Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
The US Q1 GDP report is due out tomorrow morning. The forecast is for -1.3% decline in GDP.
The Atlanta Fed GDPNow real-time GDP tracker is for 1.806% for Q2. If this holds, then recession fears will diminish.
Even though the US may avoid consecutive negative GDP quarters, M2 Money Velocity (GDP/M2 Money) got crushed by The Fed’s reaction to Covid back in 2020.
Talk about a bad return on “the people’s money”.
All I can say is “Wow.” Tobias Peter and Ed Pinto of the American Enterprise Institute (AEI) released their April housing report and it was a doozy. The AEI’s home price appreciation index came in at a blood curdling 17.3% YoY.
The reason why home prices are still raging at 17.3% YoY? The Fed’s monetary stimulypto is STILL in place! The Fed’s balance sheet (green line) is still staggering, and The Fed Funds target rate (white line) is a measly 1%.
Atlanta Fed President Raphael Bostic is talking about a pause in Fed tightening. Which they haven’t paused yet.
Fed Chair Jerome Powell is really “slowhand,” not Eric Clapton. Bostic is now a member of The Fed’s “Slowhand” strategy.
I have never seen two Federal entities make such a mess in my life. The Federal Reserve and The Federal government.
The good news? The 10-year Treasury yield is down -12.9 BPS this morning generally resulting in lower 30-year mortgage rates. Of course, the reason why the 10-yield is falling is generally bad news.
The bad news? US New Home Sales fell -16.6% MoM in April as mortgage rates skyrocketed.
Since the installation of Joe Biden as President, new home sales have plunged -31.2%, mortgage rates are up 88.9%, and framing lumber prices are up 29.2%.
Biden is out there bragging about rising energy prices which he views as a necessity to force the conversion of America to electric cars and trucks. Biden is the first President in history to gloat over the suffering of American households.
Under Biden, regular gasoline prices are up 92%, diesel prices are up 111%, and CRB Foodstuffs are up 61%.
Say, framing lumber for housing is cheaper than food. Maybe Biden will suggest Americans transform to being beavers and gnaw on wood.
As The Federal Reserve tries to fight inflation (it can’t thanks to Federal energy policies and bottlenecks), it is causing a disconnect between mortgage current coupon rate and the MBS index coupon. The disconnect is so bad that it is back to 1985 levels.
The Fed can certainly try to cool inflation, but Biden is intent on raising energy prices (leading to food price increases, and everything else) to shift us to electric cars. So, Biden is unlikely to back off.
So, The Fed is left trying to fight a war against inflation that only Biden can fight.
Meanwhile, the US mortgage market is getting pulverized
Mortgage rates have increased dramatically under “Middle Class Joe” as The Federal Reserve attempts to choke-off inflation caused by … The Fed coupled with Biden’s energy policies (hope you are enjoying those high gasoline and diesel prices!) and the Federal government’s staggering spending spree under Pelosi, Schumer and McConnell.
Thus far, The Federal Reserve has leveled-out out their Treasury Note and Bond purchases, increased their Agency Mortgage-backed Securities (AgMBS) holdings, but strangely have reduced their holding of Treasury Inflation-Protected Securities (TIPS) in the face of rising inflation.
And while The Fed Funds Target rate is a lowly 1%, it is projected to rise to 2.890% by the February 1, 2023 FOMC meeting. That should send mortgage rates up.
As if mortgage rates haven’t skyrocketed already, thanks to The Fed’s jawboning about having to raise rates and extinguish inflation.
With sizzling mortgage rates (cooling a bit as the global economy slows), home mortgage payments have risen +43.4% YoY.
Now we have President Biden trying to scare us about the Monkey Pox, yet leaves the southern border wide open. One would think that Biden would shut the borders (as if the surge in Fentanyl, sex trafficking and other diseases aren’t reason enough. But I do predict another massive spending bill from Biden/Congress to combat Monkey Pox and the resurgence of Covid variants.
Meanwhile The Fed jawbones fighting inflation with monetary tightening in the future, even if they jawboning causes mortgage rates to soar and mortgage payments to spiral.
Kansas City Fed President Esther George said The Fed isn’t focused on impact of rates on stocks (or pension funds, apparently).
The inflation that is crushing Americans is due to energy and food price increases. That is, the non-core inflation. Under Biden, food is up 63%, gasoline is up 92% and diesel prices are up 112%. But The Fed doesn’t consider food and energy prices, per se.
If we look at the Taylor Rule considering fighting inflation including food and energy, The Fed would have to raise their target rate to … 21.38%.
Now, The Fed can clearly cool-off the housing market by raising rates. In fact, my fear is that they go too far and crash the housing market. The Fed will NEVER get to 20% again like we last saw under Volcker in 1981. 20% rates certainly cooled home prices back then and Fed rate hikes helped crash the housing market in 2008.
So, when The Fed says they want to be the inflation-fightin’ Fed, we must be aware what The Fed can and cannot do. They can’t tame the inflation beast in the form of food and energy prices (unless they crash the economy), but they can crush home prices.
April’s inflation numbers are out and, at first glance, inflation seems to be cooling from 8.5% YoY in March to 8.3% YoY.
But the headline inflation numbers do not accurately reflect the pain and suffering of American households. Food is up 9.4% YoY and gasoline is up 43.6% YoY.
The strange way the BLS measure “shelter” shows that housing only grew at 5.1% YoY. That’s odd since home price growth is almost 20% YoY and rent growth is near 20%.
Runaway home prices and rents are especially painful given that inflation is destroying the purchasing power of the dollar for consumers. Real average weekly earnings YoY are at -3.4% YoY.
Hence, the purchasing power of the US Dollar keeps eroding.
Good luck out there with inflation still roaring, and food/housing/energy prices soaring.
Here is a photo of American children trying to create energy from flying a kite made from progressively devalued US currency.
Yes, homebuyers are jumping into a generally slowing housing market to “beat the heat.” That is, beat The Fed’s monetary tightening.
Mortgage applications increased 2.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending May 6, 2022.
The seasonally adjusted Purchase Index increased 5 percent from one week earlier. The unadjusted Purchase Index increased 5 percent compared with the previous week and was 8 percent lower than the same week one year ago.
The Refinance Index decreased 2 percent from the previous week and was 72 percent lower than the same week one year ago.
Beat the Heat!! Or Beat The Fed!!
As least inflation came in slightly cooler in April at 8.3% YoY. While housing (own or rent) is rising at over 2x CPI.
At least S&P 500 futures are up this morning, an opportunity to buy the dip.
But on the housing front, we see that mortgage rates have pieced the 5.50% barrier and is now at 5.57%.
On the rent side, apartment rents are growing at 19.3% YoY for both Class A and Class B units.
Commodities are down this AM. WTI Crude is down -1.71%, iron ore is down -4.06% and nickel is down -6.29%.
Whoops! After a positive futures reading before opening, the Dow is down near a full percentage point, but the NASDAQ is almost breakeven for the day.
And the 10-year Treasury yield is down 8.6 bps.
As The Boss sang, “We’re going down.”
As crooner Dean Martin once said, “Let ’em have it!” Ain’t this a kick in the … head.
Perhaps Joe Biden and Fed Chair Jay Powell are channeling Dean Martin by letting us have it.
Since Obama’s 3rd term as President (aka, Biden’s installation as President on January 20, 2021), mortgage rates have risen 87%, regular gasoline prices have risen 80%, CRB foodstuffs are up 59% and Commodities are up 63%.
And don’t forget about America’s energy life force, WTI Crude Oil. It is UP 123% under Biden.
Rents? Rising at a 16.8% rate.
Rents rising, food costs rising, energy costs rising, Biden and The Fed are taking us higher. In terms of prices and cost of living.
Confounded Interest - Anthony B. Sanders 
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