Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
The US housing market continues to struggle as The Federal Reserve continues to fight inflation. Today’s pending home sales are another nail in housing casket.
Pending home sales declined -34.4% year-over-year (YoY) as M2 Money growth went negative (-1.3% YoY).
At least UMich buying conditions for housing increased … to 44, well below 100.
The December new home sales report is good news and bad news.
The good news? US new home sales rose by 2.3% in December from November to 616k units sold SAAR. That is the good news.
The bad news? Since December of 2021, new home sales fell -23% year-over-year (YoY).
The median price of new home sales rose 7.8% YoY, but the trend as The Fed withdraws monetary stimulus (orange line) is not good.
Perhaps there is a communications breakdown between the Biden Administration and The Federal Reserve.
Today’s GDP report from the BEA reminds me of the Peggy Lee song “Is That All There Is?” Between the massive Fed monetary stimulus since late 2008 (and particularly since Covid in 2020) and all the Federal spending (Covid relief, Inflation reduction, Omnipork spending bill, etc.), US real GDP rose by only 2.9% in Q4 from Q3.
But signs of slowing underlying demand mounted as the steepest interest-rate hikes in decades threaten growth this year.
Gross domestic product increased at a 2.9% annualized rate in final three months of 2022 after a 3.2% gain in the third quarter, the Commerce Department’s initial estimate showed Thursday.
Personal consumption, the biggest part of the economy, climbed at a below-forecast 2.1% pace (forecast was for 2.9%). Again,
The report also showed some signs of stress for American consumers whose wages have failed to keep up with inflation and continued to encourage them to draw down savings accumulated from government pandemic-relief programs. The burden of elevated prices and higher borrowing costs is mounting, pointing to a tenuous outlook for the economy.
A key gauge of underlying demand that strips out the trade and inventories components — inflation-adjusted final sales to domestic purchasers — rose an annualized 0.8% in the fourth quarter after a 1.5% gain.
Core PCE growth grew at 3.9%, but is slowing already as M2 Money growth dies.
Stock-index futures and Treasury yields remained higher and the dollar was little changed after the GDP report and better-than-expected weekly jobless claims. Applications for unemployment insurance dropped to 186,000 last week, the lowest since April.
Recent data show cracks are developing more broadly. Retail and motor vehicle sales data showed households are starting to retrench, the housing market continues to weaken and some businesses are reconsidering capital spending plans.
As the Federal Reserve continues to hike interest rates to ensure inflation is extinguished, housing and manufacturing have deteriorated quickly while industries including banking and technology are carrying out mass layoffs.
The GDP report showed the personal consumption expenditures price index, a key inflation metric for the Fed, rose at an annualized 3.2% rate in the fourth quarter, down from a 4.3% pace in the prior three months. The core index that excludes food and energy climbed at a 3.9% rate compared with 4.7% paces in the prior two quarters. Monthly data for December will be released Friday.
The moderation in price pressures is consistent with forecasts that the Fed will further scale back its tightening campaign next week, when it’s expected to raise rates by 25 basis points. Policymakers boosted the benchmark rate by 50 points in December after 75 basis-point hikes at their previous four meetings.
The world’s largest economy expanded 2.1% last year. In 2021, when demand snapped back from pandemic-related shutdowns, the economy grew 5.9% — the best performance since 1984.
The GDP data showed services spending increased at 2.6% annualized rate in the October-December period, the slowest since last year’s first quarter. Outlays on goods rose at a 1.1% pace, the first advance since 2021.
Business investment slowed sharply after a third-quarter surge. Spending on equipment declined an annualized 3.7%, the most since the second quarter of 2020. Outlays for structures rose at a 0.4% pace.
Let’s hope the BEA isn’t padding the numbers like the BLS was caught doing in the first half of 2022.
Lastly, US Real GDP growth YoY FELL to only 0.95925% as M2 Money growth disappears.
The 3-2-1 crack spread is a great indicator to gauge fuel product tightness. High spreads indicate gasoline, diesel, jet fuel, and other petroleum products are in short supply, while low spreads mean an abundance of supply. Spread direction is also important — if rising, it would mean fuel inventories are declining.
The simple calculation of refining margins is for every three barrels of crude oil the refinery processes — it makes two barrels of gasoline and one barrel of distillates like diesel and jet fuel.
On Tuesday, the crack spread hit a three-month high of $42 a barrel. For some context, the five-year January average is $15.56.
Reuters pointed out that refinery outages exacerbate fuel supply tightness.
A diesel producing unit at PBF Energy’s (PBF.N) Chalmette, Louisiana, refinery was shut following a fire on Saturday. It could be out for at least a month. Exxon Mobil (XOM.N) said Monday it will perform planned maintenance on several units at its Baytown, Texas, petrochemical complex.
The ongoing refinery maintenance season could be much lengthier than usual, with many U.S. Gulf Coast refineries still running below capacity after Winter Storm Elliott knocked out some 1.5 million barrels per day of refining capacity in December. A Suncor refinery in Commerce City, Colorado, has remained offline since the storm.
Also, the number of refinery overhauls is double the amount this spring. Many of these overhauls were postponed due to the pandemic. Some are due to record-high margins driving increased profitability for oil companies.
There are at least 15 oil refineries plan maintenance ranging from two to 11 weeks through May, tallies by Reuters and refining intelligence firm IIR Energy show. By mid-February, U.S. refiners will drop some 1.4 million barrels per day of processing capacity, double the five-year average.
“A lot of plants didn’t want to shut down last year when margins were strong, but they have to get this work done,” said John Auers, refining analyst with Refined Fuels Analytics.
Nine U.S. refineries operated by Marathon Petroleum, Valero Energy, Exxon Mobil, Phillips 66, and BP will shutter some of their fuel-producing units this spring, according to IIR and Reuters sources.
All of the outages and planned overhauls are going to make it difficult for refiners to catch up with demand as inventories are relative to historical levels.
“If we aren’t hearing the alarm bells, it’s because we’re deaf after refining margins reached eye-watering levels in 2022, when the 3-2-1 crack spread briefly surged above $60. But from a historical perspective, current margins are sky-high, as well,” Bloomberg Opinion’s Javier Blas said.
According to AAA data, gasoline and diesel prices at the pump are starting to move higher after months of declines following the rise in the 3:2:1 crack spread.
And the ‘raw materials’ for the refining process are rising rapidly…
Perhaps the victory lap was a little premature?
Mission Accomplished 2.0?
Not really. US gasoline prices are UP 45% under Biden, diesel prices (the lifeblood of the shipping industry) are UP 77 under Clueless Joe and the Strategic Petroleum Reserve is DOWN -47% under China Joe.
Falling mortgage rates are having a predictible effect on mortgage refinancing applications, but not so much for mortgage purchase applications.
Mortgage applications increased 7.0 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending January 20, 2023. This week’s results include an adjustment for the observance of Martin Luther King, Jr. Day.
The Refinance Index increased 3.15 percent from the previous week and was 77 percent lower than the same week one year ago. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 39 percent lower than the same week one year ago.
Generally speaking, declining mortgage rates are due to declining 10-year Treasury yields. And 10-year Treasury yields decline as the economy weakens. Of course, M2 Money growth YoY is now 0% as The Fed tightens.
On a humerous note, US Treasury Secretary Janet “The Evil Gnome” Yellen is visiting Africa and lecturing them on prudcnt sovereigh debt management. Seriously. China responded with “Fix the US debt problems before you lecture anyone else.”
Three regional Fed reports I like to watch are New York’s Empire State Outlook, Philly Fed’s Outlook and Richmond Fed’s outlook. Today, The Richmond Fed released their manufacturing outlook and … it declined to -11.
So the big three are all down (Philly down to -8.9 while NY’s Empire State outlook is down to -32.9.
On the Treasury front, the US 10Y-3M yield curve inverted further (a signal of impending recession) just tanked to -126.462 basis points.
Winter is coming!
The Conference Board’s Leading Indicator should be called The Bleeding Indicator given that the leading index has declined to 10 straight months. This is happening as The Fed tightens monetary policy to combat inflation.
Leading indicators include economic variables that tend to move before changes in the overall economy. These indicators give a sense of the future state of an economy.
How about mortgage rates? Settling in a 6.47%.
I must admit, Joe Biden has a horribly misleading nickname “Middle Class Joe.” Between Biden’s horrible energy policies and Pelosi’s/Schumer’s spending binges, the US middle class and low wage workers have suffered mightely with the inflation tax. Throw in Jerome Powell and The Federal Reserve’s manic money printing and the American middle class has a problem.
US inflation peaked at 9.1% year-over-year (YoY), but has declined to a still painful 7.1% YoY as The Fed removes it aggressive monetary stimulus. But to cope with persistent US inflation, consumers have had to dip into savings and use more credit cards. As a consequence, personal savings plunged -64.8% YoY while consumer credit rose 7.9% YoY.
The other tax on the middle class and low-wage workers is the 21 straight months of negative REAL weekly earnings growth.
On the housing front, REAL home prices are growing at 1.5% YoY while REAL weekly wage growth is still NEGATIVE at -3.13% YoY.
Make no mistake, inflation caused by The Fed and Federal governments spending is a tax on the middle class and low wage workers.
Biden, Pelosi, Schumer and Powell are the 4 Horseman of the Inflation Apocalypse.
First, US default risk as measured by credit default swaps remains elevated (primarily because Biden and Democrats refused to cut wasteful spending or reign in non-retirees on Social Security). And NY Fed’s Reverse Repos remain elevated.
And then we have Citi’s economic surprise index for the US at -17 as The Fed slows money growth to 0%.
I wish I knew a place where inflation and insane Federal government spending and policies doesn’t exist.
The Thrill Is Gone from the US housing market as M2 Money growth fells to 0%.
US Existing Home Sales fell -1.5% from November to December (MoM) to 4.02 SAAR units sold. That translates to a depressing -34% decline since December 2021 (YoY).
On the positive side, these numbers are better than expected (-3.4% MoM expected). Still, these numbers are pretty dismal.
Existing home sales MEDIAN PRICE fell to $366.9k as M2 Money growth vanishes. And inventory of existing homes for sale remains lower than pre-Covid levels.
Let’s see what Powell and the Gang (aka, The Federal Reserve Board of Governors) does with interest rates going forward.
Today, the 10-year Treasury yield is up 7.1 basis points, but the real action is in Europe where sovereign yields are up 11.5 bps in France, 9.8 bps in Germany and 18.6 bps in Italy.
Confounded Interest - Anthony B. Sanders 
You must be logged in to post a comment.