Recession Alert! ISM Prices Paid Crashes To Covid Shutdown Levels As Fed Tightens

Warning! Evidence of a US recession is appearing. And with a recession, prices will likely fall due to lack of demand.

Why might inflation be falling? Take a gander at ISM Prices Paid. They just fell to the lowest level since the infamous Covid economic shutdowns of 2020.

M2 Money growth YoY is the lowest in years, but The Fed’s balance sheet remains elevated. But apparently the Covid-related sugar rush has ended.

104 Days Later! US 10Y-2Y Yield Curve Remains Inverted For 104 Staight Days, Mortgage Rate Falls As Fed Tightens (Ethereum Rises > 4%)

Yes, The US Treasury 10Y-2Y yield curve remains inverted, for the 104th straight day. And Bankrate’s 30-year mortgage rate has dropped -57 basis points since November 3, 2022.

This comes after a gruesome Pending Home Sales and mortgage applications reports today.

At least Ethereum is up over 4% today!

US Pending Home Sales Fall -36.7% YoY In October, MBA Purchase Applications Fall -31.22% YoY As Fed Tightens

The Federal Reserve continues to remove the monetary punch bowl despite the global yield curve inverting and The Fed fighting Bidenflation.

On the mortgage front, mortgage applications decreased 0.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending November 25, 2022. This week’s results include an adjustment for the observance of the Thanksgiving holiday.

The Refinance Index decreased 13 percent from the previous week and was 86 percent lower than the same week one year ago. The unadjusted Purchase Index decreased 31 percent compared with the previous week and was 41 percent lower than the same week one year ago.

On the housing front, US pending home sales fell for a fifth month in October as demand continued to sag under the weight of high mortgage rates.

The National Association of Realtors index of contract signings to purchase previously owned homes decreased 4.6% last month, according to data released Wednesday. And fell -36.7% YoY.

All together now. Look at pending home sales YoY and mortgage purchase applications SA compared with M2 Money YoY.

Is this part of The Great Reset??

US Home Price Growth Slows To 10.65% YoY In September As Fed Tightens

The Covid outbreak of early 2020 begat a massive surge in monetary stimulus which has dissipated. Notice that home price growth is dissipating as well.

Also causing problems for housing is NEGATIVE REAL WAGE GROWTH. While the US is suffering from inflation and decling real wage growth, trading partner Germany has even a worse REAL WAGE GROWTH problem.

Where? Florida is doing great!!

Do I detect a trend?

World Yield Curve Inverts For First Time Since At Least 2000 (US Yield Curve Has Been Inverted For 107 Straight Days) Drums Along The Potomac??

Do I hear Drums Along The Potomac or East River??

The hawkish drumbeat from central bankers is raising fears of a downturn, with global bonds joining US peers in signaling a recession, as a gauge measuring the worldwide yield curve inverted for the first time in at least two decades.

The US Treasury 10Y-2Y yield curve, on the other hand, has been inverted for 107 straight months.

And in Europe, 10-year sovereign yields are dropping like a paralyzed falcon.

The world and US yield curves are pointing to trouble. And drums along the Potomac (DC) and East River (NYC).

Fed Rollercoaster! Fed Will Slash Rates By 200 Basis Points by Mid-2023 Says Deutsche Bank

Fed Rollercoaster!

Deutsche Bank, my former employer, said that The Fed will slash rates by 200 basis points by mid-2024 after staying hawkish in the short term.

Deutsche Bank increased its view on the terminal rate and now sees it hitting 5.1% in May.

The Federal Reserve will remain hawkish in the short term but will cut benchmark rates sharply after that, according to a Monday note from Deutsche Bank.

The central bank has hiked rates by 375 basis points so far this year, with another half-point increase widely expected next month. Even more tightening will come, with analysts at Deutsche Bank increasing their view on the terminal rate, which they now see hitting 5.1% in May.

“Risks remain skewed to the upside, and we caution that the transition to pausing and eventual cuts may not be entirely linear,” the note said. “If elevated inflation and labor market imbalances persist, or financial conditions fail to tighten, a higher terminal rate could be needed.”

Meanwhile, the economy will slow down amid the aggressive tightening, and Deutsche Bank sees an 80% probability of a recession in the next year.

Analysts anticipate a moderate recession beginning mid-2023, with real GDP falling about 1.25 percentage
points over three quarters and the unemployment rate reaching a peak of 5.5%.

“With a sharp rise in the unemployment rate and inflation showing clearer signs of progress, the Fed should cut rates by 200bps by mid-2024 when it approaches a neutral level around 3%,” analysts said. “QT should cease when the Fed cuts rates, to ensure both tools are not working in competing directions. Balance sheet drawdown could be modified or halted earlier if reserves continue to fall faster than expected.”

The first rate cut will be 50 basis points in December 2023, followed by 150 basis points of cuts into 2024, the note said.

The last Fed Dots Plot shows the next leg of The Fed Rollercoaster.

In the short term, Fed Funds Futures are pointing at another 106 basis point increase by June 2023.

Yes, its The Fed Rollercoaster!

As The Fed Tightens To Fight Inflation, The US Banking System Growth Grinds To A Halt, Bank Deposits Decline -0.6% YoY (SBF’s Lemonade Stand Isn’t Helping)

The US has an inflation problem. Both headline and core inflation YoY remain high compared to the previous 40 years. And The Federal Reserve is resolute in trying to curb inflation to 2%.

But as The Fed counterattacks inflation by raising their target rate, we are seeing a problem forming at the nation’s commercial banks. The growth in deposits YoY is now -0.6%. Commercial bank holdings of Treasuries and Agency MBS are declining as well. Agency MBS holdings are down -4.6% YoY and Treasuries and Agency holdings are down 0.0%.

How about M2 Money growth and M2 velocity? M2 Money growth has fallen to 1.3% YoY while M2 velocity has not been the same since the Covid sugar splash by The Fed and Federal government.

While inflation is creating havor for commercial bank deposit growth, it is interesting to follow the adventures of a spoiled child from MIT and his multi-billion dollar lemonade stand with all the controls of a child.

Once again, how did regulators get this SOOOOO wrong? And why didn’t investment advisors look at the balance sheet of FTX and Alameda Research. Yes, the media loves to report on FTX orgies, but the FTX fiasco points to something far more sinister. Were Sam Bankman-Fried and his paramore Caroline Ellison fronting this operation on behalf of some other parties?

Here is the FTX bankruptcy declaration in the State of Delaware. It appears like a massive case of fraud to me. And perhaps worse. Here is a nice summary from Zerohedge.com.

I recall one of Woody Allen’s best lines. When asked what an investment manager does, the response was “they manage your money until nothing is left.” Sounds like SBF has a great future on Wall Street! And Caroline Ellison should have known better than to post things like “Here are what I think about some things: controlling most major world governments.”

Rent Crisis! 41% in U.S. Couldn’t Pay Rent November (Bank MBS Holdings Collapse With Fed Tightening)

Interesting story on Alignable.

Due to high inflation, reduced consumer spending, higher rents and other economic pressures, U.S.-based small business owners’ rent problems just escalated to new heights nationally this month, based on Alignable’s November Rent Poll of 6,326 small business owners taken from 11/19/22 to 11/22/22.

Unfortunately, 41% of U.S.-based small business owners report that they could not pay their rent in full and on time in November, a new record for 2022. Making matters worse, this occurred during a quarter when more money should be coming in and rent delinquency rates should be decreasing. But so far this quarter, the opposite has been true.

Last month, rent delinquency rates increased seven percentage points from 30% in September to 37% in October. And now, in November, that rate is another four percentage points higher, reaching a new high across a variety of industries.

All told in Q4 so far, the rent delinquency rate continues to increase at a significant pace, up 11 percentage points from where it was just two months ago.

Well, this is not good.

And on the mortgage front, not all is quiet.

Commercial bank holding of Agency mortgage-backed securities (MBS) has collapsed with Fed tightening and mortgage rate increases.

Ain’t that a lot of bad news for real estate and the mortgage market.

Bad Sign! What Interest Rates Are Telling Us (US 10Y-2Y Curve Inverts To -80 Basis Points, Euro 10Y Yields Falling, Fed Funds Rate Priced At 2.301% By January 2024)

What interest rates are telling us is a bad sign.

With an impending railroad strike that can torpedo the US economy (but if that is possible, why is the Biden Clan vacationing in Nantucket for Thanksgiving weekend when Joe should be talking with railroads and the unions to not let this happen?), let’s see what interest rates are telling us.

First, the US Treasury 10Y-2Y yield curve continues to descrend into the abyss (now at -80 basis points).

Second, the latest Fed Dot Plot (from September, new one will be issued during December) show that The Fed thinks that their target rate, while rising in 2023, will likely start falling again in 2024.

Third, since it is Thanksgiving Day, US bond markets are closed. But in Europe, the 10-year sovereign yields are falling, a sign that the ECB is reversing course by increasing monetary stimulus and/or a European are slow down.

Fourth, US mortgage rates have cooled since peaking (locally) at 7.35% on November 3, 2022 and now sit at 6.81%, a decline of 54 basis points. A clear sign of cooling.

Fifth, how about Fed Funds Futures data? It is pointing to a peak Fed Funds Target rate of 4.593% at the June FOMC meeting. Then a decline in rates to 2.301% by January 2024.

Now, go and enjoy your Thanksgiving dinner with friends and family (up 20% since last year), courtesy of Jerome Powell, Joe Biden, Nancy Pelosi and Chuck Schumer.

US New Home Sales Surprise To The Upside, Median Price Up 8.2% MoM (It’s Now Clear That QE Was a Colossal Policy Mistake)

The good news today is new home sales surprised to the upside and grew 7.5% MoM in October. The bad news? Some are now realizing that The Fed’s QE program was a colossal policy mistake because there’s no convincing evidence that central banks’ purchases of trillions of dollars of bonds and other financial assets helped any economy. But it did help create massive asset bubbles!

But back to the surprising new home sales report where economists forecast a -5.5% MoM decline but +7.5% MoM materialized. Notice that The Fed’s balance sheet has barely come down after it exploded upwards with Covid. So, like with the velociraptors in Jurrasic Park, The Fed Balance Sheet is still out if force.

Not surprisingly, the median price of new home sales are up 8.2% MoM (since September).

The Fed’s minutes for their last FOMC meeting will be out at 2pm EST. Let’s see if they discuss WHY they haven’t reduced their balance sheet by much which is contributing to asset bubbles.

Here is The Fed’s Dots plot from the September meeting. I get the impression that The Fed thinks that their target rate will be coming down in 2024 and after.