April 20th, 2025
An update on the current economic situation concerning inflation and its future outlook. Recent data shows progress in controlling inflation, with the Consumer Price Index (CPI) decreasing by 0.1% in March, its first decline since May 2020. This was mainly driven by a drop in energy prices, but core inflation, which excludes food and energy, also saw a modest decrease to 2.8% year-over-year. However, despite these positive signs, there are growing concerns about the sustainability of this trend. Consumer sentiment dropped significantly, partly due to rising inflation expectations, which reached their highest levels since the 1980s. The Federal Reserve Bank of New York's survey showed similar increases in inflation expectations, albeit less dramatic. The impact of tariffs, particularly on raw materials and goods are contributing to rising production costs. The Producer Price Index (PPI) showed an uptick in prices for goods like steel and lumber, suggesting that future consumer prices could rise as well. These higher production costs are already showing up in certain sectors, such as construction. While inflation has decreased in recent months, there are obvious signs that inflationary pressures could resurge, particularly due to rising expectations and increasing production costs. The Federal Reserve is in a difficult position, as it may need to tighten monetary policy to prevent a self-reinforcing inflation cycle, even as economic growth slows.
The Trump Administration is planning to withdraw the U.S. implementation of the final phase of the Basel 3 rules, referred to as the "Endgame," opting instead to start over with a new approach. Regulatory agencies including the Federal Reserve, the FDIC, and the Office of the Comptroller of the Currency (OCC) are expected to begin fresh discussions, abandoning the 2023 proposal from the Biden Administration. The original Biden-era plan, which faced heavy criticism from major banks and industry groups, proposed a 19% increase in Tier 1 capital requirements for large banks and raised the securitization P-factor from 0.5% to 1%. Industry groups like the Structured Finance Association and the CRE Finance Council have expressed concerns about the plan’s impact on financial products such as securitizations and warehouse lines. As discussions restart, industry leaders are lobbying for lower capital requirements, including a reduction of the P-factor to 0.25%, aligning more closely with European standards. Treasury Secretary Scott Bessent recently suggested a shift away from international frameworks like Basel, signaling possible easing of capital rules not only for large institutions but also for community banks. While the U.K. and EU have delayed Basel 3 implementation, they are waiting for the U.S. to finalize its new direction.
The Opportunity Zone tax program, a policy initiated during President Trump’s first term under the Tax Cuts and Jobs Act of 2017. Designed to stimulate investment in economically distressed areas, the program offers tax incentives to individual investors who invest in designated "opportunity zones" — areas suffering from high poverty and low economic activity. This includes deferring and potentially reducing taxes on capital gains from investments made in these zones until 2026. As the program nears its expiration, many investors are pushing for an extension or even a permanent implementation. The program has helped spur the completion of thousands of new multifamily housing units, particularly in cities like Los Angeles, which have seen a significant rise in residential development. The number of new units in these zones has surged, with apartment openings rising 151% by 2024, far outpacing the national average. Critics of the program argue that it could be improved. They point out issues such as the lack of permanence, the need for more rigorous criteria for zone eligibility, and a requirement for deeper financial distress in the target areas. Additionally, the program’s focus on capital gains tax breaks may not be enough to drive broader economic benefits, particularly for rural communities. One major advantage of opportunity zones is their relatively low cost to the federal government compared to other housing programs like the Low-Income Housing Tax Credit (LIHTC). The program has attracted significant funding, with individual investors—particularly high-net-worth individuals—driving much of the activity. This has been especially impactful in cities like Los Angeles, where it has contributed to addressing a critical shortage of affordable housing. However, as the program faces a potential expiration in 2026, there is a growing push for its renewal or expansion. Some supporters suggest structural changes, such as allowing more flexibility in the timing of tax deferral, which could encourage broader participation and sustained investment. Despite some concerns about inefficiencies and missed opportunities, the program has garnered bipartisan support for its role in addressing housing shortages and encouraging economic development. As 2026 approaches, stakeholders in the real estate and investment sectors are hoping for a "Opportunity Zones 2.0" that could build on the initial success and ensure continued growth in disadvantaged areas.
As discussed last week the 10Y UST is still mostly rangebound as it closed Friday hovering around 4.3%, after opening Monday right around 4.5%. We will provide an update on pricing and spreads across products this week.
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