The real estate market has been worrying and disappointing for well over a year now. Home sales and new constructions have been trending poorly, all of which has worried investors that a recession may be on the way. However, this year’s drop in yields has made mortgages much more affordable, which seems to be helping the market. Big market player Realtor.com has just put out its updated outlook for the year, saying “lower, but still increasing mortgage rates that will buoy home prices and sales by boosting buyers’ purchasing power beyond what we initially projected”.
FINSUM: For a $200,000 mortgage, the difference in monthly payments right now is already almost a $150 lower versus what it was in the fourth quarter. That is a meaningful difference for many families.
One of the core tenants of US central banking is being shunned by Jay Powell’s Fed. Former central bank leadership had always taken the approach that tight labor markets posed a serious threat for higher inflation. However, Powell is stepping away from that view. Labor markets remain tight, with unemployment very low and strong job creation consistent. Yet, the Fed has completely stepped off the gas pedal on rate hikes, a position that runs counter to previous approaches.
FINSUM: At least in this cycle, the relationship between labor markets and inflation seems to be thoroughly broken. The reality is that no one can give a great answer as to why, but Powell’s policy nonetheless sticks to the idea that the link is severed.
Something very worrying happened yesterday if you are an investor in bank stocks. Bank of America released what were widely considered to be stellar earnings, yet the stock fell. We don’t just mean stellar in the “oh, they beat estimates” sense, but that the company looks healthy even as some other banks (e.g. Goldman Sachs) look weak. However, the stock fell because the bank indicated that its cost pressures were rising, and coupled with the fact that yields are now lower, means the bank will have higher expenses and lower interest income, putting a squeeze on margins.
FINSUM: This does not seem to be unique to B of A, as the whole industry has the same interest margin and cost pressures.
The bond market took on a very strong position about the Fed in its recent rally—that rate cuts were likely this year in order to stimulate the economy. However, upon the release of the most recent Fed minutes, that view appears to be quite clearly wrong. The Fed minutes show no indication at all of cuts to come this year. Instead, those at the Fed merely indicate that hikes are likely to be put on hold for the rest of the year.
FINSUM: We don’t think there is much of a chance the Fed will cut this year. Recent economic data has been a little better, which means they seem much more likely to stand pat than to cut.
There is a LOT going on in fixed income markets right now, and for the most part, those developments are confusing. Treasury bonds had a huge rally, and then a little pull back, on worries about the economy. But at the same time, the riskiest bonds—high yield—have been doing very well even though they are the most likely to suffer in a recession. So where should investors have their money in fixed income? Long-dated municipal bonds might be one good idea. Advisors will be well aware of their tax exempt status, but what is interesting right now is that they appear a relative discount. 30-year munis have yields over 3%, well above Treasuries, making them look like a relative steal.
FINSUM: These seem like a good buy right now, especially with the rate outlook being so dovish.