Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
We are going down this road, feeling bad.
As The Fed Reserve prepares to raise their target rate in a week by 75 basis points to 2.50%, the NAHB Home Builder’s confidence index plunged.
The 30-year mortgage rate is up 89% under Biden as his green energy fiasco is helping drive inflation to its highest level in 40 years leading The Fed to tighten its monetary policies.
Meanwhile, Jerome Powell and The Fed are doing The Fed Rate Shake.
The dollar’s gain is the world’s pain — and based on its current trajectory, the world may be in for a whole lot more discomfort.
Concerns over global growth have recently sent the US Dollar Index to the strongest level on record, with the greenback hitting multi-decade highs against currencies like the euro and the yen.
But the move risks becoming a self-reinforcing feedback loop given that the vast majority of cross-border trade is still denominated in dollars, and a stronger US currency has historically translated into a broad hit to the world economy.
Against the backdrop of higher-than-expected inflation and still-elevated commodities prices, the concern is that we’re in for a dollar ‘doom loop’ like never before, according to Jon Turek, the founder of JST Advisors and author of the Cheap Convexity blog.
With the Federal Reserve hiking interest rates at the fastest pace in decades, he says, it’s much less clear what could break the feedback loop in the next few months.
The Dollar Doom Loop with US inflation causing The Fed to tighten
Under Biden’s policies, inflation hit a 40-year high (blue line), and the US Dollar (green line) is strengthening. Then we have The Fed raising the target rate (purple line) and the probability of recession rising with Fed tightening.
Is a US recession coming? The US Treasury 10Y-2Y yield curve is inverted at almost -20 basis points.
There is a Fed open market committee meeting in one week and they are expected to raise their target rate by 75 basis points according to Fed Fund Futures data. Inflation keeps rising as does the probability of a US recession. So, The Fed will keep on tightening.
The Federal Reserve has behaved like buckaroos! Why? Since the financial crisis, The Fed has left its enormous monetary stimulus outstanding for too long.
The Fed initiated asset purchases in a series of moves (aka, QE) culminating in Covid QE that has been barley removed. With The Fed’s stimulypto (and Federal spending), we have seen the S&P 500 index soar along with home prices.
Of course, this begs the question as to whether the stock market and housing market can withstand The Fed’s tightening plans.
A closer look at the S&P 500 index and the Case-Shiller National home price index under Biden. The S&P 500 has been declining since The Fed started their monetary tightening. But the Case-Shiller National home price index as of April ’22 was still soaring.
With inflation at a 40-year high, the Taylor Rule suggests a Fed target rate of … 23.30%. It is currently at 1.75%. That is an unrealistic target rate that The Fed will never do. It is, in fact, a Bridge Too Far.
How about the Taylor Rule using Core PCE? It is still 12.71%. Still a bridge too far!
Markets are conditioned to massive Fed stimulypto, so how will markets react to stimulus reduction?
While The Fed is intent on withdrawing SOME of the enormous monetary stimulus, they are still buckaroos. And Biden/Congress still want to distort markets by Federal spending such as the Build Back (Inflation) Better bill that Manchin has blocked … so far.
As Americans are painfully aware, inflation is the highest in 40 years prompting The Federal Reserve to remove the massive punch bowl. In fact, Federal Reserve Governor Christopher “Fats” Waller backed raising rates by 75 basis points this month.
How hot was the recent inflation report? The Atlanta Fed’s flexible price index rose to 18.74% YoY. On the other hand, the CORE flexible price index (less energy and food) plunged to 8.46% YoY. The 30-year mortgage rate from Bankrate rose slightly to 5.83% as the implied overnight rate for the July FOMC meeting rose to 3.45%.
Inflation is ravaging consumers with the savings rate falling by -46.3% YoY while consumer credit rose 7.3% YoY. Yes, thanks to high inflation, consumers are saving less and borrowing more.
When even CORE flexible price inflation is 8.40% YoY, you know that The Fed and Federal government have made serious policy errors.
The US Dollar keeps strengthening as inflation skyrockets. Good news?
Bear in mind that a strong dollar is a two-edged sword. The US Dollar Index has risen 16% year-over-year, presenting a big hurdle for US firms with business overseas.
That strength of the greenback will rise until the Fed makes a dovish policy pivot.
And that pivot is forecast to occur at the Feb ’23 FOMC meeting.
But will The Fed pivot?
The Biden Cocktail. A fine wine turned to vinegar.
Face it. The Biden Administration has little interest in trying to increase the supply fossil fuel energy which would anger his “green” base (like building more refineries or allowing for more crude oil and natural gas exploration). So, the burden of “inflation fighting” falls on the frail shoulders of The Federal Reserve.
Given today’s US Producer Price Index Final Demand prices rising +11.3% YoY in June, it seems that The Fed has not been able to extinguish the “Tower of Inflation.” But, Fed Funds Futures are pointing to a near 100 basis point (or 1%) increase in The Fed Funds target rate at the July 27th Fed Open Market Committee (FOMC) meeting.
The Fed Funds Futures Data points to a +0.920 (almost 1%) increase at the July 27th FOMC meeting. Followed by rate cuts.
And with the fear of a near 100 basis point increase, today’s stock markets are a sea of red.
It is up to Fed Chair Jerome Powell and policy error brigade to extinguish price increases caused by 1) bad Biden energy policies and 2) too much spending by Biden and Congress. It is like trying to wave-down the Super Chief train with a cigarette lighter.
Yet, the Frail Fed will try to waive down The Super Chief inflation engine with Fed Fireballs. Aka, rate increases of 100 basis points.
Update! Dow down over 500 points this AM.
Bank of America is predicting 4 straight quarters of negative real GDP growth.
2022 is shaping up for a bad year.
Here we go loop de loop! Traders are pricing in a 75 basis point rate increase at the July FOMC meeting despite collapsing Fed 5-year inflation breakeven rates.
Money markets are betting on a three quarter-percentage point hike by Federal Reserve officials later this month, wagering the US will need to ramp up the pace of monetary tightening to tame inflation.
The repricing comes ahead of a key inflation report due Wednesday. The headline figure for June is set to accelerate to 8.8% year over year, the highest since 1981.
Bankrate’s 30Y mortgage rate fell slightly ahead of today’s inflation report with the expectation of The Fed hiking their target rate by 75 basis points to 2.338% at the July 27th Fed Open Market Committee meeting.
Trader expectations from Fed Funds Futures data:
Last night I watched “The Shallows” on Peacock TV. I thought from the title that it was going to be a biography of The Federal Reserve, but it was a film about a surfer being attacked by a shark.
We are across the great divide! In terms of house prices and affordability.
We are all aware that inflation is soaring, since the Covid outbreak in 2020 and the massive overaction by The Federal Reserve and Federal government in terms of stimulus spending and economic lockdowns.
Things were “normal” before Covid in that REAL housing rent (white line) and REAL average hourly earnings YoY (yellow line) moved together. But after Covid shutdowns and Federal stimulus “relief” (orange line), we see that inflation (blue line) took off along with the growth in housing rent. The problem, of course, is that REAL average hourly earnings YoY has been declining. I call this “The Great Divide in housing affordability”.
The question, of course, is whether The Federal Reserve will continue their “war on inflation” with a 75 basis point rate increase.
Inflation is at its fastest pace in 40 years, and is expected to increase even higher in tomorrow’s inflation report.
Gasoline prices have been dropping recently, but remain above $4.50 per gallon (regular gas price was $2.40 per gallon on Biden’s inauguration day. And no, it wasn’t the Biden Administration selling nearly 1 million barrels of crude oil from the strategic petroleum reserve to the Chinese government-owned Sinopec that Biden’s son Hunter is an investor (so, The Big Guy aka Joe Biden gets a 10% piece of the action). It is a slowing global economy that is helping to lower gasoline prices.
Between soaring gasoline prices and soaring home rents, it is little wonder that there is a serious homeless problem in places like New York and California.
With rising mortgage rates, we are seeing a surge in pending home sales cancellations.
Atlanta Fed’s Raphael Bostic thinks that the US economy is so strong that it can easily handle a 75 basis point increase at the next FOMC meeting. Fortunately, he is not a voting member.
I wonder if Joe Biden sings “Carry On My Wayward Son” to Hunter?
The US economy is slippin’ into darkness.
The US Treasury 10Y-2Y yield curve steepened after Biden’s inauguration as President, a sign of economic optimism. Then reality began to dawn when inflation began to surge (blue line). Then The Fed stepped in to combat inflation by signaling an increase in their target rate (green line). The result? The 10Y-2Y Treasury curve is inverted at -4.85 BPS, generally an indicator of an impending recession.
But never fear! The Feral Reserve is expected to reverse its rate increases by March 2023.
So, it looks like The Fed will be returning to its “low rider” rate policies in early 2023.
In other words, hold on, The Fed is coming. Again.
Confounded Interest - Anthony B. Sanders 
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