Displaying items by tag: inflation

Friday, 15 December 2023 06:11

What Does REIT Rebound Portend for 2024

REITs have seen big gains in recent weeks with the FTSE Nareit All Equity index up nearly 12% in November and now green on the year. The major catalyst for recent gains has been increasing certainty that the Fed is nearing the end of its hiking cycle and may begin cutting rates by the second half of next year.

 

According to the REIT industry association Nareit, this strength will continue in 2024. In its outlook piece for next year it said, “We are cautiously optimistic that despite those challenges, the REIT recovery could begin next year. The impressive performance of REITs during late October and November may be a signal that, as in previous periods of monetary policy adjustments, the end of the rate-rising cycle will herald a period of REIT outperformance.”

 

Based on historical precedent, REITs have returned 20% over the next year following when rates stabilize which is better than stocks and private real estate. It also forecasts the performance gap between public and private real estate shrinking during this period. However, John Worth, Nareit’s executive VP of research and investor outreach, warns that these returns will be lumpy which means that investors will be rewarded for being in the market rather than timing the market.


Finsum: REIT stocks are seeing a strong rally in recent weeks amid optimism that inflation is falling and that the Fed is done hiking rates. Here’s why some see it extending into next year.

 

Published in Eq: Real Estate

Treasury yields were higher following the November jobs report which showed a bigger than expected decline in the unemployment rate. The report suggests that the labor market remains tight which could prolong the Fed’s hiking cycle. However, the bulk of the gain in yields was given up in ensuing sessions as traders remain more focused on weakening inflation and softer economic growth.

 

According to the Labor Department, the US economy added 199,000 jobs in November which was just above consensus expectations of 190,000 jobs added and an improvement from an increase of 150,000 jobs in October. The unemployment rate dropped to 3.7% below consensus expectations of 3.9%. Some note that the report was helped by auto and entertainment workers returning to work after strikes. 

 

Some traders are looking for labor market weakness as the next impetus for the Fed to shift its policy. Clearly, this report dispelled notions that the economy is contracting and provides more ammunition for the ‘soft landing’ hypothesis. 

 

Wage growth also moderated to fall to 0.4% monthly and 4% on an annual basis. In terms of the economy, government and healthcare were the biggest sources of jobs growth, while the retail sector and transportation & warehousing shed the most jobs.


Finsum: Treasury yields were slightly higher following the November jobs report which came in stronger than expectations. 

 

Published in Wealth Management
Wednesday, 13 December 2023 04:58

Rocky Road to Lower Rates in 2024: Schwab

Charles Schwab is forecasting positive returns for fixed income as the economy slows and inflation continues to fall. However, it expects volatility to linger given uncertainty about the Fed’s policy moves. 

 

Schwab notes that yields have been unusually volatile as the 10-year yield has ranged between 3.5% and 5% over the past 12 months. Yet, it believes that short and long-term yields have peaked for the cycle. 

 

It sees downward pressure for inflation given that supply issues have abated, while it sees the impact of tighter monetary policy continuing to materialize, also adding to downward pressure on inflation. Despite this bullish forecast for bonds, it doesn’t see a return to the pre-Covid era of low rates and quantitative easing (QE). 

 

In terms of economic growth, Schwab notes some risks as high real rates are impacting the economy as they create more incentives for consumers to save rather than spend. Two more  headwinds are tighter lending standards at banks and the Fed continuing to unwind its balance sheet. Another factor contributing to volatility is that the Fed could elect to keep rates higher as it wouldn’t want to squander gains made in the fight against inflation.


Finsum: Charles Schwab sees positive returns for fixed income in 2024 due to slower economic growth and falling inflation. However, it expects volatility to continue given uncertainty over the Fed.

Published in Wealth Management
Sunday, 10 December 2023 08:53

Treasury Rally in Early Innings: BoA

Since the yield on the 10-year inched above 5% in October, we have seen a relentless rally in Treasuries. According to Bank of America, this rally is due to the increasing likelihood of an upcoming Fed rate cut and is just getting started. It eventually forecasts the 10-year yield falling another 200 basis points based on historical precedent of dramatic declines in yield during the interim period between the Fed’s final rate hike and first rate cut. 

 

There have been five hiking cycles since 1988. Each saw a major rally in Treasuries once the hikes were complete. The largest decline was 163 basis points, while the average decline was 107 basis points. The drop in yields tended to abate once the Fed began cutting rates. This cycle Bank of America sees the 10-year yield dropping to 2.25% by May 2024 which is when the first hikes are expected to take place. 

 

Such a decline in Treasury yields would have major implications for other asset classes as well. The researchers also warned that this prediction could be impacted by ‘lingering inflationary pressures. Interestingly, the bank’s strategists have a different outlook as they expect the 10-year period to end next year at 4.25%, which indicates minor change from current levels. 


Finsum: Bank of America shared historical research which shows that the 10-year yield tends to experience weakness during the interim between the Fed’s final hike and its first rate cut. 

 

Published in Wealth Management
Sunday, 10 December 2023 08:50

Cloudy Outlook for Commercial Real Estate

Commercial real estate (CRE) has been in the crosshairs due to a combination of cyclical and secular factors. However, there is a wide dispersion in the sector with some areas facing perilous times like offices and retail, while others continue to experience strong fundamentals like industrial, multi-family, and tech infrastructure.

 

The biggest cyclical threat is the Fed’s interest rate hikes which have increased the cost of capital, especially with so many borrowers looking to refinance in the coming months and years. Adding to this is that many regional banks are dealing with impaired balance sheets due to falling bond prices and have reduced lending activity to minimize risk. This means that capital is more expensive and harder to access. Another concern is if the economy falls into a recession this could lead to a spike in defaults, downward pressure on rents, and an increase in vacancies. 

 

Operators in the space must adapt to these new realities rather than wish for a return to the previous era, when low rates and steady economic growth fueled a long bull market. Some recommendations for owners and investors in the space are to upgrade properties, find new capital sources, spend on technology for greater efficiencies, invest in sustainability, and adjust accommodations for hybrid work arrangements. 


Finsum: Commercial real estate (CRE) has faced major struggles over the past couple of years. Yet, there is a wide dispersion in space with some areas continuing to have strong fundamentals while others are in a much more vulnerable position.

 

Published in Eq: Real Estate
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