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HFF Research Update for March 17, 2016: The Snakes of Ireland

Thursday, March 17, 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 or access the HFF Daily Rates App in iTunes.

Top of the mornin’,

St. Patrick was born in Roman-controlled Britain sometime in the fourth century. He was abducted by Pagan Irish and enslaved for many years before escaping. Patrick’s father and grandfather were clergymen in the Roman Catholic Church and, having found God during his enslavement, Patrick later returned to Ireland as a priest to convert his Pagan captors and scores of others. In the words of Art Cashin, “Unfortunately, Patrick wasn’t an MBA and did not know the law of diminishing returns. So he managed to baptize over 120,000 people, built more than 300 churches and chased the snakes out of Ireland while also creating the shamrock and opened a factory to make pennants carrying the slogan ‘Go Notre Dame!’”

Analysis of Market Insights and Economic Performance

Maybe some of the above is hyperbole – there are no snakes in Ireland, after all, just as there are no slithering reptiles in Iceland, Greenland, Antarctica or New Zealand.

The Fed believes there is a snake out there to be reckoned with, however, and it is downside risk associated with a rise in its Fed Funds Rate. For the past few months, two Fed Governors have been vying for Chairwoman Janet Yellen’s logic. Stanley Fischer and Lael Brainard were at opposite ends of an argument relating to the impact a rate hike could have on the national/global economies. From a Bloomberg article this week, “At stake is the Fed Chair’s willingness to embrace a policy stance that accepts the risk that inflation will overshoot the U.S. central bank’s target. At the moment, Brainard has the upper hand in this battle. And she has a new weapon on her side: increasing concerns about the stability of inflation expectations. The lines of division within the Fed are clearly drawn. Fischer’s side fears the inflationary consequences of a labor market quickly nearing full employment and below – i.e., hike away. Brainard meanwhile believes recent financial instability has exposed the downside risks associated with a rate hike – i.e., back off rate hikes.”

It appears Brainard won this month. Whether the snake is real or not remains to be seen.

Fed officials indicated a more cautious approach to the near-term policy outlook at Wednesday’s meeting, with the median projection for the funds rate showing only two rate increases in 2016, down from a projected four increases only three months ago. Yellen’s commentary after the meeting suggested the shift related to concern about the transmission of policy changes through financial markets and a more dovish take on recent gains in core inflation.

More from Cashin, “The results were financially pyrotechnic. The USD plunged and commodities soared, especially gold and oil. Bond yields dropped.”

Overnight, Norway’s central bank announced intentions to reduce its rates to negative territory to avoid recession. This further weakened the USD and oil continues higher.

The 10-year UST is currently trading near 1.90 percent. Credit spreads are coming in, ostensibly on the corporate bond spread narrowing we discussed in Monday’s rates memo.

Let’s take advantage!

About Jimmy Hinton

HFF Jimmy HintonMr. Hinton serves as Managing Director of Research for HFF and is responsible for the firm’s research efforts. Mr. Hinton works with the executive management team to assist in investor relations and to inform both HFF staff and firm clients with in-depth analysis of economic, property and capital market trends. He is also responsible for providing extensive market reports, client presentations and deal-specific analysis for debt placement and investment sales assignments. Mr. Hinton’s responsibilities include substantial interaction with pension funds, life insurance companies, regional and CMBS lenders, REITs, foreign investors and private equity funds.

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