Rampant inflation is really hurting American households (even Fed Chair Powell admitted as much yesterday), but because of inflation, The Fed’s counter-punch has resulted in 1) declining equity prices, declining bond prices and increase mortgage rates. In fact, over the past 12 months, the 2-year US Treasury yield is up over 15 times (0.262% to 4.226%), Bankrate’s 30-year mortgage survey rate up 116.2%.
As The Federal Reserve battles inflation (caused by excessive monetary stimulus since 2008), Biden’s green energy policies and excess Federal government spending), we can see that the US Treasury 10yr-2yr yield curve has inverted to -54.4 basis points, the lowest since 1982 after Fed Chair Paul Volcker’s war on inflation.
The US Treasury 10yr-2yr yield curve typically inverts (or goes below zero) several months prior to a recession and is most inverted since 1982.
Fed Funds futures data points to the target rate rising to 4.613% by the May ’23 FOMC meeting … then declining.
Since this is rather miserable news for the economy, I will now play my favorite Bruce Springsteen tune, Sherry Darling.
At least the Dow Jones mini-me futures are up this morning.
The US Dollar/Euro cross currency is rising with Fed tightening.
As expected, The Federal Reserve raise their target rate by 75 basis points today. While that sounds like an inflation (blue line)-crushing rate hike, look at the slowly shrinking Fed Balance Sheet (gold line).
Of course, the risk of a recession (dark blue line) is on the increase.
Given the increasing likelihood of a recession, The FOMC’s Dots Project shows The Fed’s target rate increasing to 4.625% in 2023, then gradually declining to 2.5% in the long run.
Fed Funds Futures data points to a peak in May 2023.
Well, The Federal Reserve is doing what they wanted … crushing the housing market as they fight inflation.
Today we get our first glimpse of the carnage in the housing market from August. With mortgage rates having soared and homebuilder sentiment tumbling (and permits plunging), it should be no surprise that existing home sales were expected to fall for the 7th straight month (-2.3% MoM vs -5.9% MoM in July).
Somewhat surprisingly, existing home sales ‘only’ fell 0.4% MoM in August (from a revised 5.7% MoM drop in July), but that is still 7 consecutive drops. This left existing home sales down 19.87% YoY.
Look at existing home sales YoY as M2 Money Yoy crashes.
Median prices YoY for existing home sales plunged to 7.63% while inventory for sale (yellow line) remains depressed.
As people are painfully aware, The Federal Reserve is on a mission … to hike interest rates to tame inflation back to 2%.
So, we saw a small surge in mortgage applications last week as the expectations of Fed rate hikes sinks in and households try to lock in mortgage rates.
Mortgage applications increased 3.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 16, 2022. Last week’s results include an adjustment for the Labor Day holiday.
The Refinance Index increased 10 percent from the previous week and was 83 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. The unadjusted Purchase Index increased 11 percent compared with the previous week and was30 percent lower than the same week one year ago.
At least the percentage of ARMs remained the same, 9.1%.
By the way, the theme song for the US version of the TV show “The Office” was written by Jay Ferguson, the primary singer for the ’60s band Spirit (that performed “I’ve Got A Line On You!”).
Today will be another Fed rate hike, expected to be a whopping 75 basis points. The S&P 500 tends to rally (green line) after the FOMC announcement. What will happen today?
It was not immediately clear why buyers had submitted requests for capacity when Russia has given no indication since it shut the line that it would restart any time soon.
Russia, which had supplied about 40% of the European Union’s gas before the Ukraine conflict, has said it closed the pipeline because Western sanctions hindered operations. European politicians say that is a pretext and accuse Moscow of using energy as a weapon.
But German inflation, using CPI, is only 7.9%. Something has to give!
On the western front (US), the US Treasury 10yr yield is up +10.2 bps. And sovereign yields in Europe are all above 10 bps.
The US is short on housing stock and remains short in August. While housing starts in August seems fantastic (12.8% MoM), the YoY growth in housing supply is down -0.1% as mortgage rates soar and The Fed removes monetary stimulus.
On a month-over-month (MoM) basis, 1-unit (single family detached) were up only 3.43% in August. 5+ unit (multifamly) starts were up 28.57% in August.
Since the Biden Administration has allowed over 2 million illegal to flow across the southern border, apartment space is in high demand.
According to RentCafe, the hottest rental markets in the USA are Miami, Orlando, SW Florida and … Harrisburg PA (the temporary home of uber-leftist PA Lt Governor John Fetterman). Perhaps Fetterman is letting illegal immigrants stay in his Harrisburg mansion, unlike President Obama on Martha’s Vineyard.
Why isn’t Biden letting illegal immigrants stay in his massive summer mansion in Reboboth Beach, DL?
Even Obama’s economic advisor, Larry Summers, is wondering why Biden won’t allow pipelines to be build to reduce energy prices and reduce inflation.
Having said that, US mortgage rates are now the highest since 2008 and continue to rise with the expectation of more Fed rate hikes this year. Even core inflation is on the rise motivating The Fed to do more tightening since they aren’t receiving any help from Biden on energy or Congress in terms of massive spending of our money.
Mortgage payments for a median existing home in the US is back to the mid-1980s.
Data from Fed Funds futures implies that The Fed will raise their target rate to 4.50% by March 2023, then slowly lower rates.
Futures are down with the prospect of a 75 basis point bump in rates tomorrow. The Dow Jone Mini is down -167 points.
The National Association of Home Builders market index fell more than expected in September to 46, the lowest reading since 2012 (if I exclude the Covid economic shutdown).
Note that the NAHB market index is declining along with at the increase in the 30yr mortgage rate.
Confounded Interest - Anthony B. Sanders 
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