Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
Fannie Mae’s Home Purchase Sentiment index has declined from 81.7 shortly after Biden was sworn-in as President to a meager 62.8 in July 2022.
Of course, mortgage rates have risen quite rapidly and home price growth remains elevated as The Fed still has not trimmed its balance sheet as promised.
The US housing market is simply unaffordable for millions of Americans. To illustrate the problem, here is a chart of the Case-Shiller National home price index less CPI YoY graphed against Average Hourly Wages less CPI YoY.
The gap between the REAL national home price index YoY and REAL US average hourly earnings YoY is near the largest since 1988. Inflation is making matters far worse since REAL average hourly earnings growth continues to decline.
The only thing positive to say is that REAL home price growth YoY is lower now than at the peak of the 2005 home price bubble that burst catastrophically.
Another “positive” is that the REAL 30-year mortgage rate has fallen to -3.23%. At the peak of the house price bubble in June 2005, the REAL 30-year mortgage rate was +2.58%. THAT is one big difference between the pre-2008 recession and today’s impending recession.
Here is your weekend update on Treasury and Mortgage markets.
The current US Treasury 10Y-2Y yield curve just slipped further into reversion at -40.299 basis points, screaming impending recession. Oddly, The Federal Reserve has been leaving its balance sheet of Agency Mortgage-backed Securities (MBS) in tact (green line).
On the mortgage front, Bankrate’s 30-year mortgage rate index rose to 5.60% while the affordability-friendly 5/1 Adjustable Rate Mortgage (ARM) rate rose to 4.21%.
Currently, a 5/1 ARM borrower can save 139 basis points over the traditional 30-year mortgage rate.
Have a wonderful weekend!
After mortgage rates topped 6%, they settled back down with the global economic slowdown, but are on the rise again.
Bankrate’s 30-year mortgage rate index rose to 5.57% after rising above 6% in June 2022. Mortgage rates are up 92% under the team of Biden and Fed Chair Powell as The Fed tries to extinguish the inflation fire cause by 1) excessive Fed stimulus, 2) Biden’s anti-fossil fuel policies and 3) Biden/Congress’ reckless spending.
The Fed still has not shrunk its balance sheet yet and home price growth is still soaring.
The US Treasury 10Y-2Y yield curve inversion just worsened to -38.503, the most inverted since 2000.
Over the longer-term, the US Treasury 10Y-2Y yield curve is the most inverted since 2000. Remember, the 10Y-2Y yield curve inverts prior to a recession.
In terms of putting out the inflation fire, The Fed is acting more like The Three Stooges.
Federal Reserve Bank of St. Louis President James Bullard said he favors a strategy of “front-loading” big interest-rate hikes, and repeated he wants to end the year at 3.75% to 4% to counter the hottest inflation in four decades.
“We still have some ways to go here to get to restrictive monetary policy,” Bullard said in a CNBC interview Tuesday.
“I’ve argued now with the hotter inflation numbers in the spring, we should get to 3.75% to 4% this year. Exactly whether you want to do that at a particular meeting or some other meeting is a great question. I’ve liked front-loading. I think it enhances our inflation-fighting credentials.”
Federal Reserve presidents including Bullard speaking this week emphasized that inflation at a 40-year high has yet to slow, and pushed back against the perception the central bank was pivoting to a less aggressive phase of tightening monetary policy. Fed Chair Jerome Powell last week cited Federal Open Market Committee forecasts that the Fed would raise rates to 3.4% at the end of the year and 3.8% in 2023.
Bullard wants to raise rates to boost Fed credibility?? When flexible price inflation is at 20.13% and The Fed is awfully slow to shrink their balance sheet??? What credibility is he talking about????
Is Fed Chair Jerome Powell “Mr. Freeze?”
We are seeing a slowing of the US economy. For example, the JOLTs (job openings) numbers are out for June and they are down -5.5% from May. And from April to May, JOLTs declined -3.2% MoM. That is a clear slowing trend.
And on the housing front, the CoreLogic HPI Forecast indicates that home prices will increase on a month-over-month basis by 0.6% from June 2022 to July 2022 and on a year-over-year basis by 4.3% from June 2022 to June 2023. But rose +18.3% YoY in June. Also a clear cooling trend.
And its “Escape From Blue States” (perhaps a new Kurt Russell movie), with home prices rising fastest in red states (primarily The South). And contiguous migration from California to Nevada and Arizona.
The Fed Funds Futures market is pricing in rate hikes until the March 2023 FOMC meetings. After all, Prince Imhotep (aka, Minneapolis Fed’s Neel Kashkari) is screaming for more rate hikes to fight inflation … caused by 1) loose monetary policies since late 2008 and 2) insane Federal government spending.
Let’s see if “Mr. Freeze” (aka, Jerome Powell) relents on Fed rate increases before the March 2023 FOMC meeting.
The spendiholics in Washington DC (aka, Biden and Congress) have passed yet another inflationary legislation, this time the sadly misnamed “The Inflation Reduction Act” since it will likely lead to a furthering recession of the US economy. Well, that is one way to reduce inflation: cause a recession and job loss.
An analysis by the National Association of Manufacturers says the tax in 2023 alone will reduce real GDP by $68.5 billion and cut labor income by $17.1 billion. One well-known economic truth is that corporations don’t really pay taxes (they pass on taxes to consumers in the form of higher prices). They are essentially tax collectors, as the corporate tax rate ultimately falls on some combination of workers, shareholders and customers. Raise the corporate tax rate, and you’re cutting wages and salaries for workers.
“Americans are already experiencing the consequences of Democrats’ reckless economic policies. The mislabeled ‘Inflation Reduction Act’ will do nothing to bring the economy out of stagnation and recession, but it will raise billions of dollars in taxes on Americans making less than $400,000,” said Sen. Mike Crapo, an Idaho Republican who sits on the Senate Finance Committee as a ranking member, and who requested the analysis.
“The more this bill is analyzed by impartial experts, the more we can see Democrats are trying to sell the American people a bill of goods,” Crapo added.
According to Schumer and Manchin, “The Inflation Reduction Act of 2022 will make a historic down payment on deficit reduction to fight inflation, invest in domestic (green) energy production and manufacturing, and reduce carbon emissions by roughly 40 percent by 2030. The bill will also finally allow Medicare to negotiate for prescription drug prices and extend the expanded Affordable Care Act program for three years, through 2025.”
No wonder House Speaker Nancy Pelosi took her extensive entourage on a paid vacation to Singapore, Malaysia and perhaps Taiwan. Its called “Getting out of Dodge.” If Pelosi believed in this legislation, she could have “saved the environment” by simply doing a Zoom call. Then again, Biden’s Climate Envoy, John Kerry, still travels the globe trying to sell green energy and carbon reductions in his private carbon-spewing jet. But I forget, Biden, Pelosi, Schumer and Kerry are our elites who deserve platinum treatment, not lowly serfs like 99% of the US population.
So, here we go loop-de-loop. Politicians want to spend money on their friends and donors and then raise taxes on the rest of us.
On the recession front, the 10Y-2Y US Treasury yield curve just flattened another -6.015 basis points to an inverted -30.195 basis points.
Despite what the talking heads in Washington DC say, the US economy has officially slipped into recession.
US Real GDP for Q2 slumped -0.9% QoQ, the second straight quarter negative GDP growth. Also, known as RECESSION.
The GDP price index rose more than expected (+8.7% versus the expected +8.0%).
The Federal Reserve is not a friend of mine.
Stagflation???
US new home sales plunged -17.4% YoY and down -8.1% MoM in June.
The unsettling bit is the median price of new home sales declining -9.47% YoY.
The midwest was the big gainer in new home sales in June.
The housing market is suffering from Too Much Fed Stimulus!
The May Case-Shiller home price indices are out and they’re a doozy. The national home price index rose 19.75% YoY. Why? You can thank The Fed’s “slowhand” approach to withdrawing the Covid-related stimulypto.
Where are home prices booming? Everywhere.
Miami, Tampa, Dallas and Phoenix (red states) are growing at over 30% YoY. Boston, Chicago, Cleveland, Detroit, Minneapolis, New York, Portland and Washington DC (blue states) are all growing at over 10% YoY. Cleveland is a blue city in a mostly red state while San Diego is a red city in an almost blue state.
Jerome “Slowhand” Powell is not shrinking The Fed’s balance sheet.
Confounded Interest - Anthony B. Sanders 
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