Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
Markets opened after a long (and expensive) Memorial Day weekend, with the 10-year Treasury yield up 8.1 basis points (to
Meanwhile, banks continue to park funds at The Federal Reserve in the form of reverse repos as global inflation soars.
And then we have US gasoline prices rising to the highest in history.
Its like banks know something that the rest of us don’t. Although we do know about the highest gasoline prices in history.
German inflation hit another post-World-War-II record high, piling pressure on The ECB’s need to exit from crisis-era stimulus after numbers from Spain also printed hotter than expected.
Driven by soaring energy and food costs, this morning’s data showed consumer prices in Europe’s largest economy surged 8.7% YoY – far hotter than the +8.1% expected (the highest since the start of the monthly statistics in 1963).
And top of that, the German 10-year Bund rate rose +9.4 BPS this morning, although Finland, Hungary and Slovakia all rose above +10 BPS.
While US markets are closed today in honor of Memorial Day, the US Treasury curve (10Y-2Y) has stabilized at 25.8 basis points after the initial shock of The Fed finally raising rates for the first time under Biden.
Then there is this headline: Biden to Meet Powell to Discuss Economy Amid Inflation Pain. So much for Fed independence. I wonder if Powell will say “Joe, have you ever considered canceling your executive orders on oil and natural gas exploration?”
Or perhaps Powell can bring Randy Newman to The White House to sing “Mr. President, have pity of the working man.”
OR maybe Biden can tell Powell to pause monetary tightening to avoid mortgage rates from rising to disastrous levels.
Memorial Day weekend is one where families often travel to meet relatives and friends, or travel to Washington DC to remember those who have died in the service of our country.
But traveling has gotten a lot more expensive under Biden. Gasoline prices are up 92.4% under Biden, while food prices are up 60%. Those hamburgers and hot dogs for grilling are being replaced by … pizza? Or maybe plant-based products.
Zillow’s Rent Index All Homes YoY was only 0.6234% in February 2021, and has soared to 16.36% YoY under Biden. That is an increase of 14.75x. So, not only is it much more expensive to travel on Memorial Day weekend, but it is far more expensive to stay home in your rental property.
On the currency front, we are seeing the US Dollar falling (greenback line), along with the Yuan/USD cross currency. West Texas Intermediate Crude Cushing OK spot is at $115.07.
At least Venezuela and Iran are benefiting greatly by Biden’s energy policies, even if Americans are suffering. Perhaps this is the new foreign policy of Wynken (US VP Harris), Blynken (US SecState), and Nod (Biden).
Remembering my Uncle Jack Sanders who served in the Battle of The Bulge during World War II, winning an individual Silver Star for bravery and two Purple Hearts. He rose from “buck” private to First Sergeant by the end of WWII.
Mortgage applications decreased 1.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 20, 2022.
The Refinance Index decreased 4 percent from the previous week and was 75 percent lower than the same week one year ago. And under Biden, the refinance index is down -83.2%.
The good news? The seasonally adjusted Purchase Index increased 0.2 percent from one week earlier. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 16 percent lower than the same week one year ago. And the mortgage purchase applications index is down -12% under Biden.
While mortgage interest rates are up 71.7% than one year ago and mortgage rates are up 87% under Biden. As The Federal Reserve signals (but not yet accomplished) monetary tightening.
Once again, The Fed is dead set on cooling inflation caused by 1) Biden’s anti-drilling policies and 2) the remnants of the Federal government spending splurge to combat Covid. The Fed has been increasing their asset purchases (purple line) as inflation increase (blue line). Now they are signaling a decline in the balance sheet (green line) in the hope that it will cool inflation. Fat chance.
Let’s see how DEAD SET The Fed is about tightening monetary policy in the face of rising energy and food prices while a war rages in Ukraine and China in a Covid lockdown.
We are all goin’ down the road feelin’ bad under Biden.
As The Federal Reserve tries to fight inflation (it can’t thanks to Federal energy policies and bottlenecks), it is causing a disconnect between mortgage current coupon rate and the MBS index coupon. The disconnect is so bad that it is back to 1985 levels.
The Fed can certainly try to cool inflation, but Biden is intent on raising energy prices (leading to food price increases, and everything else) to shift us to electric cars. So, Biden is unlikely to back off.
So, The Fed is left trying to fight a war against inflation that only Biden can fight.
Meanwhile, the US mortgage market is getting pulverized
Kansas City Fed President Esther George said The Fed isn’t focused on impact of rates on stocks (or pension funds, apparently).
The inflation that is crushing Americans is due to energy and food price increases. That is, the non-core inflation. Under Biden, food is up 63%, gasoline is up 92% and diesel prices are up 112%. But The Fed doesn’t consider food and energy prices, per se.
If we look at the Taylor Rule considering fighting inflation including food and energy, The Fed would have to raise their target rate to … 21.38%.
Now, The Fed can clearly cool-off the housing market by raising rates. In fact, my fear is that they go too far and crash the housing market. The Fed will NEVER get to 20% again like we last saw under Volcker in 1981. 20% rates certainly cooled home prices back then and Fed rate hikes helped crash the housing market in 2008.
So, when The Fed says they want to be the inflation-fightin’ Fed, we must be aware what The Fed can and cannot do. They can’t tame the inflation beast in the form of food and energy prices (unless they crash the economy), but they can crush home prices.
US Existing Home Sales were 5.61M SAAR in April, down -2.4% from March’s -3.0% MoM reading. But median prices YoY for existing home sales printed at 14.85%, still hot, hot, hot.
With 3 consecutive declines in MoM existing home sales, how can prices still be raging at 14.85%? First, inventory for sale in April remains low compared to 2010 (yellow line). Second, The Federal Reserve’s Stimulypto (excessive monetary easing) is still out there in force despite Jerome “Slowhand” Powell signaling rate increases (green line). 30Y mortgage rates are still rising.
Where do we go from here? 30 year mortgage rates have been climbing as The Fed signals its intents to tighten monetary policy. But with global economic slowing, Treasury yields have been coming down (like today’s -5.2 BPS drop (Germany’s 10Y Bund Yield dropped -8 BPS on slowing global economic growth).
But remember, the Existing Home Sales numbers are for April.
Jay the Revelator! He revealed that The Fed will not hesitate to keep raising rates until inflation comes down. Which means that mortgage rates may be rising.
Mortgage applications decreased 11.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 13, 2022.
The Refinance Index decreased 10 percent from the previous week and was 76 percent lower than the same week one year ago. The seasonally adjusted Purchase Index decreased 12 percent from one week earlier. The unadjusted Purchase Index decreased 12 percent compared with the previous week and was 15 percent lower than the same week one year ago.
Of course, The Fed has about as much chance of slowing down energy and food prices as I do of becoming King of the United States. But Jay the Revelator may be able to cool housing demand with rising mortgage rates.
Seriously, with soaring energy prices and soaring EVERYTHING prices (except for real wage growth), it is difficult to see how the US will avoid a recession.
Yes, everything is seemingly rising in price, yet REAL average hourly earnings growth keeps falling. Rising price + declining real earnings growth = eventual recession.
So, let’s get ready to stumble … into recession.
Most of us are painfully aware of rising food prices, particularly with the US fighting a proxy war with Russia. Wheat prices have doubled under Biden and the Russian invasion of Ukraine.
But inflation is everywhere. Rising home prices, rising gasoline and diesel prices, etc. When Jeep can see a Wagoneer for $100,000+, you know we have inflation.
The surprise this morning was retail sales, up 0.9% MoM (though still less than expected), despite rising prices. Odd since REAL wage growth is negative.
But the other bit of good news this AM is that US industrial production rose +1.1% MoM in April. And US Capacity Utilization is rising dangerously towards 80%, it is at 79% in April.
You will notice that Fed monetary tightening occurs when capacity utilization hits 80%, indicating an overheated (or OVERSTIMULATED) economy. Yes, we still have The Fed Funds Target Rate (Upper Bound) at only 1% and The Fed Balance Sheet still near $9 trillion. So, Fed stimulypto is still in play.
Meanwhile, M2 Money Velocity is near its historic low and M2 Money YoY is still sizzling at 9.85% YoY.
Wheat prices have doubled under Biden, and you can see how wheat futures soared when Russia invaded Ukraine.
So, despite The Fed’s intent to tighten, The Federal Reserve and Fed government are still overstimulating the economy. But what happens when the stimulus is gone?
Fear the Talking Fed!
Confounded Interest - Anthony B. Sanders 
You must be logged in to post a comment.