Fed’s Snakejuice And Winners/Losers From T-Curve Flatterning (Winners: Real Estate, Financials, Information Tech, Losers: Industrials, Retail, Metals And Mining)

At the annual Jackson Hole (aka, J-Hole) Economic Symposium, Federal Reserve Chairman Jerome Powell reiterated that the Fed is in no hurry to either taper asset purchases immediately or aggressively. Additionally he made crystal clear that even when the Fed does eventually start tapering asset purchases (likely November or December), it should not be taken as signaling interest rate hikes will follow on some preset course. Indeed, Fed Chairman Powell continues to claim that inflation is transitory. Finally, he said that part of the mandate (employment) is still far from being achieved. So, expect more SNAKE JUICE.

The shape of the yield curve has been highly influential recently in relative performance trends between various areas of the market. From last summer through May of this year, the steepening of the yield curve coincided with healthy outperformance of cyclical stocks. Since May, the flattening of the curve has coincided with more defensive (or at least high quality) leadership out of the tech and health care sectors. The logic goes, therefore, that a re-steepening of the curve should coincide with a shift back to cyclicals. Indeed, that shift may be in the early innings.

Let’s take a look at the US Treasury 10Y-2Y curve slope over the past twelve months against the Citi Economic Surprise Index for the US. You can see curve fatigue starting in April 2021 as the Citi Economic Surprise Index turns negative.

The the more cyclical and smaller skewed S&P 500 equal weight index has started to outperform the S&P 500 again, right on queue with the yield curve re-steepening.

Industrial stocks are under-performing the broader S&P 500 index as the curve flattens.

Real estate stocks? They are outperforming the broader S&P 500 index.

Mining stocks like gold mines? They are underperforming the broader S&P 500 index.

Financial stocks? Not surprisingly, The Fed’s dovish behavior is causing financial stocks to outperform the broader S&P index.

Likewise, information technology stocks are outperforming the broader S&P 500 index.

So, by Powell delaying any balance sheet slowdown and rate increases, we have clear winners (real estate, financials, information tech) and clear losers on a relative basis (industrials, retail, metals and mining).

Pure snake juice.

The Others! Due to volatility differences, I wouldn’t over-interpret this chart. But Bitcoin as a ratio of the S&P 500 index is “kicking ass!” Gold and housing as a ratio of the S&P 500 index seemingly can’t keep up with the S&P 500 index.

US Q2 GDP Prices Rise 6.10% Compared To Home Prices Rising At 16.61% YoY While Avg Hourly Earnings Rising At 4.70% YoY (UGLY Chart Warning!!)

For your viewing pleasure.

Looks an awful lot like 2005 before the housing price crash, financial crisis and Great Recession. US home prices, HOUSING inflation, is growing at 16.61% YoY, GDP Price index QoQ (annualized) is growing at 6.10%, and average hourly earnings is growing at 4.20% YoY.

Let’s see what happens in Jackson Hole this weekend!

US Mortgage Purchase Applications Rise 1% From Previous Week, But 16% Lower Than 1 Year Ago

Mortgage applications increased 1.6 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 20, 2021.

The Refinance Index increased 1 percent from the previous week and was 3 percent higher than the same week one year ago. You can clearly see the Refi Wave associated with the Covid outbreak and sudden Fed monetary stimulus resulting in a lowering of 30-year mortgage rates.

The seasonally adjusted Purchase Index increased 3 percent from one week earlier. Notice the general slowdown in purchase applications with soaring home prices.

The unadjusted Purchase Index increased 1 percent compared with the previous week and was 16 percent lower than the same week one year ago.

Rolling, rolling, rolling, keep those mortgages moving.

US New Home Sales Rise To 708K Units SAAR In July (+1% From June) While Median Price Soars To $390K

The good news! US new home sales rose 1% in July to 708k units SAAR.

The bad news? The median price of new home sales is $390k.

More bad news for the midwest and northeast. New home sales dropped. Most of the growth in new home sales occurred in The West.

Hot, hot, hot! But not in the northeast and midwest. There it is not, not, not.

Fed’s Ability to Set Rates Floor Is Weakening on Cash Deluge (“Charming” Powell Had At Least 350 Meetings, Dinners Or Phone Calls With Members Of Congress)

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.

Powell is sounding more and more like Parks and Recreation’s Tom Haverford in terms of schmoozing Congress for support.

Update: The Mises Stationarity Index is flashing “BUBBLE.”

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.

US Existing Home Sales Median Price Slows To 17.8% YoY In July On Continued Low Inventory For Sale (EHS Increased To 5.99M SAAR)

Feeling hot, hot, hot. Housing, that is!

US existing home sales in July rose to 5.99 million SAAR, beating expectations. But the inventory of home available for sale remains low by historic standards.

The median price of existing homes declined to 17.8% YoY with The Federal Reserve pumping money into the system like there is no tomorrow.

Bloomberg had the following headline: “Sales of Existing Homes in U.S. Rise as Inventory Picks Up.” While that is a true statement, existing home sales inventory is still down 12% YoY.

I wonder if the attendees at the Jackson Hole Fed conference will be discussing the gut-wrenching home price growth? Rumor has it that Fed Chair Powell will use J-Hole as a platform to suggest paring back on the monetary stimulus.

Treasury And Mortgage Rates In A Never-Ending Balance Sheet World (REAL Mortgage Rates NEGATIVE With Skyrocketing Home Prices)

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)?

US Homebuilder Confidence Drops To 13-Month Low As Building Material Prices Increase 19.4% Over Past Year

The NAHB Homebuilder confidence index dropped to a 13 month low as building materials rise by 19.4% YoY.

Of course, then we have the University of Michigan conditions for buying a home crashing as well.

Rising home prices and rising construction material costs? Yikes.

Of course, the NAHB had this to say:

“Our expectation is that production bottlenecks should ease over the coming months and the market should return to more normal conditions,” NAHB Chief Economist Robert Dietz said in a statement.

Perhaps, but The Fed needs to slow down its money printing as well.

The most powerful economists in the world?

More Housing Inventory is Coming! 850,000 Borrowers Will Exit Forbearance Between August and October (Will The Fed And Biden/HUD/Congress Take Action?)

The ball is in the court of The Fed, the Biden administration (HUD) and Congress. Will they take action?

There will be more housing inventory hitting the market soon. As home prices are up and most are no longer in negative equity situations, some will decide to sell into this hot market. Obviously not paying your mortgage for 12, 14, 16, or even 18 months is a nice bonus that party is coming to an end.

Zillow’s research found that most are not going to bring their mortgage current. Assume someone took a forbearance and their monthly mortgage cost was $2,000 per month, some may be behind by up to $36,000 when the forbearance period ends. Okay, well what if you can’t make it current? You can defer the payments to the end of the mortgage but you still owe that and many got used to not even paying the regular monthly payment. So a sizable portion will be selling

Here is Black Knight’s Scheduled Forebearance Plan expirations.

Could this be the end of the 16.6% YoY growth rate in home prices? Or will Congress and/or The Biden Administration extend the forbearance? Or will The Fed expand their balance sheet even further??

Will the Biden Administration come to the rescue?

Consumer Sentiment in U.S. Plunges to Lowest Since 2011 (Good Time To Buy A Home Falls To 30% Share Due To Raging Home Price Growth)

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.

Consumer sentiment in U.S. plunges on concerns about virus, economic prospects

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.

Buying conditions deteriorate sharply for American consumers as prices soar

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.