Like the poem, Casey At The Bat, the US economy struck out with a shockingly bad jobs report for September.
Oh, somewhere in this favored land the sun is shining bright; The band is playing somewhere, and somewhere hearts are light, And somewhere men are laughing, and somewhere children shout; But there is no joy in Mudville USA—mighty Casey Biden has struck out.
The U.S. economy added fewer jobs than forecast for a second straight month in September. Nonfarm payrolls increased by just 194,000 last month after an upwardly revised 366,000 gain in August, Labor Department figures showed Friday. 500K was expected.
The U-3 unemployment rate declined to 4.8% (meaning that the labor force shrank due to people dropping out of the labor force). In fact, 338,000 people dropped out of the labor force.
Average hourly earnings YoY rose to 4.6%. While that is an improvement, but it is lower than the inflation rate of 5.25% YoY and house price inflation of 20% YoY.
This miserable jobs report is a victory for Fed doves that don’t want to raise rates or slow down the balance sheet growth.
Where were the jobs created? Leisure and hospitality, as usual, leads in job gains.
It was great to be a “Master of the Universe” (Treasury and MBS trader) since October 1981 when the US 10Y Treasury yield peaked at 15.84% and mortgage rates peaked at 18.63%. Treasury and mortgage rates have generally fallen ever since. But what happens if Treasury and mortgage rates rise?
Bond investors are piling back into short positions, motivated not only by the specter of inflation but also by the risk that yields are approaching levels that will unleash a wave of new selling by convexity hedgers.
That level is around 1.60% in the U.S. 10-year Treasury yield, less than 10 basis points from its current mark, according to Brean Capital’s head of fixed income strategy, Scott Buchta. It’s the mid-point of “a key threshold” between 1.40% to 1.80%, an area “most critical from a convexity hedging point of view.”
Convexity hedging involves shedding U.S. interest-rate risk to protect the value of mortgage-backed securities as yields rise, slowing expected prepayment rates.
It’s already begun to pick up as yields stretched past the 1.40% level. Another wave is expected at around 1.6% — a point of “maximum negative convexity” in agency MBS, “where 25bp rallies and sell-offs should have an equal effect on convexity-related buying and selling,” Buchta says.
Signs that short positions are accumulating include Societe Generale’s “Trend Indicator.” Among its 10 newest trades are short positions in Japanese 10-year debt, German 5-year debt futures, U.K. 10-year gilts, U.K. short sterling and U.S. 2- and 5-year notes. Meanwhile, CFTC positioning data for U.S. Treasury futures show asset managers flipped to net short in 10-year note contracts in the process of dumping the equivalent of $23 million per basis point of cash Treasuries over the past week. Hedge-fund shorts also remain elevated in the long-end of the curve, as measured by net positions in Bond and Ultra Bond futures.
“Bond-bearish impulses remain in place,” says Citigroup Inc. strategist Bill O’Donnell in a note, citing tactical and medium-term set-ups. Traders should be aware of short-covering rallies in the meantime, however, he says.
“Potentially extreme short-term positioning and sentiment set-ups could easily allow for a counter-trend correction under the right conditions,” he said.
U.S. 10-year yields topped at 1.57% this week, the cheapest level since June, spurring the breakeven inflation rate for 10-year TIPS to 2.51%, the highest since May. Friday’s September jobs report could add fuel to this inflationary fire, rewarding bond shorts.
Here is a chart of the rising 10Y Treasury yield against The Fed’s 5Y forward breakeven rate.
Here is a Fannie Mae 3% coupon MBS. Note the rise in Modified Duration with an increase in interest rates.
Well, Janet, we are headed there anyway with GDP crashing to a measly 1.33%.
The fear of not approving a debt ceiling increase (laughable since Democrats can do it on their own) has caused there to be a “little dipper” in the US Treasury actives curve. Meaning that the 1-month T-bill yield is higher than the 1-year T-bill yield.
The national HOAM index stood at 92.2 in June, its lowest level since 2008.
National housing affordability fell 11.9 percent in June, the sharpest drop since 2014.
Home sale prices were up 23.8 percent over the past year.
On average, a median-income household would need to spend 32.6 percent of its annual earnings to own a median-priced home.
Although demand for housing remains strong, steadily declining affordability is beginning to affect buying decisions.
The latest reading of an Atlanta Fed measure and US housing trends show home ownership is becoming out of reach for many buyers and resistance to higher prices is building. More than 80 percent of US metro areas had a drop in affordability.
Where is housing most and least affordable?
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Of course, the one chart that The Fed never includes is home price growth and Fed monetary policy.
So, if The Fed is so concerned with median-income households being priced out of housing markets, why are the still sticking with their unorthodox monetary policies?
Since Joe Biden took office in January 2021, we have seen several actions from The White House. First, was the cancellation of the Keystone Pipeline (making the US more energy dependent on others). Second, Biden waived US sanctions on Russian pipeline to Germany. Big winner? Russia. Big loser? US consumers trying to heat their homes.
Here is a chart of natural gas prices since Biden took office in January.
Biden reminds me of Dwight Schrute from the TV show “The Office” as he loves to punish people. In this case, families trying to heat their home. And have his own currency, Schrute Bucks.
Perhaps The Federal Reserve should rename the US Dollar as “Biden Bucks.”
Can you say “All the king’s horses and all the king’s men ..” Or “All The Fed’s stimulus and all of Biden’s jobs bills ..”
Yes, the Atlanta Fed’s GDPNow Q3 tracker slumped to 2.3% despite the massive stimulus coming from The Federal Reserve and the Biden Administration. Down from 13.7% GDP growth as of 5/5/2021.
Here they go again! A cautionary tale of a government gone wild resulting in gut-wrenching inflation and 76.7% of the population living in extreme poverty.
Venezuelais launching a new version of the bolivar in the latest attempt to salvage a currency so beaten down by years of hyperinflation that residents have adopted the U.S. dollar.
The so-called digital bolivar, which is being introduced Friday, effectively removes six zeroes from the “sovereign bolivar,” which started circulating just three years ago.
New banknotes and coins will be put into use. Bank accounts will be adjusted to reflect the redenomination. And debit and credit card purchases will become easier: there were so many digits involved in some transactions that merchants were forced to split the transaction into multiple card swipes.
It’s another maneuver aimed at propping-up the national currency, even though President Nicolas Maduro’s government is permitting the use of the U.S. dollar as a way to cope with runaway inflation and shortages. The government has implemented two other currency changessince 2008, dropping eight zeroes. Hyperinflation, among the highest in the world, has slowed to 2,146% per year from more than 300,000% in 2019, according to Bloomberg’s Cafe Con Leche index.
Under Friday’s change, the largest former banknote, for 1 million bolivars — worth about $0.23 –will be replaced by a 1-bolivar coin. One dollar will fetch around 4.2 bolivars instead of 4.2 million bolivars at the official exchange rate.
“This is useless. Prices will continue to rise and, in a few months, the new bills will be useless,” said Leida Leon, a 37-year-old cleaning worker at a Caracas school.
And Venezuela’s official inflation rate for household goods is a blood-curdling 4,245% YoY.
On Thursday, demand for dollars rose as people feared a prolonged suspension of banking services as the redenomination is rolled out, said Luis Arturo Barcenas, senior economist at Caracas-based financial analysis firm Ecoanalitica.
Two-thirds of retail transactions involve the U.S. dollar, according to Ecoanalitica. Yet, many Venezuelans need bolivars for everyday transactions, like bus fares and to buy gas subsidized by the government. While the government is attempting to boost the use of digital payments, many regions are beset by regular electrical blackouts that affect communications.
Venezuelans have faced disastrous government policies and pressure from U.S. sanctions that have put the country on the brink of its eighth-straight year of economic contraction. More than 5 million people have fled the country, once one of Latin America’s wealthiest.
An estimated 76.6% of Venezuelans are living in extreme poverty, up from 67.7% last year, according to a university survey on living conditions known as Encovi.
As least Venezuela’s Treasury Department could produce a likeness of Simón Bolívar (aka, Simón José Antonio de la Santísima Trinidad Bolívar y Ponte Palacios y Blanco) that doesn’t look like a bad cartoon character.
Only a multi-millionaire like Powell would call it frustrating. Most US consumers would call it “devastating.”
Look at home prices, natural gas, gasoline and food prices since The Fed turned on the money pump to combat the Covid shutdown by government. Well, at least food price growth has slowed, but that is more that offset by natural gas (heating) costs skyrocketing.
Rent? That too has zoomed upwards, although Powell likely isn’t worried about his rent rising by 11.5%.
I wonder if Powell is frustrated by banks parking their money at the Fed’s reverse repo facility? Ninety-two participants on Thursday placed a total of $1.605 trillion at the Federal Reserve’s overnight reverse repurchase agreement facility, in which counterparties like money-market funds can place cash with the central bank. The previous record, set the day before, was $1.416 trillion. Thursday’s leap was the biggest one-day increase in usage since mid-June.
Biden blames “greed” for rising prices, Powell is “frustrated” by bottlenecks. But why pump trillions into the economy when you know there are bottlenecks? Or meatpacking firms are “greedy”?
A national mortgage lender has just introduced a 105 Loan-to-value (LTV) ratio loan and a lowering of FICO scores from 660 to 620.
Now, the loan still requires 97% LTV with downpayment assistance and gift funds permitted to boost CLTV to 105%.
With The Fed helping to raise home prices at a whopping 20% YoY, …
lenders are trying to find loan products for lower-income households so they can get in on the bubble! Hence, a 105% CLTV mortgage product with reduced credit requirements and increased Debt-to-income requirement rising from 43% to 45%. Also, borrowers can avoid the 3% downpayment requirement and put down only $500.
This is lending into the storm: softening of underwriting requirements as the house price bubble surges. Sound like 2005. This was not supposed to happen. After the housing bubble burst and the financial crisis, The Fed was supposed to encourage counter-cyclical lending (tighten credit standards as a housing bubble worsens). Instead, lenders are lowering credit standards, feeding the house price bubble.
If this was just one lender, I would have barely noticed. But this mortgage is being offered by most banks. And then sold to our GSEs: Fannie Mae and Freddie Mac.
Speaking of lending into a storm, as part of the raft of new legislation designed to spur first-time homeownership in America, a remarkable bill has joined the fray: its sponsors propose creating a new subsdizied 20-year-fixed-rate mortgage program through Ginnie Mae, HousingWire reports.
According to the bill, Ginnie Mae in tandem with the Department of the Treasury would subsidize the interest rate and origination fees associated with these 20-year mortgages, so that the monthly payment would be in line with a new 30-year FHA-insured mortgage. The move – which is an explicit subsidy of one share of the population by another – could, in theory, “allow qualified homebuyers to build equity-and wealth- at twice the rate of a conventional 30-year mortgage.” Instead, what it will do is lead to is an even bigger housing bubble.
Confounded Interest - Anthony B. Sanders 
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