really good right now.

Hopefully, economic indicators, including job gains numbers due out Friday, will overshadow the extreme volatility of the equities market. A payroll report from ADP on Wednesday says private employers added 190,000 jobs in August, slightly below expectations. The federal government’s report on job creation is due Friday, and economists are expecting 220,000 new jobs, which would be continued modest growth.

Stability of the financial markets will continue to be weighed by the Federal Reserve and give us further insight into the big decision to move rates higher or delay further.

In the meantime, my guess is that the bells will continue to sound!


NikkiBy Nikki Vasco | Chief Investment Officer | FullCapitalStack 

 

Market Report: ‘Falling knife’ or ‘buy on fear’?

It’s hard to even look at the numbers right now. 

After a sharp slide to end last week, investors woke to more disturbing news Monday as international market declines sent the Dow Jones Industrials into a 1,000-point tailspin to start the day. Even a big late morning rebound eventually gave way to a sell-off later in the day.

So, let’s stay away from the absolute and instead, focus on the differential. Despite the massive rally in the Treasury market, refinance rates moved about 10 basis points lower. In other words, spread widening significantly muted the Treasury run. Typically in a bearish environment, credit becomes tight and financing more difficult. However, the numbers are showing a bottom to the correction.

Although credit products blew through support levels, the quick bounce on Monday indicates a probably near term correction and potentially continued strength in the CRE market.


NikkiBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

Market Report: On Track For Rate Hikes?

Expectations this week continue to point toward a September interest rate increase, supported by Friday’s jobs report.

The Labor Department said Friday that the U.S. economy created 215,000 net new jobs in July with a nationwide unemployment rate unchanged at 5.3%. The numbers illustrate a stable job market, no longer adding jobs at last year’s more rapid pace, but still churning along at a decent pace.

Is this enough to justify what is now a widely held belief that the Fed will hike rates in September?

Depends on who you ask. Many believe the threat of asset price bubbles and inflation make it an ideal time to begin rate increases, even if job growth is merely adequate.

“A similar report for August … would likely be enough to seal the deal for a mid-September rate hike,” Gus Faucher, senior economist at PNC Financial Services Group, told the Los Angeles Times.

However, some objectors continue to point to slow wage growth and global concerns as reasons to postpone rate increases.

“This morning’s report was hardly suggestive of improvement,” Lindsey Piegza, chief economist at Stifel Fixed Income, told NPR on Friday. “Status quo is hardly a step in the right direction, making it difficult for the Fed to justify a near-term rate increase.”

Still, consensus believes Friday’s jobs report supported the expected September rate hike. 

Here’s one more point to keep in mind as rate hikes are contemplated: When rate hikes begin, they have historically continued quickly. In the last Fed tightening cycle (2004-2006), the Fed raised rates 200 basis points in the first 12 months of the cycle and 425 basis points over 25 months.

Will refinance rates be 200 basis points higher at this time next year?


NikkiBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

Market Report: Volatility Is Here To Stay

How many hits does it take to become unaffected by the blow? 

The global markets calmed a bit last week. However, that didn’t continue as this week opened with the Greek stock market plunging after five weeks of being closed. Additionally, commodities were hit again after China announced a slide in manufacturing. 

And, of course, U.S. equities opened lower on global concerns despite the strength in personal spending.

This week is sure to be a repeat of the roller coaster ride with everyone waiting for the latest jobs numbers due to be released on Tuesday.

So, to address my initial question: Can we absorb so many hits that we become unaffected by the blow? Never.  But an investing world dominated by the global economy, real-time information and electronic transactions is here to stay.  Volatility is becoming the norm.

Take a picture of rates and the current lending environment. Tomorrow will be different.


Nikki VascoBy Nikki Vasco | Chief Investment Officer | FullCapitalStack

Interest rates: How many increases are on the way?

Yes, investors, interest rates will go up this year.

Here’s the question we really want answered: Will two rate hikes happen before Christmas?

Historically, multiple successive rate hikes have followed a period of prolonged low interest rates. This was the case at the conclusion of the low-rate periods of the early 1990s and mid 2000’s.

“When rates go up, they usually keep going up,” says Nikki Vasco, chief investment officer at FullCapitalStack. “There’s a good chance that the Fed could raise rates this fall, and then again before the end of the year.”


source: tradingeconomics.com

Of course, this most recent period of low interest rates has set new historical standards. With federal funds rates at or near zero since 2009, the Fed is preparing to increase rates from unprecedented territory. Raising interest rates from this point forward will be new frontier.

In a speech in Chicago on Friday, Federal Reserve Chairwoman Janet Yellen remained steadfast in her expectation that the central bank’s Federal Open Market Committee will enact the initial rate increase before the end of the year.

“Based on my outlook, I expect that it will be appropriate at some point later this year to take the first step to raise the federal funds rate and thus begin normalizing monetary policy,” Yellen told the audience at the Chicago City Club. “But I want to emphasize that the course of the economy and inflation remains highly uncertain, and unanticipated developments could delay or accelerate this first step.”

Yellen’s comments were closely followed by U.S. investors, who thought her outlook might change in response to the turmoil in Greece. She mentioned Greece just once in her speech, saying, “Although the economic recovery in the euro area appears to have gained a firmer footing, the situation in Greece remains unresolved.”

The Fed chair said she expects the U.S. employment market to keep improving, with inflation moving closer to its 2 percent target rate. Those expectations are coloring her plans to increase interest rates. She also indicated the Federal Reserve will move slowly and gradually, shaping decisions based on economic realities.

“I currently anticipate that the appropriate pace of normalization will be gradual, and that monetary policy will need to be highly supportive of economic activity for quite some time,” she said. “But, again, both the course of the economy and inflation are uncertain. If progress toward our employment and inflation goals is more rapid than expected, it may be appropriate to remove monetary policy accommodation more quickly. However, if progress toward our goals is slower than anticipated, then the Committee may move more slowly in normalizing policy.”

Reading tealeaves, the fate of rate hikes — and whether or not they’ll happen consistently, or in fits and starts — appears to depend Yellen’s view of economic growth. If U.S. economic growth is believed to be choppy, the rate increase schedule could reflect that. And if growth is steady? There’s a strong chance interest rates will follow suit.

Bloomberg: Higher U.S. Rates Bound to Disappoint

According to reporters Susanne Walker and Liz Capo McCormick of Bloomberg, “just because the Federal Reserve is about to raise interest rates, don’t expect savers to benefit.”

The recent Bloomberg article explains that those individuals who have counted on higher interest rates to lift their investment returns are being blocked by regulations designed to make the financial system safer in the wake of the credit crisis. That credit crisis effectively dried up liquidity in debt markets. Walker and McCormick noted that “the rules are pushing firms to park more excess cash into Treasury bills that yield next to nothing, squeezing money-market funds that buy the short-term debt.”

According to Christopher Sullivan of United Nations Federal Credit Union, “You’ve got the worst of all possible worlds for savers.”

Unfortunately, according to the Bloomberg analysis, baby boomers nearing retirement will be the most deprived of income long after the Federal Reserve starts to increase interest rates.

You can read more of Walker and McCormick’s analysis here.

Here’s our take: Finding investments that make sense from a risk and return perspective continues to be difficult. With bonds yielding next to nothing and stock market volatility continuing to challenge investors, it’s time to look outside of traditional investments. Cost of living will only increase. Investors may find it difficult to rely on traditional, short-term investments to offset cost of living increases. Fortunately, alternatives are available for people looking to diversify their investment portfolio.


Courtesy of FullCapitalStack, a QuietStream Financial portfolio company.