Reversal Of Fortune: Yield Curve Drooping As 2022 Forecast To Be Slower Market For Housing

No, not the Klaus von Bulow type of “reversal of fortune” (when he killed his wife). I am talking about a reversal in fortune for America.

Let’s look at the 10Y-2Y Treasury curve. It typically falls below 0 basis points before every recession. Except the mini-COVID recession of 2020. But notice that the Treasury curve did not recover from the COVID recession as it typically did. More along the lines of 1984-1985.

Speaking of Reversal of Fortune, everything changed once Fed Chair Powell started to speak after Tuesday’s FOMC meeting.

Hmm. Midterm elections, possible Russian invasion of The Ukraine, further problems in China, etc. While The Fed Funds Future data implies that The Fed may raise their target rate 5 times over the coming year, we’ll see.

I happen to agree with Fannie Mae’s Doug Duncan who says that he is less bullish about the housing market in 2022.

If 2021 was a great year for the US housing market, 2022 faces “a new normal” marked by a slowing down of home price rises, job layoffs in the mortgage industry, and concerns over rising inflation and interest rate hikes, according to Douglas Duncan (pictured), Fannie Mae’s senior vice president and chief economist.

Duncan said “a shift” was underway in the market and the wider economy, which would result in far more moderate home price appreciation, expected to be between 7% and 7.5% this year due to the ending of fiscal and monetary stimulus.

“One of the elements of the shift is that you’re going to see house prices up, but not nearly as far as they were in the last two years because that was driven hugely by the fiscal and monetary stimulus (now) being removed,” he told MPA.

Ominously, he added that low interest rates “may never be seen again”. Or at least until Biden appoints more doves to The Federal Reserve Board of Governors.

The doves at The FOMC.

Bidenomics: Buying Conditions For Vehicles Falls To 46 As Vehicle Prices Soar (WTI Crude UP 87% Over Past Year, Buying Conditions For Housing Falls To 77)

Here is a lesson in Bidenomics. “Going Green” sounds great to some (like Al Gore, Leonardo DiCaprio and Greta Thunberg), but there are costs to not growing America’s energy supply.

Rising energy costs have helped create the rise in consumer prices and inflation. Not to mention chip shortages for car and trucks. The University of Michigan conditions for vehicles plummeted to 46 (100 baseline) as used vehicles prices sky rocket.

Under Biden’s reign of error, West Texas Crude futures prices have risen 87% (regular gas prices are up 49% even with Biden’s releasing two days of supply from the Strategic Petroleum Reserve.

On the housing front, the University of Michigan buying conditions for houses fell to 72 (baseline of 100) as home prices are roaring at a 18.81% YoY clip.

To paraphrase the comic strip “Gasoline Alley,” “Unca’ Joe, what have your done t’ US?”

Too Much Money! U.S. Consumer Spending Drops, Price Index Up Most Since 1982 (REAL Personal Spending Fell 1% In December)

This is a case of “Too much money” in the economy, courtesy of The Federal Reserve.

(Bloomberg) — U.S. inflation-adjusted consumer spending fell last month by the most since February, suggesting that Americans tempered their outlays amid the latest Covid-19 wave and the fastest inflation in nearly 40 years.

Purchases of goods and services, adjusted for changes in prices, decreased 1% from November, the Commerce Department said Friday.

The personal consumption expenditures price gauge, which the Federal Reserve uses for its inflation target, rose 0.4% from a month earlier and 5.8% from December 2020, the most since 1982. Unadjusted for inflation, spending fell 0.6%, while incomes rose 0.3%.

Yes, the PCE Deflator YoY rose to 5.8% as M2 Money Stock is growing at a 13.1% YoY clip.

REAL personal spending declined 1% in December as prices rose in part thanks to the 13.1% growth in M2 Money stock YoY.

Too much money! Time to slow down, Jay Powell! Stop sucking the life out people with inflation.

US Pending Home Sales Drop 6.64% YoY In December As Dow Rises 1.6% As Fed Won’t Remove The Stimulypto (Gold And Bitcoin Down)

Pending home sales in the USA tanked 6.64% YoY. Yes, it was for December, but down 6.64% YoY means that pending home sales are lower than last December.

And the stock market was up across the board as Powell refused to take his foot off the monetary gas pedal.

Gold is down along with Bitcoin for you ALT investment types.

US Q4 GDP Price Soars To 6.9% QoQ As Commodity Prices Skyrocket (10Y-2Y Treasury Curve Tanks)

Yes, The Federal Reserve could have raised their target rate at their January meeting, but chose not to raise rates. Instead, Chairman Powell said that rate increases are a comin’!

I hope Powell wasn’t hoping for a slowdown in inflation, because today’s Q4 GDP report showed a surge in GDP to 6.9% QoQ. But with that GDP surge we also got a surge in prices paid by consumers to 6.9% as well. Thanks to the continuing massive Federal stimulus being poured into markets.

Despite the positive news on Q4 GDP, we are still seeing 7% inflation and a diving 10Y-2Y yield curve.

Along with that surprising GDP report, we are seeing the Bloomberg Commodity Index rising like a bat out of hell (RIP, Meatloaf).

Powell apparently found paradise by the dashboard light. So, why rock the boat? Oh yes. INFLATION.

Should Powell be renamed Meatloaf?

Fed Stands Still Despite 7% Inflation And 3.9% Unemployment (Taylor Rule Suggests Almost 18% For Target Rate, Fed Stays At 0.25%)

Despite inflation growing at 7% (versus The Fed’s target rate of 2%) and U-3 unemployment being only 3.9%, one would have thought that Jay and The Gang would have started increasing rates at the January meeting.

But nooooo. The Fed actually sat on their hands and did nothing.

What did The Fed say?

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. In support of these goals, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent. With inflation well above 2 percent and a strong labor market, the Committee expects it will soon be appropriate to raise the target range for the federal funds rate. The Committee decided to continue to reduce the monthly pace of its net asset purchases, bringing them to an end in early March. Beginning in February, the Committee will increase its holdings of Treasury securities by at least $20 billion per month and of agency mortgage‑backed securities by at least $10 billion per month.“

According to The Fed Funds Futures data, the market is anticipating 1 rate increase at the March FOMC meeting. And another at the June FOMC meeting.

The Taylor Rule (not used by Jay and The Gang), suggests that The Fed should have their target rate at almost 18%! NOT 0.25%.

The Fed stands still.

US New Home Sales Crash -14% YoY In December As Median Price Slows To +3.4% YoY (Mortgage Applications Decline As Mortgage Rates Increase)

US new home sales spiked in December by 11.9% from November, but were down 14% year-over-year.

But the median price of new home sales (YoY) declined to 3.4%.

The Midwest saw a surge in new home sales (+56%).

The MBA’s mortgage applications index shows declining purchase applications (-1.83%) and declining refinancing applications (-12.60%) as mortgage rates increased from 3.64% to 3.72% for the week of 01/21.

Now, mortgage purchase applications rose for the week of 01/21 if we used non-seasonally adjusted data.

US Home Price Growth “Slows” To 18.81% YoY With Phoenix AZ At 32.2% (Simply Unaffordable!)

Happenings two months ago. The Case-Shiller home price index is out for … November 2021.

The Case-Shiller National home price index “slowed” to 18.81% YoY in November as The Fed continues its monetary stimulypto. Notice that The Fed is easing even when there is limited inventory available. Result? Hideous home price inflation.

Which metro area is growing the fastest, making housing even more unaffordable for renters? Phoenix AZ is growing at a 32.2% YoY clip while Washington DC is the slowest growing metro area at 11.1% YoY. The second faster growing metro area in Tampa FLA.

Phoenix AZ is growing at the fastest rate in the nation as The Fed still has its monetary stimulus at FULL SPEED AHEAD.

Let’s see if Fed Chair Powell decides to raise rates and let the Fed’s balance sheet run-off.

The Market Has Never Plunged 10% This Fast To Start A Year (But We’ve Had Biden As President For A Year!)

The stock market has never started a year falling as quickly as it is now.

The S&P 500 has dropped 11% — heading into correction territory — in the first 16 trading days of 2022 in its worst-ever start to a year, according to Bloomberg data that goes back over nine decades.

The downturn comes as traders brace for the Federal Reserve to tighten monetary policy and a surge in U.S. Treasury yields weighs on the outlook for stocks. A host of technical signals also suggest that more volatility may be coming up ahead.

S&P 500's 11% drop in first 16 days is worst of all years

“The Fed pulled the punchbowl, liquidity has evaporated, and the S&P and NDX broke below their 200dma for the first time since the Covid outbreak,” said Rich Ross, technical strategist at Evercore ISI.

A bear market down to the 3,800 level is likely for the S&P 500, Ross said, given “the dramatic erosion of the technical backdrop, in conjunction with the highest inflation, tightest policy, and most uncertain political and geopolitical condition in years” — not to mention its historic rally since 2020.

The Shiller CAPE ratio is extremely high …. not surprising how much air The Fed pumped into the market tires.

But look at Europe too!

Bubble Burst? NASDAQ, WTI Crude Futures And Bitcoin All DOWN On Opening (Europe Stoxx Down 4%)

Is this the bubble burst many were expecting once The Federal Reserve starting raising rates?

Well, if today’s market opening is an indication, the answer is yes. The NASDAQ Composite Index is down 1.36% and West Texas Intermediate Crude Oil futures prices are down 2%.

The S&P 500 index is down over 10% since January 3rd.

Drawdown is taking place.

But if you think the US equities are deflating, look at European equities. The Euro Stoxx 50 index is down 4.04%.

Is this a Don Ho “Tiny Bubble” burst? Or a slow deflation of asset prices as The Fed removes its stimulus?