US New Home Sales Fall 7.7% YoY In November, But Rise 16.9% MoM, Most Since 1992 (Months Supply Still Elevated, Median Price Falls)

Now you know why Fox Business and CNBC no longer invite me to be interviewed. They love the headline “November New Home Sales Surge By The Most Since 1992!”

Let’s start with the +16.9% MoM number, a more cheery, pop the champagne bottle headline.

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But on a YoY basis, new home sales fell 7.7% in November.

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Months supply of new home sales fell in November, but are still at elevated levels.

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And the median price of new home sales fell in November as The Fed’s normalization grabs the housing market with its icy grip.

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“The weather started getting rough, the tiny ship was tossed….”

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Gold Rewards Bulls in January as Fed’s Message Wounds Dollar (Gold Vol Remains Subdued)

The Federal Reserve’s “maybe we will, maybe we won’t” regarding further shrinking of its balance sheet coupled with keeping its target rate at 2.50% was celebrated by equity investors … and gold investors (including SPDR Gold Shares).

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(Bloomberg) — Gold is poised to close out January with a fourth straight monthly gain after the Federal Reserve signaled it’s done raising interest rates for a while, hurting the dollar, and as investors sought a haven against slowing growth and U.S.-China trade disputes.

Spot bullion traded at $1,321.89 an ounce at 10:33 a.m. in London after hitting $1,323.43 on Wednesday, the highest level since May, according to Bloomberg generic pricing. The precious metal is up about 3 percent this month, while the greenback’s decline in January is the most in a year.

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Gold volatility remains subdued.

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And yes, Powell wounded the dollar.

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Yes, The Fed benefitted equity and gold investors while wounding the US Dollar.

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For excellent gold charts and analysis, see Jesse’s Cafe Americain site!

Mambo Italiano! Italy Falls Into Recession (Again) as Output Shrank More Than Forecast (Italian Bank Assets Plummet, ECB Ineffective)

It is the continuing mambo of Italy falling into recession.

(Bloomberg) —  Italy fell into recession at the end of 2018, capping a year of political turmoil, higher borrowing costs and fiscal tensions that took their toll on the economy.

Output contracted 0.2 percent in the three months through December, following a 0.1 percent fall in the previous quarter, statistics agency Istat said Thursday in Rome. The year-end shrinkage was greater than expected. 

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The data “reflect a marked worsening of the industrial sector’s performance, and of a negative contribution of agriculture,” Istat said in releasing the data. It said services’ activity “stagnated.”

Premier Giuseppe Conte said Wednesday that he expected the fourth-quarter shrinkage, speaking in Milan a day before the official announcement.

Investors have been warily watching Italian economic performance following weeks of negotiations with the European Union over the government’s budget that pushed up bond yields. The latest round of bad news is likely to test market confidence in the government’s expansive program for 2019.

The fourth-quarter contraction was greater than a median estimate in a Bloomberg survey of 28 analysts that called for a quarterly shrinkage of 0.1 percent. The economy expanded 0.1 from the same quarter of 2017, while the full-year growth totalled 0.8 percent on a work-day-adjusted basis. 

The December unemployment rate fell to 10.3 percent, Istat said earlier in the day.

In addition to output declining (resulting in a real GDP QoQ reading of -0.20%), total assets of Italian banks have been plummeting. On the bright side, bank nonperforming loan rates are falling (but are still quite high at 14.4%).

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All this despite the ECB’s Main Refinancing Operations Annoucement Rate of … 0%.

Italy’s sovereign yield curve remains steeply upward sloping with short rates negative (courtesy of the ECB). 10Y SR CDS for Italy is 242.8 (elevated risk).

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Italy shows the limits of central bank zero-interest rate policies. Perhaps ECB head Mario Draghi should sing “Mambo Italiano” instead of distorting economies and asset prices.

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Fed Keeps Fed Funds Rate At 2.50%, Tepid On More Balance Sheet Normalization

Today, The Federal Reserve announced that their target rate remained at 2.5%.

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This was expected.

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But on further balance sheet unwinding, Fed Chair Thurston Powell III had this to say:

“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,”

Wednesday’s statement from the policymaking Federal Open Market Committee struck a more tepid approach.

The committee lowered its assessment of economic growth from “strong” to “solid” and noted that its inflation gauges “have moved lower in recent months.”

*Fed removes reference to further gradual rate increases
*Fed says it plans to continue with current floor approach
*Fed says it’s prepared to adjust balance-sheet normalization
*Fed reiterates federal funds target is primary policy tool
*Fed says economic activity rising at solid rate, jobs strong
*Fed says labor market strengthened, unemployment remained low
*Fed says spending grew strongly, investment moderated
*Fed says core and headline inflation remain near 2%

The reaction on the Dow? Investors seem to like Powell’s tepid message.

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And yield on 10-year Treasury Notes fell on the message.

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Fed Chair Thurston Powell III with wife Lovey (aka, Janet Yellen).

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Fed Balance Sheet Fracas Highlights Confusion Over Market Impact (Dazed And Confused? Or Communications Breakdown?)

Are financial markets “dazed and confused” by The Fed’s activities? Or is there a “communications breakdown?” Or are we “over, under, sideways, down” in terms of The Fed and asset bubbles?

(Bloomberg) — Wall Street has become obsessed with the Federal Reserve’s balance-sheet runoff, as investors debate why it’s suddenly roiling markets more than a year after it began.

There’s been no shortage of industry veterans sounding the balance-sheet alarm in recent weeks. . Billionaire Stanley Druckenmiller has called it a “double-barreled blitz” that coDoubleLine Capital Chief Executive Officer Jeffrey Gundlach says the unwind, interest-rate policy and guidance on where the two are headed have resulted in the equivalent of 15 implied tightenings. Billionaire Stanley Druckenmiller has called it a “double-barreled blitz” that could lead to a major policy error. And Guggenheim Partners Chief Investment Officer Scott Minerd has expressed concerns that liquidity constraints could give way to systemic risk.

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Others say not so fast. Strategist at Barclays, Royal Bank of Canada and Wrightson ICAP have suggested the unwind’s link to stocks is weak, at best. Still, the S&P 500 Index plunged more than 3 percent in the hours following last month’s Fed meeting after Chairman Jerome Powell said the rundown was on “automatic pilot,” forcing policy makers to re-craft their message on the fly. And U.S. stocks spiked higher Friday amid reports that the Fed is weighing ending the reductions sooner than previously expected.

The extent to which officials are ready to change tack should become clearer Wednesday following the Federal Open Market Committee’s first meeting of the year. A survey of economists ahead of this week’s decision indicates that most don’t expect the central bank to slow or stop the balance sheet run-off this year, while the median forecast for interest-rate hikes is two in 2019. Regardless of what officials signal, though, Wall Street is likely to remain on edge as it comes to terms with what the balance-sheet unwind actually means for markets.

How did we get here?
The Fed’s unprecedented quantitative-easing programs in the aftermath of the financial crisis pumped trillions of dollars into the banking system. It bought bonds from banks and paid for them by crediting their reserves. Now, with the economy on firmer ground, the Fed wants to siphon off that extraordinary liquidity to contain the potential inflationary effects, prevent asset-price bubbles, and replenish its ammunition to fight the next downturn. The central bank has been letting Treasuries and mortgage bonds on its balance sheet roll off, or mature rather than replacing them, since October 2017. The unwind has gradually accelerated to its current pace of a maximum $50 billion a month.

By contrast, the market frenzy over the balance sheet erupted just weeks ago — a disconnect that raises some eyebrows, particularly among fixed-income practitioners. Wrightson ICAP economist Lou Crandall wrote that “the Fed’s portfolio runoff is a sideshow” for equities, and RBC’s Michael Cloherty has described the impact as “wildly exaggerated.” That said, most agree that more clarity on the process surrounding the Fed’s unprecedented policy maneuver could help.

“The Fed has never done a two-variable experiment at the same time as they’re tightening policy,” said Lisa Hornby, a U.S. fixed-income portfolio manager at Schroder Investment Management. “The market has been scared by the fact that it’s a reversal of the policies that have been happening for years that have helped all risk assets.”

Where is the unwind being most directly felt?
Money markets. The Fed’s crisis-era bond investments created vast excess bank reserves. Post-crisis rules enacted to curb risk-taking have prompted banks to use much of those reserves to meet the more stringent requirements. As the balance-sheet unwind slowly drains liquidity from the financial system, some in the market are suggesting bank reserves are once again poised to become scarce, forcing banks to tap additional funding. Combined with a surge in Treasury-bill issuance — in and of itself partly driven by the government’s need to replace the Fed as a regular buyer — that’s helped push key money-market rates higher, especially in the market for repurchase agreements.

“Even though the Fed might be holding rates at 2.40 percent, the clearing rate for repo is much higher than that and I think that’s a result of this quantitative tightening and balance-sheet unwind,” said Bret Barker, a fixed-income portfolio manager at TCW Group in Los Angeles.

What about the impact on riskier assets?
That’s more complicated. The Fed’s purchases suppressed yields on Treasuries and agency mortgage-backed securities, driving investors into higher-yielding assets such as equities and corporate debt. Narrowing credit spreads enabled a record amount of corporate borrowing, which was used in part to buy back shares. Now, as the Fed normalizes policy, some of the tailwinds are reversing. Yields on Treasury bills from one- to six-months have risen to roughly 2.3 to 2.5 percent, more than the 2.1 percent dividend yield on the S&P 500 Index. Some say the additional tightening impact of the balance-sheet unwind may make credit conditions too restrictive, particularly for over-levered companies, and push the economy into recession.

“A lot of it is sentiment more than the fundamentals,” said Sebastien Page, head of global multi-asset strategy at T. Rowe Price in Baltimore. The markets have “gone through massive liquidity injections and the building up of those balance sheets. So what investors are worried about is the change in direction, so you go from rates going down and liquidity going up, to rates going up and liquidity going down.”

Where does the balance sheet unwind go from here?
It’s fair to say no one — not even the Fed chairman — can say with certainty what the balance sheet will look like in a year’s time. The most recent New York Fed survey shows primary dealers expect it to stabilize at about $3.5 trillion, which at the current rundown rate implies an end to the unwind in early 2020, according to analysis from ABN Amro Bank. Just three weeks ago, Powell said the future balance sheet “will be substantially smaller than it is now,’’ and encountered yet another wobble in stocks. More recent public statements from central-bank officials suggest policy makers are considering stopping the runoff sooner rather than later.

Another point of contention is whether the portfolio will still include mortgage-backed bonds. Nomura’s head of Americas fixed-income strategy George Goncalves expects a “full roll-off of the legacy MBS book but also a shift to a short U.S. Treasury duration portfolio.”

Amid all this uncertainty, a couple of things about the balance sheet are clear. Markets will have to accept that — at least for the remainder of this economic cycle — the days of maximum policy accommodation are over. In the meantime, will have to be wary of drawing attention to the autopilot and take full control of the market narrative.(Updates to add result of economists survey.

Here is Fed Chair Jerome Powell demonstrating his toxic masculinity by singing “I’m a man.’

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US Economy Growing Above Long-run Trend Without Sustained Inflation (As Gov’t Measures Inflation)

The good news? The US economy is growing above the long-run trend. But without sustained inflation.

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At the last reading Core Personal Consumption Expenditure (PCE) growth was only 1.88%. Compare that to home prices growing at 4.7% YoY (CS) and FHFA’s Purchase Only YoY at 5.76%.

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Zillow’s rent index for all homes YoY is only 0.485, well below The Fed Funds Target rate and Core PCE growth. And The Fed Funds Target rate is above Core PCE growth.

Here is a closer look at the past year. Rising Fed Funds Target rate, stable inflation (Core PCE YoY), decling house price growth and continued balance sheet undwinding.

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Home Prices in U.S. Cities Rise by Lowest Rate in Almost Four Years As Fed Unwinds Its Balance Sheet (Vegas Fastest Growing, DC Slowest)

Yes, US home price growth continues to slow as The Federal Reserve continues to unwind its bloated balance sheet.862767_cshomeprice-release-0129

(Bloomberg) — Home prices in 20 U.S. cities rose in November at the slowest pace since early 2015, decelerating for an eighth straight month as buyers balk at the ever-receding affordability of properties.

The S&P CoreLogic Case-Shiller index of property values increased 4.7 percent from a year earlier, down from 5 percent in the prior month, and below the median estimate of economists, data showed Tuesday. Nationally, home-price gains slowed to a 5.2 percent pace.

Sure enough, US housing has gotten quite expensive (although not Singapore, Hong Kong or London expensive). But the interesting story is … look at house price growth when The Fed enacted QE3, their third round of asset purchases. Then look at house price growth when The Fed began unwinding its bloated balance sheet.

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Let’s see what happens if The Fed continues its unwind.

On a metro level, Las Vegas (still recovering from the horrid collapse in house prices in the late 2000s) was the YoY leader … again. Followed by Phoenix, rising from the housing ashes of the housing bubble of the 2000s.

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The slowest growing metro areas? Once again, Washington DC has the slowest growth rate followed by Chicago. And then New Yawk (or New York).

 

Dust Their Brooms: Should Lehman Bros Have Been “Surprised” By Their Sudden Illiquidity? (Bear Stearns Then Fannie Mae And Freddie Mac’s Stock Price Already Plunged)

Movies like “Margin Call” and “The Big Short” make the financial crisis look like a total surprise … to them. Well, it wasn’t a surprise to GSEs Fannie Mae and Freddie Mac. Their common stock prices (green line) began plummeting in December 2007. Lehman Bros stock price didn’t start plummeting until February 2008.

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Why? National home prices had peaked in 2006 and had slowly begun to retreat. But as of December 2007, the Case-Shiller national home price index had fallen 17.4% from the peak in 2016. Subprime delinquencies had risen 46.5% over the same period. U-3 unemployment started rising in a big way in 2008.

But as home prices nosedived in 2008, subprime delinquencies skyrocketed. You can see Fannie Mae’s large drop in price in November 2008 (while they didn’t purchase subprime loans in high volume, they did invest in subprime ABS and ALT-A loan deals). While ALT-A turned out to suffer big losses, they performed better than subprime after the intial subprime spike.

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On September 6, 2008, Fannie Mae and Freddie Mac were placed into conservatorship with their regulator, FHFA and remain there ever since. Also in September, Lehman Bros declared bankruptcy … afer Fannie Mae and Freddie Mac were placed into conservatorship.

*There was other lenders that failed or had to be absorbed elsewhere, like Countrywide, and Wachovia.

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But Fannie Mae, Freddie Mac and Lehman Bros demise came AFTER Bear Stearns demise in March 2008, owing to subprime deal failures. In fact, you could see trouble brewing shortly after home prices started to fall. By 2007, both Bear and Lehman were showing distress, but not Fannie Mae. Fannie Mae and Freddie Mac’s regulator, FHFA saw the warning signs with subprime and took action on September 8th (maybe prematurely since they could have continued).

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Congress bailed out the banks and Fannie Mae and Freddie Mac and swept the financial dust away (aka, dust their brooms).

Just look at the above chart. Starting in 2016, risk managment at all financial firms should have been on yellow alert. By Q4 2007, it should have been upgraded to red alert. How is it possible that Lehman Bros or Bear Stearns (or Goldman Sachs) were taken by surprise as Margin Call implied.

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Oh well.

The “Sanders Polynomial” Update: Mortgage Purchase Applications And Mortgage Rates (The Raising Of Credit Standards And Demise Of Non-vanilla ARMs Since Financial Crisis)

Back in 2010, bank analyst Chris Whalen wrote this piece for Zero Hedge entitled “The Sanders Polynomial or Why “Esto se va a poner de la chingada””.

Yes, things got ugly for the residential mortgage market following the mortgage purchase application bubble that peaked around 2005. If you fit a non-linear curve to MBA Mortgage Purchase Applications, you can see a polynomial peaking in 2005.

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Here is the updated chart. Mortgage purchase applications have started to rise again since 2010, but at a much slower pace. And there is no polynomial since 2010, just a nice linear increase.

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But the mortgage market has fundamentally changed since 2005-7.  First, the volume of adjustable rate mortgages (blue line) has declined to under 10% of all mortgage applications. Second, the number of mortgage originations under 620 (also known as “subprime” is far below the levels seen in 2003-2007. Also, the number of non-vanilla ARMs (like pay-option and Limited Documentation ARMs) have reduced greatly.

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So when the narrator at the end of the movie “The Big Short” said that nothing has changed,  that was fundamentally incorrect. As you can see, ARMs and subprime have essentially vanished.  Here is a chart of The Big Short period (in red) and notice that mortgage lending truly did change.

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Also, a non-banker lender, Quicken Loans, is the second lending originator after Wells Fargo.  My how times have changed.

But are lender credit standards too high? Or are lenders and investors low riding credit?

How about a spoonful of extra credit box expansion?

But let’s not turn back the credit clock too far!!

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Fed Dead Redemption II: Fed Officials Weigh Earlier-Than-Expected End to Bond Portfolio Runoff

First, the expectations for furthering tighening of The Fed Funds Target Rate are near zero, at least according to WIRP.

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Now, according to Nick Timiraos at the Wall Street Journal, Federal Reserve officials are close to deciding they will maintain a larger portfolio of Treasury securities than they’d expected when they began shrinking those holdings two years ago, putting an end to the central bank’s portfolio wind-down closer into sight.

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The Fed indeed may slow the unwind of its balance sheet which is primarily allowing Treasury Notes and Treasury Bonds to mature. Agency MBS are expected to mature at later dates.

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So, The Fed may, at their next meeting, adjust their redemption schedule.

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And alter their redemption caps.

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Clearly, The Fed is trying to keep interest rates from rising too quickly. Good luck with that! It could be that The Fed has run out of ammo.

Case in point? Recent Fed Balance sheet reductions correspond to LOWER 10-year Tteasury yields and 30-year mortgage rates.

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Here is The Fed’ image of itself and “the savior” Ben Bernanke. But here is the reality.

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