Fed’s Limbo Rock: Powell Rejects Negative Rates As A Policy Tool As Taylor Rule Suggests A Negative Target Rate Of -13.52%

Fed Chair Powell rejects using negative rates as a policy tool.

Speaking of Powell’s proclamation that negative rates are not appropriate for the US, the Rudebusch (SF Fed) specification of the Taylor Rule says that the Fed Funds target rate should be -13.52%.

That represents a spread of 13.77% over the current Fed Funds Target rate of 0.25%, the largest disconnect since 2000.

Apparently, Powell has gone as low as he will go.

Economists at the University of Chicago estimate that more than two-thirds of the workers on unemployment insurance are making more in jobless benefits than they did at work.  Some are even hauling in two to three times as much.

Stimulypto! Atlanta Fed GDPNow For Q2 Plunges To -51.2 Percent As Stimulus Boosts Incomes But Not Spending

Fed Chair Powell Participates in Virtual Discussion
* Powell says Fed ‘days away’ from Main Street lending
* Negative not ‘appropriate’ for U.S., he says
* A second virus wave would undermine confidence
* Fed works in ‘strictly nonpolitical way’

The massive stimulus known as the CARE Act (and massive Fed stimulus) did not work as hoped. Consumer spending in April declined by 13.6% MoM.

Personal income rose 10.5% MoM as intended, but personal spending did not work as planned.

The Atlanta Fed GDPNow forecast for Q2 US GDP is now below 50% at -51.2%.

And speaking of Powell’s proclamation that negative rates are not appropriate for the US, the Rudebusch (SF Fed) specification of the Taylor Rule says that the Fed Funds target rate should be -13.52%.

US Existing Home Sales Plunge 17.8% In April, Worst Since 2010 (Lower-end Housing Hit The Worst)

According to the National Association of Realtors (NAR), US existing home sales in April plunged 17.8% from March, the largest drop since 2010.

Existing homes sales MoM is the white line, the Mortgage Bankers Association 30-year rate is the blue line.

Given how unemployment is differentially hurting lower-wage workers, it is not surprising that existing home sales in the $0-$100,000 range fell 33% in April.

While $500k-$750k home sales fell by “only” 12.2%.

Existing home sales inventory remains low while median home price of existing home sales rose 2% from March to April.

US Housing Starts Crash In April Thanks To COVID-19 Lockdown (Despite Declining Mortgage Rates)

US housing starts in April crashed to their lowest level since 2015 despite near-record low mortgage rates.

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1-unit starts declined 25.4% from March to April. But it is the 5+ unit starts (apartment) that suffered a 40.31% MoM decline.

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It appears that The Fed’s snake juice isn’t working.

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Taylor Rule Calls For Negative Rates Of -10%, Powell Says No

Fed Chair Jerome Powell is adamant that the US will not go where other Central Banks have gone before … to negative rates.

Even though the Mankiw specification of the Taylor Rule model says that The Fed Funds Target rate should be -10.01% based on the surge in unemployment (14.70%) and the lack of core inflation (1.70%). The Fed Funds Target rate remains at 0.25%.

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As unemployment surges (green line) with the lockdown, banks are expecting a tsunami of loan delinquencies and defaults. Hence, bank excess reserves have spiked as well (white line fever).

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Hopefully with states opening up again, this is simply temporary.

Instead of losing my blues, Powell is giving me the blues.

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Atlanta Fed GDPNow Q2 Forecast Plunges To -42.8%

US Governors: “It’s our party and we’ll snub who we want to.”

The shutdown continues as Q2 GDP “growth” is now forecast to be … -42.8%.

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This comes on the heels of the St Louis Fed’s forecast of -48.07 for Q2.

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The shutdowns are strange since COVID-019 is 7th on the list in terms of US deaths.

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The Los Angeles County medical superintendant.

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Gov’t Shutdown Causing Economic Sodom and Gomorrah (Retail Sales Down 16.4% MoM, St Louis Fed Q2 GDP Down To -48.7%), Stock Market Shrugs

April’s economic numbers reflect the damage caused by the shutdown of the economy thanks to the pandemic.

Retail sales advance dropped 16.4% from March, Industrial Production declined 11.2%

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The St Louis Fed Economic News Index is showing -48.07. Let that sink in for a second.

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Industrial production is down 11.2%, the largest decline in modern history.

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But the stock market just shrugged off the news.

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Yet we rely on government to save us … when the government shutdown at state levels is causing the economic Sodom and Gomorrah.

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US GDP Forecast To Decline -34.9% QoQ (S&P 500 Sez “Meh”)

Now ain’t this a kick in the head. The Covid-19 and the government shutdown response is leading to a crushing decline in US GDP for Q2 2020 of … -34.9% QoQ.

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The recent dismal wholesale trade report sent forecast Q2 GDP down -34.9% QoQ.

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The reaction to the declining US GDP? Meh.

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The good news? NMHC rent payment tracker finds 80.2% of apartment households paid rent as of May 6.

Limbo Rock! Fed Funds Futures Imply Negative Futures US Interest Rates

Fed’s Jerome Powell is watching how low interest rates will go.

Despite Chairman Powell’s claims that the US will never go negative, The Fed Funds Futures rates are signaling YES.

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Negative interests rates are appearing in US Treasury Strips (both coupon and principal strips).

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The short-end of the Treasury curve is flirting with negative yields while the TIPs curve is profoundly negative beyond 3 years.

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How low will interest rates go?

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S&P 500 Implied Correlation Remains Elevated (70.56) As Volatility Subsides

March was truly a horrific month for employment and markets. But S&P 500 volatility is subsiding while the components of the S&P 500 remain at increased levels of implied correlation.

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Not surprisingly, JPMChase and Blackrock are highly correlated.

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The CBOE S&P 500 Implied Correlation Index measures the expected average correlation of price returns of S&P 500 Index components, implied through SPX option prices and prices of single- stock options on the 50 largest components of SPX.

Fed Chair Powell has upwards of $11.6 million invested with BlackRock, the firm that will manage a $750 billion corporate bond bailout program for the Fed.

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