Pensford Weekly Round-Up (July 15th-22nd)
July 25, 2022
Welcome to this week's Pensford weekly roundup. I'm Josh.
This week started with a pessimistic tone, with recession fears continuing to grip markets. This has been driven by concerns of rampant inflation continuing to slow economic growth. The delayed impact of Fed rate hikes has the market now fearing that they may end up hiking us into a recession.
The Fed's own Beige Book also outlined concerns of an economic downturn, stressing that "ongoing inflation and efforts to control it like rate hikes pose significant threats to activity moving forward."
Finally, the yield curve inversion has deepened even more and has remained inverted for the entire week, with the 2/10 spread reaching negative 25 basis points.
Our clients also share concerns about an economic downturn in the near term. Deals are becoming more difficult due to widening loan spreads across the board and lower LTVs. In some cases, lenders are just pulling out entirely.
On the short end of the curve, rates have surged exponentially, primarily due to the CPI report, which came out on Wednesday. Core CPI, the inflation measure that strips out volatile food and energy prices, printed at 5.9%, beating expectations and, more importantly, the month-over-month measure. Overall, CPI printed that point 7%, not only beating expectations, but also coming in hotter than last month's reading. This suggests that inflation could still be accelerating.
This has given the Fed more cover to hike 75 basis points at their next two meetings. A Bloomberg measure shows that there's over a 50% chance that they will actually hike a full point at the next meeting.
If you're locking in a fixed-rate loan or a longer-term swap, you're probably seeing some relief after last month's run-up. If you're a floating rate borrower, you're probably feeling a little bit of pain, with CAP costs coming up 10 to 15% across the board. This includes other hedging instruments that you may be discussing, such as corridors. On the flip side, if you've got a defeasance or some other prepayment penalty, with just a couple of years of term left, then you've probably seen a little bit of relief from the rise in short-term rates.
Next week is going to be a little bit lighter. We have some housing data and some PMI prints to be on the lookout for. Otherwise, there is nothing on the forecast as volatile as this week. You should keep in mind that we are just a couple of weeks away from the next Fed meeting. In general, markets tend to get extra sensitive around any fed speech, with volatility constantly spiking, which could impact cap costs.
That's it for this week's Pensford Weekly Round-up. Have a good weekend.