The Amazing, Disappearing Jumbo/Conforming Mortgage Spread Since Covid And Fed Intervention (Jumbo Spread At 1.67 Basis Points After Covid Fed Reaction)

Years ago, Brent Ambrose, Michael Lacour-Little and I wrote a paper on the US 30-year jumbo mortgage spread over conforming 30-year mortgage rates entitled “The effect of conforming loan status on mortgage yield spreads: a loan level analysis.” But that paper was written before Covid and the dramatic distortion caused in mortgage markets by The Federal Reserve’s massive increase in money.

Here is the spread between Bankrate’s 30-year mortgage rate and their 30-year JUMBO mortgage. Notice that between 2007 and early 2020, the median “jumbo spread” was 49 basis points. But after Covid and The Fed’s counterattack (by printing M2 Money), the median Jumbo spread from 4/1/2020 to today is only 1 basis point.

In the following chart, you can see the jumbo mortgage rate (yellow) against the conforming mortgage rate (white) and there is almost always a spread between the two UNTIL 2020 where we saw M2 Money growth (green line) spike and The Fed increased their purchases of Agency MBS (purple line). Since Covid and The Fed’s massive reaction, the jumbo rate and conforming rate are virtually the same. In fact, the latest jumbo spread is 1 basis point over the conforming rate.

Why is this happening? One explanation is that demand from the investors who ultimately buy jumbo mortgages. The strong demand by investors appears to have driven down the yields on jumbos relative to conventional loans, especially as the use and accessibility to jumbos has grown.

A second explanation is that Loan Level Price Adjustments that were added to conforming loans post-financial crisis never went away (until just recently on selected loans). This makes jumbos and conforming loans very close in yield.

So, when will the mortgage market return to normal and jumbo mortgages go back to the normal 50 basis point spread? We may see normalization if The Fed speeds up its withdrawal from markets. Also, getting rid of Loan Level Price Adjustments would help normalized the mortgage market.

But things are getting stressed in jumboland (California) where home prices are crashing in 5 of the top 8 metro areas.

Harry Houdini couldn’t have created a more tantalizing mystery … and one I wish would go away.

Not Always Sunny! Philadelphia Fed Admits US Jobs “Overstated” By At Least 1.1 Million From March To June 2022 (Will Biden Retract “Greatest Economy In History Statement?)

Its NOT always sunny in Philadelphia. Here is a video of the Philly Fed economists explaining massively overstated job numbers to Fed Chair Jerome Powell.

The Federal Reserve Bank of Philadelphia estimates that the employment data was vastly overstated in 2022. 10k jobs added instead of 1.1 million reported from March to June of 2022.

Here is a chart (courtesy of Zero Hedge) showing reported payrolls and REVISED payrolls. Somehow, I don’t think Jean Pierre (Biden’s spokesperson, not the French chef) will be touting “Unlike Trump, our administration barely added any jobs in March, April, May and June 2022.

How will this revelation influence the Fed’s open market committee (FOMC) going forward knowing that the Biden Administrations job creation claims are wildly overstated?

Perhaps it doesn’t matter since Bernanke, Yellen and Powell don’t follow any rules (like the Taylor Rule), but generally with job creation almost nonexistant in March through June of 2022, The Fed should be cutting rates like mad. But wait! Can they with significant inflation?

The good news is that inflation is coming off its peak, but will take a while to get to The Fed’s 2% target. Hence The Fed may raise their target rate since they cannot achieve it will energy price up substantially since Biden became President.

California Screamin’! 2022 Home Prices Crashed Mostly In California As Fed Withdraws Monetary Stimulus (Austin TX And Seattle WA Also Crashed Hard)

California Screamin’!

6 of the top 8 metro areas with the largest home price crash in 2022 were in California, according to Redfin.

Sadly, I lived in three of these metro areas (Austin TX, San Jose CA and Phoenix AZ), although I wouldn’t confuse correlation with causation.

The trend for home price growth (blue line) is definitely on the downturn as The Fed removes its ample stimulus (green line).

Here is California governor Gavin (Nancy Pelosi’s nephew) Newsome screaming about crashing California home prices.

The Empire Strikes Out! NY Manufacturing Outlook Shrivels To -11.2% And Its NOT Always Sunny In Philadelphia Fed Outlook At -13.8% (S&P 500 Index Drops -1.87%, EuroStox Drops -3.42%)

The numbers coming out today are not good. November numbers were 1) US Industrial Production was down -0.2% MoM, 2) manufacturing production is down -0.6%, 3) retail sales advanced down -0.6% (most in 11 months) and …

The Empire State Manufacturing outlook was down -11.2% and the Philadelphia Fed (or Phed) business outlook was down -13.8% in November.

And with all this bad news, global equity markets are dropping like a paralyzed falcon.

But at least Biden traded a dangerous international arms dealer for WBNA star Brittney Griner. Possilby the worst trade in history after the Chicago Cubs traded future Hall of Famer Lou Brock for sore-arm pitcher Ernie Broglio. Griner is Ernie Broglio.

Fed Surprises No One With 50 Basis Point Rate Hike, Highest Since November 2007 (New Fed Dots Plot Looks Like Lillehammer Ski Jump)

As expected, The Federal Reserve raised their target rate by 50 basis points to 4.50%, the highest Fed target rate since November 2007.

The only thing interesting that happened was Powell’s hawkish statements about The Fed wanting to keep tightening to fight inflation caused under “Inflation Joe” Biden.

But the NEW Fed Dots plot looks like an Olympic Ski jump with expectations of DECLINING Fed target rates.

My take on the steeply downward sloping Dot Plot is a tacit acknowledgement that a recession is headed our way in 2023.

Here is the Lillehammer Olympic ski jump that resembles today’s Fed Dots Plot.

Gone In 60 Seconds? Treasuries And Stock Futures Trading Spike 60 Seconds BEFORE CPI Data Release (Who Tipped The Wink?)

Apparently, despite the denials from the Biden Administration, someone at Bureau of Labor Statistics or someone in Congress or the Federal Reserve or the Biden Admininstration itself likely tipped the wink on the soft CPI report on Tuesday.

Treasuries were well on the front-foot in the lead up to the below-estimate November CPO print, as a surge of buying took place seconds before the official 8:30 am New York release time. Over a 60 second period before the data, 13,518 March 10-year futures traded as the contract moved from 114-04+ up to 114-22. Gains were then extended up to 115-11 session highs once the data was released.

On the equity side, stock futures suddenly spiked more than 1%. Trading in Treasury futures surged, pushing benchmark yields lower by about 4 basis points. Those are major moves in such a short period of time — bigger than full-session swings on some days. And they should get scrutinized by regulators, long-time market observers say, even if a leak is only one of several possible explanations for why traders suddenly started buying right before the report was published.

Remember that current Treasury Secretary Janet Yellen was accused of leaking information to a NY hedge fund ahead of the Fed Open Market Committee meeting? And then we have the Wolf of Wall Street.

I wonder if the REAL Wolf of Wall Street did this?

MBA Mortgage Applications Rise 3.2% From Previous Week, But Purchase Applications Down 38% From Same Week Last Year As Fed Tightens

Mortgage applications increased 3.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending December 9, 2022.

The Refinance Index increased 3 percent from the previous week and was 85 percent lower than the same week one year ago. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 38 percent lower than the same week one year ago.

You can see the impact of seasonalilty on mortgage purchase applications (white line). They peaked in the week of May 6, 2022 and have been generally declining since. While refi applications (orange line) increased over the past week, they have been pummelled by The Fed tightening.

It is quiet today as investors wait for The Fed to announce a 50 basis point rate increase. Fed Funds Futures point to almost another 100 basis point hike by May 5, 2023, then a slow decline in The Fed Funds target rate (upper bound).

And here is Sam Bankman-Fried and his high-powered legal defense.

The Fed Needs To Take A Look At Itself: WSJ Editorial By Levy And Plosser (Taylor Rule Implied Target Rate Of 12.07%, Current Rate At 4%)

Paul Revere and the Raiders said it best about The Federal Reserve. Take a look at yourself.

Mickey Levy of Berenberg Capital and Charles Plosser wrote a great op-ed in the Wall Street Journal entitled “The Federal Reserve Needs a Hard Look in the Mirror.” Here is a Fed Reserve St Louis paper by Levy and Plosser entitled “The Murky Future of Monetary Policy.”

Abstract

In August 2020, the Federal Reserve unveiled its new strategic framework. One major objective of the Fed was to address its concerns over the potential consequences for the conduct of monetary policy when the policy rate was constrained by its effective lower bound. This article concludes that there are significant flaws in the new strategy and that it encourages a more discretionary approach to monetary policy and increases the risks of policy errors. The new framework is an overly complex and asymmetric flexible average inflation targeting scheme that introduces a significant inflationary bias into policy and expands the scope for discretion by broadening the Fed’s employment mandate to “maximum inclusive employment.” In a postscript, the article describes how quickly the flaws have been revealed and urges a reset toward a more systematic and coherent strategy that is transparent and broadly understood by the public.

I attended a speech by macoeconomist Gershon Mandelker at the National Association of Realtors where he called on the Federal Reserve to follow some observable rule rather than the complex (or seat of the pants) approach to monetary policy.

With today’s inflation report (core inflation YoY of 6%) results in a Taylor Rule estimate of The Fed Funds Target Rate of 12.07%. We are struggling to reach 5% as a “terminal” Fed target rate (currently at 4% and likely to rise 50 basis points at tomorrow’s Fed meeting).

The matrix of CPI and unemployment under the Taylor Rule shows that The Fed’s target rate isn’t at even 5% for any relevant combination of core CPI (inflation) and unemployment rate.

Note that since the financial crisis the Fed’s target rate (white line) has been consistely below the Taylor Rule implied rate (blue dashed line).

Here is Treasury Secretary and former Fed Chair Janet Yellen laughing at those who want some kind of observable Fed rule.

Pre-Fed Status: 100% Probability Of US Recession In 2023, Mortgage Rate Steady (US Yield Curve Now Inverted For 116 Straight Days, Implied Rate Hike Of +50 BPS To 4.50%)

Fun week ahead. US inflation numbers are out on Tuesday (forecast? CPI YoY = 7.3%, Core CPI YoY = 6.1%) and The Federal Reserve’s Open Market Committee (FOMC) rate decision is on Wendesday.

So, where are we sitting on Monday?

First, the US Treasury 10Y-2Y yield curve has been inverted (a precursor to recession) for 116 straight days). Second, the likelihood of recession in 2023 is 100%. Third, with the forecast of core inflation at a still numbing 6.1%, The Fed seems dead set on raising their target rate by 50 basis points to 4.50% on Wednesday.

dddd

So, as The Fed debates recession versus fighting inflation (partly caused by The Fed), we have Kevin Malone from The Office debating Angela versus double-fudge brownies:

“I hear Angela’s party will have double fudge brownies. But it will also have Angela. Double fudge.. Angela.. double fudge….. Angela. Hmm..” I am betting on risking a recession by raising the Fed’s target rate by 50 basis points.

Blackrock’s Dire Forecast For 2023 And FAANG’s Loss Of >$3 Trillion In 2023 (M2 Money Velocity Near Lowest In History, US Yield Curve STILL Inverted)

Blackrock has a grim presentation on investing in 2023. Particularly with regards to The Federal Reserve and their ability to stave-off a recession (comin’ at you!).

Central bankers won’t ride to the rescue when growth slows in this new regime, contrary to what investors have come to expect. They are deliberately causing recessions by overtightening policy to try to rein in inflation. That makes recession foretold. We see central banks eventually backing off from rate hikes as the economic damage becomes reality. We expect inflation to cool but stay persistently higher than central bank targets of 2%.

For some investors, this year’s rout in high-flying technology stocks is more than a bear market: It’s the end of an era for a handful of giant companies such as Facebook parent Meta Platforms Inc. and Amazon.com Inc.

Those companies — known along with Apple Inc., Netflix Inc. and Google parent Alphabet Inc. as the FAANGs — led the move to a digital world and helped power a 13-year bull run. And FAANG drawdown have reached over $3 trillion.

FAANGs (Meta, Amazon, Apple, Alphabet, Netflix) are getting clobbered in 2022.

Typically, when The Fed prints too much money, such as 10% or higher (red line), inflation follows. Particularly when The Fed prints at 25% YoY in Q4 2020, it was followed by the highest inflation rate in 40 years. But if M2 Money continues to slow, inflation will likely slow, but not to The Fed’s target of 2%.

Despite what Minneapolis Fed’s Neal Kashkari said about The Fed having infinite printing resourses, The Fed is going to fight inflation THAT THEY HELPED CAUSE. Biden’s energy policies (did you see that Elon Musk has a car that uses plentiful hydrogen?), and excessive Federal spending by Biden/Pelosi/Schumer, are culprits in creating the supply chain problems facing America. BUT after the 25% surge in M2 Money in 2020 and 2021, we saw M2 Money VELOCITY crash and burn to its lowest level in history. Which means the “bang for the buck” for printing more money is negligible.

Of course, big tech firms got caught influencing the 2020 Presidential election (see Musk’s release of Twitter files) and engaged in restriction of the 1st Amendment (Freedom of Speech). How much will that impact FAANG stocks going foward?

And yes, the US Treasury yield curve is inverted pointing to a recession in 2023.