Just when you may have thought it was going to be a relatively calm second half to the summer season, this week’s events pretty much knocked the floor from under our feet and kind of reminded me of Indiana Jones and his ‘love’ of snakes.
For all the talk leading up to this past week’s Fed policy meeting and the realization that a rate cut was an absolute, the only question sliding its way around markets was the amount of the cut. Was it going to be 25bps? 50bps? Heck, even some outliers expected as much as 75bps.
Either way as the days leading up to Wednesday’s announcement proved 25bps was the majority consensus, Powell and Company delivered just that, albeit much to the dismay of our fearless leader in DC. In sheer contrast to Annie Wilkes being Paul Sheldon’s “number one fan,” the President as we all know is no fan of the Fed and has been pretty vocal regarding his ‘disappointment’ in current Fed policy and the need for a much larger rate cut to help spur markets further.
Well, as expected, the Commander in Chief certainly did not get what he wanted in this case and the war of words, albeit mostly one sided (at least in the public view), was out in full force this week.Further, while the 25bps cut and the overall Fed statement were in line with a majority of expectations, the Powell press conference immediately following took somewhat of a different turn – and as Harry Doyle would have said his delivery was “juuuuuusssst a bit outside” of market, and for that matter the President’s expectations.
The mere fact that the Fed chief chose to describe this move as a “midterm policy adjustment” rather than the beginning of a prolonged cycle of rate cuts to combat weakening global markets sent absolute shockwaves throughout the markets, with money immediately pouring out of Equities.This sent the Treasury yield curve to its flattest level seen in weeks. Perhaps this was Powell’s own way of sending a subtle message, or as I like to say his middle finger, to his boss that he will not be bullied into altering policy (even if it’s for the greater good – had to stick that in there), without the use of Twitter or other tactics.Nonetheless, one would have to imagine the Fed chief knew full well what the market reaction would be to his about-face press conference, yet again perhaps not.
At the same time trade talks between the US and China continued on the road to nowhere and at this point have “maybe a 50/50 chance of living….although there is only a 10% chance of that.”
On the heels of that the President announced the potential for a 10% tariff on $300B of Chinese Goods come September, should a deal not be reached. Appropriately timed given the Fed result a day earlier? I would have to imagine at least so. The President is a businessman who is in tune with Global Markets. With the Trade War and Fed policy remaining the focal points of overall market sentiment a statement/tweet such as this would certainly send markets spiraling out of control and perhaps stimulate the need for further Fed intervention, and what better way would that come that in the form of further rate cuts.
So while the war between the White House and The Fed has taken the Pee Wee Herman “I know you are but what am I” route, the rest of us are just looking for a calmer markets to prevail, cowering in the corner much like Schnarf does when the Sword of Omens does its thing (yes, that’s a ThunderCats reference).
This morning’s unemployment report for the month of July proved on par with market expectations and for the most part at this point seems to be overshadowed by the above happenings of this week with market participants choosing to maintain their focus on the Fed and Trade.
Stocks opened lower, continuing the sell-off from the last few days while Treasury Yields are lower as the flight to safety continues following the Fed and the renewed meltdown in Trade negotiations. The 10-year UST is currently yielding 1.87%, down 20bps week over week, while the 2-year is coming in at 1.73% causing a further flattening of the yield curve, as curve pundits continue to take center stage in expectation of a yield inversion between the 2- and 10-year Treasuries, particularly on the heels of the latest uncertainty regarding Fed policy.
It’s kind of amazing what a few days can do to change market sentiment completely, and reminds me of Cleo McDowell changing his sentiment on Hakeem when he learned the boy has his own money!
Over in Commercial Real Estate, the rally in Treasury and Swap yields continues to spur an abundant amount of new loan applications on both the acquisition and refinance side. Lender pipelines are full with an overwhelming number of applications hitting on both the Portfolio and Securitized lender ends. In the Agency world both Fannie Mae and Freddie Mac are on pace for record volume and at this point are well ahead of their mandated $35B FHFA volume caps. In addition, we continue to see a robust pace of flow for cap-exempt business such as transactions with high measures of affordability and Green missioned business. Given the flow, and the fear the two may breach that $35B cap prior to yearend, and in an effort to ‘cool’ the business somewhat, both Agencies have recently pulled back on overall loan level pricing, widening spreads on newly quoted business.
I understand the pullback on fully-capped business, but the question comes to mind as to why the Agencies would pull back on cap-exempt business? I mean after all, its capped exempt and they can do as much of that business as they want, right? Probably not, and one would have to imagine someone over at the FHFA is whispering in their ears after seeing the current volume and their market share continue to grow, urging/forcing the two agencies to slow it down.
Or perhaps, it’s simply a person-power matter. Lots of deals under application means you need the appropriate amount of people to process the business in order to effectively manage the deals and timelines. Simply put, given the surge in volume, that luxury may not be there, and the teams within are constantly scrambling just to stay on a respectable timeline, something many of us are all too familiar with.
Either way we certainly don’t need Doogie Howser to figure this one out and the bottom line is the pull back in pricing is the new reality for Agency originated business for the remainder of 2019.We would expect that given the continued rally in yields coupled with the pullback in loan level spreads by the Agencies supply will increase at other financing outlets who may soon follow suit as well with wider pricing.
Over on the Agency CMBS side, the rally in yields and recent volatility has not had much of an impact on investor spreads (yet) in either the FNMA DUS or Freddie K/FRESB space. New Issue DUS 10/9.5 pools continue to trade hands in the low to mid-60s over swaps with 12/11.5 pools in the low-70s and 15/14.5 pools in the upper-70s to low-80s. At this point, we would call the sweet spot out in the market as either of these three structures with perhaps some additional open period to add to the expected yield return of investors as the search for yield at any location out there reigns supreme. This week Freddie Mac priced its latest 10-year Fixed Rate securitization, FHMS K095, with the A2 bonds clearing at swaps plus 55bps and in line with initial price talk.
On the CMBS side, the recent Fed cut and the move lower in yields has pushed price talk wider on some New Issue deals currently being marketed from both Citi and Wells Fargo. For the most part, call New Issue AAA CMBS 10-year spreads in the mid-80s range over swaps. As is always the case in the face of a yield rally, GNMA spreads continue to be the most volatile in the current market environment. With 10-year Treasuries now well inside of the 2% mark, and doing so ever so quickly, GNMA spreads are marginally wider to close out this week with a greater portion of that widening to no surprise landing on the low par portion of the price curve given the extremely low coupons those bonds have to offer. While GNMA investors are in search of product, the recent pullback in yield will certainly spook some investors who may want to avoid playing Press Your Luck and elude any big potential whammies.
That’s all from us for today. Have a profitable day and even better weekend.