HFF Research Update for July 21, 2016: Quantitative Exhaustion

Thursday, July 21, 2016

Weekly insights on current research in the commercial real estate industry from HFF Managing Director of Research Jimmy Hinton. View Daily Rates on the HFF website.     

The European Central Bank has left its stimulus initiatives unchanged as President Mario Draghi and his staff attempt to monitor markets post-Brexit and as banks in his native Italy struggle to stay afloat. Status quo is now the goal (read that again) as political surprises have taken center stage abroad, financial systems come under severe pressure and, now, domestically, Cleveland plays the host of a tempestuous Republican National Convention.

The yield on the 10-year UST has crept up slowly to 1.60 percent as of this writing, and corporate bond markets are moving in lock step, maintaining consistent credit spreads. Is that market confidence or is it something else?

James Bullard, president of the Federal Reserve Bank of St. Louis, is wondering if stimulus has exhausted its merits – particularly in the labor market: "Stimulus is something you’re doing to try to smooth things out over a couple of quarters, and that’s isn’t how we need to be thinking about the U.S. economy. We badly need a growth agenda."

In the sense of economic data, I confess myself perplexed by his comment. The average creation of ~201,000 jobs per month for nearly 70 consecutive months isn't a lack of growth. I will admit it has come in an era where the labor participation rate is extremely low, so what is Bullard trying to convey?

On July 17, 2012, then-Chairman of the Federal Reserve Ben Bernanke provided testimony to the House Financial Services Committee declaring "monetary policy is not a panacea, it is not the ideal tool in many cases, and we look forward to having partnerships with other parts of economic policy."

Not much has changed in the past four years.

Back to Bullard, his comments sound quite similar to those of other Federal Reserve officials. Last month Chairman Janet Yellen told a Senate Banking Committee that fiscal policy has "not played a supportive role" in the recovery. Fiscal policy: That is the partnership to which Bernanke was appealing.

In an environment where the economy is undermined by an aging American population, softening corporate profits, ailing infrastructure and paltry productivity, Bullard believes “there are no simple answers, there is no magic wand.”

But accommodative fiscal policy could certainly help.

As the presidential election grows closer, look for an increase in coverage on the topic of fiscal policy and for yields to be driven, at least in part, by anticipations relating to leadership in Washington.

About Jimmy Hinton

Jimmy Hinton serves as managing director of HFF and is responsible for the firm’s national research efforts. Mr. Hinton works with the executive management team, assisting in investor relations and providing both HFF employees and firm clients with in-depth analysis of economic, property and capital market trends. Additionally, he provides extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton works with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

During his tenure at HFF, Mr. Hinton has supported the execution of more than 150 commercial real estate transactions totaling more than $4.5 billion in 20 states. Mr. Hinton has experience in fixed- and adjustable-rate debt, mezzanine debt, construction loans and joint venture executions on behalf of clients engaged in the acquisition, development and recapitalization of property types including multi-housing, industrial, office, retail, medical office and storage properties.

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