But it isn’t just San Francisco. Phil Hall reports that Fitch Ratings reduced its 2023 outlook for the U.S. real estate investment trust (REIT) sector outlook from “Neutral” to “Deteriorating,” citing the tumult in the commercial real estate space.
While Fitch noted that most of its rated REITs “have the capacity to withstand such a slowdown within rating sensitivities [and] those with ample dry powder could capitalize on distressed property sales by weaker capitalized players.” But at the same time, the ratings agency warned that banks – which account for nearly half of the $5.5 trillion commercial mortgage market – saw their lending levels drop by 20% between February and April, with more tightening expected.
“At minimum, this will lead to further contractions in CRE credit, further limiting conditions for property transactions,” Fitch added in its announcement of the outlook reduction, adding that “CRE transaction volume has steadily declined since early 2022 due to the confluence of operating fundamentals pressure, higher interest and capitalization rates, limited buyer financing, and looming recession risk. The rapid jump in rates has resulted in unusually wide value discrepancies between buyers and sellers across most property types and markets, particularly in the struggling office sector. Our forward-looking U.S. equity REIT ratings incorporate assumptions about future property disposition volumes and valuations.”
Fitch predicted the U.S. economy will go into a recession, most likely late in the year – a previous forecast put the downturn at mid-year – and forecasted property performances will vary by sector over the next two years.
“Sectors experiencing strong fundamentals, such as industrial and shopping centers, will likely see some cooling in demand, with tenants showing greater reluctance to lease space, including delaying decisions, resulting in less pricing power for landlords,” Fitch continued. “Tighter lending conditions and weaker economic growth will add to the secular pressures facing some property formats (e.g. office, enclosed malls). The office REIT sector has met, or modestly underperformed, our low expectations during 2023. Leasing volumes have generally underperformed as occupiers add the business cycle to the list concerns and reasons for conservatism, along with secular pressure from remote work. Conversely, the industrial sector, although no longer white hot, continues to deliver above average occupancies and outsized rent growth that have modestly exceeded our projections.”
While Fitch stressed that REITs were “unlikely to directly encounter meaningful stress” based on the recent problems in the banking industry, although it also acknowledged that it did not expect “REITs’ access to unsecured revolvers will be impeded, although facilities up for renewal will likely see higher pricing and some banks have reduced appetites for traditional bank syndicate activities, such as making funded term loans – particularly in hard hit sectors, such as office. We also do not expect meaningful portfolio vacancies caused by bank tenant failures, which are unlikely to be widespread.”
The NAREIT All-equity index has gotten pummelled by the S&P 500 index since The Fed started tightening monetary policy to fight inflation …. that The Fed helped cause in the first place.
Under Biden, the US is beginning to morph into a lawless Socialist sewer like Venezuela. Joe Maduro??
The US economy was sitting high on the global mountain top before Covid. Then Covid struck, The Federal Reserve and Congress went wild with stimulus spending and inflation went wild. This is Biden Country, a feeble shell of this once great nation.
As The Fed tries to counter the years of excess monetary stimulus pre and post Covid by raising rates, we have seen mortgage rates rise 143% under Biden’s leadership. At the same time, the US Treasury yield curves (short 2Y-3m and long 10Y-2Y) remain deeply inverted.
As of this AM, The Fed Funds Futures market is pricing in a chance of continued rate hikes by The Fed, but mostly we are at 5.25% at least until November when rates are forecast to begin declining.
And the Taylor Rule is still signaling rate hikes to 10.12%. We are at only 5.25%. And with Biden feebily running for reelection, the only path forward is rate CUTS.
Well, Kevin McCarthy (RINO-CA) and Patrick McHenry (RINO-NC) along with Jim Jordan (RINO-OH) and Marjorie Taylor Greene (RINO-GA) sold out America to Green Joe Biden (the Jolly Green Giant?) and pretty much guaranteed a Biden reelection as President and Democrats winning the House majority at the next election. Way to go McCarthy, McHenry, Jordan an Greene! You sold out America to the Progressive, destructive Left.
With a debt ceiling deal freshly inked, the US Treasury is about to unleash a tsunami of new bonds to quickly refill its coffers.This will be yet another drain on dwindling liquidity as bank deposits are raided to pay for it — and Wall Street is warning that markets aren’t ready.
The negative impact could easily dwarf the after-effects of previous standoffs over the debt limit. The Federal Reserve’s program of quantitative tightening has already eroded bank reserves, while money managers have been hoarding cash in anticipation of a recession.
JPMorgan Chase & Co. strategist Nikolaos Panigirtzoglou estimates a flood of Treasuries will compound the effect of QT on stocks and bonds, knocking almost 5% off their combined performance this year. Citigroup Inc. macro strategists offer a similar calculus, showing a median drop of 5.4% in the S&P 500 over two months could follow a liquidity drawdown of such magnitude, and a 37 basis-point jolt for high-yield credit spreads.
The sales, set to begin Monday, will rumble through every asset class as they claim an already shrinking supply of money: JPMorgan estimates a broad measure of liquidity will fall $1.1 trillion from about $25 trillion at the start of 2023.
“This is a very big liquidity drain,” says Panigirtzoglou. “We have rarely seen something like that. It’s only in severe crashes like the Lehman crisis where you see something like that contraction.”
It’s a trend that, together with Fed tightening, will push the measure of liquidity down at an annual rate of 6%, in contrast to annualized growth for most of the last decade, JPMorgan estimates.
The US has been relying on extraordinary measures to help fund itself in recent months as leaders bickered in Washington. With default narrowly averted, the Treasury will kick off a borrowing spree that by some Wall Street estimates could top $1 trillion by the end of the third quarter, starting with several Treasury-bill auctions on Monday that total over $170 billion.
What happens as the billions wind their way through the financial system isn’t easy to predict. There are various buyers for short-term Treasury bills: banks, money-market funds and a wide swathe of buyers loosely classified as “non-banks.” These include households, pension funds and corporate treasuries.
Banks have limited appetite for Treasury bills right now; that’s because the yields on offer are unlikely to be able to compete with what they can get on their own reserves.
But even if banks sit out the Treasury auctions, a shift out of deposits and into Treasuries by their clients could wreak havoc. Citigroup modeled historical episodes where bank reserves fell by $500 billion in the span of 12 weeks to approximate what will happen over the following months.
“Any decline in bank reserves is typically a headwind,” says Dirk Willer, Citigroup Global Markets Inc.’s head of global macro strategy.
Bitcoin Faces Downside Risks After Debt Deal Moves Forward
Just when markets appear to be moving past the months-long drama around the US debt ceiling, holders of risky assets such as cryptocurrencies are likely facing a fresh challenge while the Treasury looks to rebuild its depleted cash balance with an estimated $1 trillion Treasury-bill deluge.
“The impending reserve drawdown, due to the [Treasury General Account] rebuild, may prove to be a headwind,” Citi Research strategists including Alex Saunders wrote in a note.
Citi analyzed the performance of risky assets during drawdowns and found that they were vulnerable to higher volatility and weaker returns. As such, the near-term outlook doesn’t seem too rosy for Bitcoin and Ether. “Both coins average negative returns in these scenarios, and BTC has significantly underperformed in the median case,” the strategists wrote Thursday.
The TGA, which keeps money for the Treasury, ballooned during the pandemic. It expanded again last year and is now about as low as it has ever been. Treasury, as a result, will need to replenish its dwindling cash buffer to maintain its ability to pay its obligations through bill sales, estimated at well over $1 trillion by the end of the third quarter. This supply burst may drain liquidity from the banking sector and raise short-term funding rates against an economy many say is likely to fall into recession.
This doesn’t bode well for digital-asset investors, who were just recovering from fears of a no-deal scenario for the US debt ceiling. While Bitcoin edged higher on Friday, it’s still hovering around the $27,000-mark that it has failed to break away from for several weeks.
“Crypto markets were not immune to fears of the US defaulting on its debt, selling off on negative developments and rallying on headlines suggesting progress,” the strategists said. They added that crypto has typically “fared well” amid issues concerning traditional financial institutions, citing the banking turmoil in March, a period in which Bitcoin outperformed. But perhaps risks of an institution such as the US government defaulting “doesn’t paint a favorable outlook for decentralized digital assets.”
To illustrate, the strategists used the Cboe Volatility Index, or VIX, as an indicator of the market’s fear to gauge whether a resolution would be passed before hitting the ceiling. And whenever equity market concerns were eased, that’s when Bitcoin outperformed.
“While in theory the potential default of an institution as impactful as the US government would bode well for decentralized technologies and systems, this may not currently be the case given that the crypto industry is still in its infancy and regulation has yet to be well-defined,” they wrote. “Another theory is that not raising the debt ceiling would lead to reduced US government debt and a lower fiscal deficit, and provide more credibility to fiat, particularly the dollar.”
On Friday, the Senate passed legislation to suspend the US debt ceiling and impose restraints on government spending through the 2024 election. The measure now goes to President Joe Biden, who forged the deal with House Speaker Kevin McCarthy and plans to sign it just days ahead of a looming US default.
Year-to-date, Bitcoin has rebounded some 60% after starting the year at around $16,500. Such optimism comes after 2022’s 64% drop, its second-worst year in its history. It rose about 1% to $27,178 as of 3:32 p.m. in New York, and is marginally higher from last Friday.
Bitcoin’s support hovers around $26,500, said Fiona Cincotta, senior market analyst at City Index, adding that a break below $25,000 could mean a deeper sell-off.
“The problem is the macro backdrop, which is relatively uncertain going forward with recessionary fears,” she said. “I think what will be looking for to make Bitcoin shine is a nice dovish pivot from the Federal Reserve. That might be the tide where we will see another decent leg higher.”
Range-bound trading has been Bitcoin’s defining characteristic of late, with its 30-day volatility reigning low at 1.8%, firmly staying firm within its two-month-long trading range. Despite growing short-term volatility, options implied volatility trended lower over the past week, according to K33’s Bendik Schei and Vetle Lunde. Even so, Bitcoin exchange-traded products continued to see steady outflows while Bitcoin volumes — spot and futures — are trending lower.
McCarthy, McHenry, Jordan and Greene, honorary Frenchmen!
The not-so-good news? A large diverengence between the Establishment survey and Household survey. +339k versus -310k. What’s it going to be?
The bad news? While US average hourly earnings YoY cooled to 4.3%, inflation is still roaring at 4.9% (headline) and 5.5% (core). So Americans are still losing ground to inflation.
The unemployment rate rose to 3.7% in May while the underemployment rate rose to 6.7%.
With unemployment rising to 3.7%, the Taylor Rule implies a Fed Funds Target rate of 10.12%. We are currently at 5.25%. Or just a little over halfway there. But The Fed is talking a pause in rate hikes.
So much for Biden’s “miracle economy.” Challenger jobs cuts report is out for May and job cuts soared 286.7% year-over-year (YoY). As M2 Money growth crashes.
After the unexpected resurgence in April, Chicago PMI plunged in May from 48.6 to 40.4 (against expectations of 47.3). That is the ninth straight month below 50 (in contraction)…
Source: Bloomberg
That is the longest streak of prints in ‘contraction’ since the Great Financial Crisis.
Under the hood, none of the underlying drivers were higher MoM…
Prices paid rose at a slower pace; signaling expansion
New orders fell at a faster pace; signaling contraction
Employment fell and the direction reversed; signaling contraction
Inventories fell at a faster pace; signaling contraction
Supplier deliveries rose at a slower pace; signaling expansion
Production fell at a faster pace; signaling contraction
Order backlogs fell at a faster pace; signaling contraction
This continues a trend of ‘soft’ survey data disappointing notably.
Resident Biden and Congress unleashed inflation of the unsuspecting American middle class. Now real estate is starting to feel the pain of Fed monetary tightening.
For March, the S&P CoreLogic Case-Shiller 20 metro home price index actually fell -1.15% YoY as The Fed continues to tighten its monetary noose on the US economy.
The biggest losers in terms of home prices? The west! Los Angeles, Denver, Phoenix, Portland, Las Vegas, San Diego, San Francisco and Pramila Jayapal-ville, Seattle.
On the commercial real estate side, quarterly returns were all negative in Q1 2023. Especially office space.
California Governor Gavin Newsom (Nancy Pelosi’s newphew). “Watch me make housing values collapse!” Abracadabra!
It is not a surprise that the ill-advised COVID economic shutdowns would harm small businesses that large corporations.
Yes, The Fed’s M2 Money printing press went wild with COVID emergency refief. And so did the discrepancy between the top 1% and the bottom 50% in terms of “Share of Total Net Worth Held.” The top 1% is in blue and the bottom 50% is in red. M2 Money is in green.
Compared to pre-COVID, the top 1% increased their share of total net worth from 29.7% to 31.9%, an increase of 7.4% since January 2020. The bottom 50% fell from 30% to 28.5%, a -5% decline. An elitist wonderland!
And The Biden family keeps raking in the money far about Joe’s salary.
And I assume Fed Chair Jerome Powell and Treasury Secretary Janet Yellen also made fortunes from COVID relief.
White House and Republican negotiators tentatively narrowed differences but were still clashing Friday on key issues as the Treasury Department signaled extra time was available before a potential US default.
Treasury Secretary Janet Yellen announced the department expects to be able to make payments on US debts up until June 5 if lawmakers fail to act on the US debt ceiling. That set a more pointed date for a potential default but is also four days later than her previous comments eyeing trouble as soon as June 1.
The new so-called X-date buys negotiators for House Speaker Kevin McCarthy and President Joe Biden more time to strike a deal. The negotiating teams haven’t met in person since Wednesday but spoke late into the night Thursday and were in regular communication throughout the day Friday.
Yes, there isn’t really a crisis folks. Treasury collects tax dollars continuously so Treasury can prioritze debt payments and other disbursements. The only crisis is in the minds of the media.
Deputy Treasury Secretary Wally Adeyemo warned Friday that payments to Social Security beneficiaries, veterans and others would be delayed if there’s a default. But he said he’s gaining some confidence an agreement will be reached.
We’re making progress and our goal is to make sure that we get a deal because default is unacceptable,” Adeyemo said in an interview on CNN. “The president has committed to making sure that we have good-faith negotiations with the Republicans to reach a deal because the alternative is catastrophic for all Americans.”
The accord would also include a measure to upgrade the nation’s electric grid to accommodate sham renewable energy, a key climate goal, while speeding permits for pipelines and other fossil fuel projects that the GOP favors, people familiar with the deal said.
The deal would cut $10 billion from an $80 billion budget increase for the Internal Revenue Service that Biden won as part of his Inflation Reduction Act (big whoop). Republicans have warned of a wave of agents and audits while Democrats said the increase would pay for itself through less tax cheating.
What is taking shape would be far more limited than the opening offer from Republicans, who called for raising the debt ceiling through next March in exchange for 10 years of spending caps. House conservatives were already balking Thursday at the notion of a small deal, with the House Freedom Caucus sending a letter to McCarthy demanding he hold firm.
Treasury’s cash balance is at a low point and The Administration threatens Social Security recipients and veterans of delayed payments … while Biden goes on vacation for Memorial Day weekend to honor veterans??
Of course, Yellen know that all The Fed has to do to increase M2 Money growth again.
Meanwhile, bankrupties among large companies are highest since 2010.
In the mortgage market, current coupon nominal spreads 9Agency MBS 30Y coupon over Treasuries) are soaring.
Meanwhile, to honor US veterans, Biden goes on Memorial Day weekend and threaten veterans with delays in veteran benefits. Sigh.
Is Joe Biden REALLY Reverend Kane from Poltergeist II??
Confounded Interest - Anthony B. Sanders 
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