US bank loans and leases are slowing, yet The Federal Reserve has helped keep their stock values elevated thanks to the extraordinary monetary stimulus.
(Bloomberg) — U.S. banks’ loans and leases dropped to 47.15% of total assets in the week to Sept. 1 from 47.24% the week before, according to the Fed
Total assets increased to $22.19 trillion from $22.10 trillion
The share of safe assets — virtually riskless investments such as cash, Treasuries, and securities effectively guaranteed by the U.S. government — increased to 51.2% of total assets from 51.0%
Loans and leases as a percentage of deposits were unchanged at 59.7% Cash was the highest as a percentage of total assets since January 2015 Residential real-estate loans hit a historic low as a percentage of total assets at 10.0% Commercial real-estate loans were the lowest as a percentage of total assets since August 2015 Consumer loans were the lowest as a percentage of total assets since May Commercial and industrial loans were the lowest as a percentage of total assets since June 2012
Only in this deranged, hyper-stimulated market can bank stocks be soaring despite slowing loan and lease growth.
Since the Covid outbreak in early 2020, The Federal Reserve lowered their target rate and super-spiked their balance sheet. Helping to lower bank deposit rates to near zero.
But despite near zero bank deposit rates, we seeing bank deposits are larger than bank credit such as commercial and industrial loans, residential mortgages loans, car loans, etc. Normally, bank credit EXCEEDS bank deposits.
The problem? One of them is negative growth in commercial and industrial lending. It declined 13.5% YoY in August. Of course, The Federal government extended emergency business loans that were counted as C&I loans, hence the spike in C&I loan growth in May 2020. But now we are seeing a real slowdown in C&I lending.
Residential lending is down 2.1% YoY as of September 10 (for August).
Commercial real estate lending? At least it is growing at a 2.9% YoY pace for August.
Credit cards and other revolving plans increase steadily since 2014 and then declined after the Fauci Flu struck. But credit cards and revolving credit has started to rise again.
The Fed’s massive overreaction to Covid caused a storm surge in C&I lending that has subsided. But other bank lending has slowed as well.
Lots of bank assets with nowhere to go.
No wonder M2 Money Velocity (GDP/M2 Money) is at historic lows.
Remember, Federal Reserve Chair Jerome Powell is up for reappointment and President Biden must make a decision on his reappointment.
According to Deutsche Bank, 85% of the US High Yield market has a yield below the current rate of inflation.
Its not only high-yield bonds that have negative REAL yields, but even The Fed Funds Target rate is negative at -5.12%. The real 10-year government bond yield is -4.01% and the REAL Freddie Mac 30-year mortgage survey rate is -2.5%.
Since the original model of The Federal Reserve was to purchase Treasuries and Agency MBS in an effort to push down interest rates, it will be quite difficult to delink the two: taper the balance sheet while not raising short-term rates.
(Bloomberg) — Bond investors may not wait long to start pushing back against Federal Reserve Chair Jerome Powell’s efforts to delink the start of asset-purchase tapering from the countdown to eventual policy-rate hikes.
Since Powell last week said the central bank could begin reducing its monthly bond buying this year, traders have stuck with early 2023 as the likely timing for the Fed’s liftoff from zero interest rates, and Treasury yields have barely budged.
But that calm faces a test starting Friday. The potential for volatility comes from the fact that when Fed officials gather this month, they will release fresh projections for the fed funds rate for the next few years. And with the labor market pivotal for Fed policy now, Friday’s August jobs report is seen as laying the foundation for these forecasts — collectively known as the dot plot — especially as some Fed officials have already been pushing for an early taper.
The upshot is that a robust reading Friday could have investors pulling forward tightening bets regardless of Powell’s efforts last week in his virtual speech at the Fed’s Jackson Hole symposium. The risk is traders will prepare for a repeat of June, when a hawkish signal via the dot-plot took markets by surprise and triggered an abrupt unwinding of wagers on a steeper yield curve.
If the employment report is “even deemed acceptable, regional presidents will be back on the tape in a flash,” sounding hawkish again, said Jim Vogel, an analyst at FHN Financial. “And you may have more officials penciling in a 2022 hike. And that would have to flatten the yield curve.”
Expectations for a hawkish shift would lift 5-year Treasury yields in particular, shrinking the gap with 30-year rates, Vogel said. That spread was around 114 basis points Wednesday, down from about 140 just before the Fed met in mid-June.
Dots Math
Officials’ June quarterly forecasts not only showed a median funds rate projection of two hikes in 2023 — after the March dot plot indicated no tightening until at least 2024 — but that seven participants saw at least one increase next year. This time around, it will take just three officials to raise their dots for 2022 for a full hike to be the new median for next year, assuming everyone else keeps their projections where they were.
Traders responded to the Fed’s June rate projections by driving 5-year yields up the most in almost four months. That was even as Powell said in his press conference that the dot plot should be taken with a “big grain of salt” and discussion about raising rates would be “highly premature.”
Powell last week said “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.”
But the leadup to the Fed decision on Sept. 22 may culminate in a dot-plot unveiling that yet again presents a communication challenge for policy makers, as has been seen several times since the Fed introduced the projections in 2012.
“There’s information in the dots, and generally it’s good information,” said Shahid Ladha, head of Group-of-10 rates strategy for the Americas at BNP Paribas SA. It makes sense for the Fed, regarding tapering and rate hikes, “to try to separate them, but I don’t think they’ll be ultimately successful in separating them.”
Trouble Ahead
Even some Fed officials are wary of being able to disentangle the tapering from rate hikes, minutes from the July Fed meeting showed.
Kevin Flanagan, head of fixed-income strategy at WisdomTree Investments Inc., which runs exchange-traded funds with assets of $75 billion, sees trouble for the Fed.
His view is that the labor market will keep gaining ground in its rebound from the pandemic, and that the median September dot may show a hike in 2022. That bodes for higher yields, a flatter curve and makes floating-rate notes appealing, he said.
The median of economists’ projection is for a gain of 725,000 jobs in August, a slowdown from June and July but well above the average for 2021. Of course, with millions still out of work relative to pre-pandemic levels, the Fed may prove to take longer to lift rates than traders expect, especially given the central bank’s “broad and inclusive” maximum-employment goal. But the market may be about to challenge that approach.
Note: Yesterday’s ADP jobs gain was forecast to be 625k jobs added in August, but only 374k jobs were actually added.
Fed Faces ‘Ugly Fight’ Over Jobs Goal in Next Big Policy Debate
“We are going to be all of a sudden talking about rate hikes potentially next year, and that is where the focus of the bond market is going to go,” Flanagan said. “The dot plot will be the Fed’s initial message for its forward guidance on rates. And then it will begin to come from Fedspeak — which is when the rubber will really meet the road.”
And with the stock market, particularly technology stocks, rising with Fed asset purchases, I wonder if The Fed forecasts that assets prices will keep going if they withdraw the punch bowl?
Let’s see if Powell and The Gang can forecast the stock market if they taper the balance sheet and raise rates.
U.S. 10-year yields are spiking upwards in what was supposed to be a sleepy day before the Fed’s Jackson Hole conference. The 2s10s curve is the steepest in two weeks. Eurodollar yields too have risen sharply and are up 6-7 bps in the blue and gold packs.
Over the last week, we have seen a steepening in the US Treasury Actives curve and the US Dollar Swaps curve.
This may be linked to the range breach in German 10-years and Italian 10-years. In fact, France, Spain, Portugal, Netherlands and Greece has all seen 6 bps leaps in 10-year sovereign yields today.
Does this mean that Chairman Mao Powell is likely to announce the paring-back of Fed monetary stimulus at J-Hole?
Powell and The Fed’s policies have veered from their mandate requiring Chairman Powell to meet 350 times with Congress to sell The Fed’s policies.
Bloomberg) — The Federal Reserve’s floor for overnight funding markets is proving to be no match for the deluge of cash.
Money-market securities ranging from Treasury bills to repurchase agreements continue to trade below 0.05% — the offering rate on the overnight reverse repo facility, which is supposed to act like a floor for the front end. The Fed at its June meeting had raised the rate by five basis points to help support the smooth functioning of short-term funding markets.
Still, usage of the tool climbed to a record $1.136 trillion on Monday, eclipsing the previous high of $1.116 trillion on Aug. 18.
Demand for the so-called RRP facility has surged as a flood of dollars threatens to overwhelm funding markets. That’s in part a result of the central bank’s long-standing asset purchases and drawdowns of the Treasury’s cash account, which is pushing reserves into the system. As a result, liquidity has been swelling, especially as the Treasury cuts supply to create more borrowing room under the debt ceiling.
The pressure pushing down overnight rates toward zero is proving a major headache for money-market funds. It hampers their ability to invest profitably, and can lead to further disruptions as they begin to waive fees to avoid passing on negative rates to shareholders. A number of firms including Vanguard Group shut down prime money-market funds last year after struggling to cover operating costs in the low-interest-rate environment.
Yes, overnight rates such as the US SOFR rate, are near zero.
Powell’s Charm Offensive in Congress Positions Him to Keep Job
Perhaps that is why Federal Reserve Chair Jerome Powell is acting as a lobbyist with Congress for The Fed’s nontraditional approach to monetary policy.
(Bloomberg) Since he took the helm of the Fed in February 2018, through June of this year, he’s held at least 350 meetings, dinners or phone calls with members of Congress, according to his monthly calendars. That’s almost nine per month, and many of those included more than one lawmaker. The tally doesn’t count at least 16 appearances as chair before numerous congressional committees.
Well, the stock market has zoomed-up since Bernanke and The Fed adopted zero-interest rate (ZIRP) policies and the now famous quantitative easing (QE) policies in late 2008.
Congress member Alexandria Ocasio-Cortez asked Fed Chair Powell about the Fed helping with US unemployment. We are already at zero rates (on the short-end), and Congress should look at their policies on why labor force participation is slow to recover from the Covid epidemic.
The Mises Stationarity Index is different than the Shiller CAPE index, which is showing equities as being overpriced, but not yet in dot.com bubble zone.
Headline! “Fed’s Kaplan says delta variant could cause him to rethink his tapering view”
Face it, the Federal Reserve may alter its growth path on asset purchases of Treasuries and Agency Mortgage-backed Securities, but it is doubtful that they will pare back their balance sheet. Call it “A Never-ending balance sheet for you” world.
Why? Seemingly never-ending Covid crisis, etc.
Let’s look at US Treasury yields today. The 10-year Treasury yield is up slightly to 1.25% as of 10am EST.
Here is a chart of the 10-year Treasury yield, Fed Funds effective rate, Fed Balance sheet and reverse repos since the Covid outbreak and Fed massive intervention. Bottom line, the have repressed the short-term interest rates and put downward pressure on the 10-year Treasury yield.
As the 10-year Treasury yield remains repressed DESPITE HIGHEST INFLATION RATE SINCE 2008, the Freddie Mac 30-year mortgage rate remains repressed as well. Yes, that mean NEGATIVE REAL MORTGAGE RATES.
This produces a REAL mortgage rate of -2.56%.
The spread of mortgage rates over the 10-year Treasury yield is about 173 basis point since 1971.
Where will Treasury yields go from hear? If we believe technical analysis like the Ichimoku Cloud, the 10-year Treasury rate will likely rise.
And The Fed’s Dots project also see rates rising (at least on the short-end.
Negative real mortgage rates and blistering home price growth?
Will the attendees at the KC Fed Jackson Hole conference discuss these matters? Or will it just be a Federal Reserve Soul Shake (dance)?
There are a variety of measures of an asset bubble. And each one points to an unsustainable bubble in the stock market.
Let’s start with the Buffett Indicator. The ratio of Total Market Capitalization of all US stocks (WCAUUS ) to total nominal GDP of the United States (GDP CUR$ ).
There is also the GLOBAL Buffett ratio produced by Holger Zschäpitz. Global market cap now equal to 139% of global GDP, way above Buffett’s 100% bubble threshold.
Shiller’s Cyclically-adjusted Price-earnings ratio? Still climbing and resembles the Dot.com bubble of 2000.
How about gold to Average Hourly Earnings (similar to the Bichler and Nitzan “Power” measure. The spread (bottom chart) sees the S&P 500 index soaring away from average hourly earnings.
We also have the Gold to SPX ratio that is now back to pre-financial crisis levels.
How about the Ichimoku cloud, where the SPX is currently ABOVE the cloud?
SPX and Bollinger Bands? The SPX index is close to the upper band.
How about The Hindenburg Omen, a technical indicator that was designed to signal the increased probability of a stock market crash. It compares the percentage of new 52-week highs and new 52-week lows in stock prices to a predetermined reference percentage that is supposed to predict the increasing likelihood of a market crash.
So it looks like a have a bubble in the stock market.
Fed Chair Jerome Powell sees the ghost of the Dot.com bubble.
U.S. consumer sentiment fell in early August to the lowest level in nearly a decade as Americans grew more concerned about the economy’s prospects, inflation and the recent surge in coronavirus cases.
The University of Michigan’s preliminary sentiment index fell by 11 points to 70.2, the lowest since December 2011, data released Friday showed. The figure fell well short of all estimates in a Bloomberg survey of economists.
The slump in confidence risks a more pronounced slowing in economic growth in coming months should consumers rein in spending. The recent deterioration in sentiment highlights how rising prices and concerns about the delta variant’s potential impact on the economy are weighing on Americans.
“Consumers have correctly reasoned that the economy’s performance will be diminished over the next several months, but the extraordinary surge in negative economic assessments also reflects an emotional response, mainly from dashed hopes that the pandemic would soon end,” Richard Curtin, director of the survey, said in the report.
The expectations gauge plummeted almost 14 points to 65.2, the lowest since October 2013. A measure of consumers’ outlook for the economy over the coming year soured, falling the most since the onset of the pandemic in March 2020.
Only 36% of respondents expect a decline in the jobless rate, down from 52% the prior month, despite record job openings. Consumers also became decidedly downbeat about their income prospects. The gauge of expected personal finances fell to a seven-year low.
Rising prices are having a clear impact on Americans’ budgets, particularly among those with lower or fixed incomes. Nearly a third of those aged 65 or older complained that inflation had lowered their living standards, as did about a fourth of those with incomes in the bottom third or with a high school education or less.
The Michigan report showed buying conditions deteriorated to the lowest since April of last year.
Yes, only 30% of respondents felt that it was a good time to buy a home. Particularly since home prices are rising at a 16.6% YoY pace, faster even than the peak of the infamous home price bubble of 2005. But this time, The Fed is blowing the bubble, not easy mortgage credit like in 2005.
Apparently, Treasury Secretary Janet Yellen does not inspire confidence in consumers.
Confounded Interest - Anthony B. Sanders 
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