Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
I couldn’t sleep at all last night … after The Fed cranked up their target rate 75 basis points.
The odds of a recession grew to 71.7% as The Fed hikes rates.
Over the next 24 months, the probability of a US recession is 98.5%.
The NASDAQ index tanked -4% today on the fallout from yesterday’s Fed actions.
Do I detect a trend in The Fed’s latest Dot Plot??
So, will The Fed continue to go head-over-heels on monetary tightening?
Like in the movie The Poseidon Adventure, we can all sing “The Morning After.”
On the heels of The Fed’s 75 basis point surge in the target rate, the US Treasury yield jumped +11.5 BPS as of 8:30 AM EST. The S&P 500 E-mini futures contract is down -1.8%.
As investors brace for a recession, mortgage rates dropped to 6.03%.
Gasoline prices remain near $5 per gallon, diesel prices are near $6 per gallon and The Fed’s massive balance sheet is still in force.
On the housing front, US housing starts plunged -14.4% MoM in May, the biggest decline under Biden.
While housing starts were down -14.4% MoM in May, single-family detached home were down only -9.16%. It was 5+ unit (multifamily) starts that were down -26.83% MoM.
Good morning peeps! Reality is dawning after the market surge yesterday after investors celebrated that The Fed could have raised rates even more.
Sometimes I wonder if The Federal Reserve Board of Governors pays attention to economic news. For example, the Atlanta Fed’s GDPNow forecast for Q2 was released today at -0.002%. So what does The Fed do? They raised their target rate by 75 basis points to 1.75%.
Apparently, The Fed has chosen to fight inflation rather than help the economy.
While expected, it is still unwelcome news.
The Atlanta Fed’s GDPNow real-time GDP forecast for Q2 just sank into negative territory at -0.002%.
Let’s see how Real GDP does if The Fed actually withdraws its stimulus needle.
And consumer purchasing power keeps diving as The Fed keeps printing money.
I just read that President Biden has never been more optimistic about the US economy than he is now.
Well, today’s closing bell is not optimistic and is downright bearish.
The US Treasury 10-year yield rose … ANOTHER … 11.3 basis points as rumors circulate that The Fed might actually raise their target rate by 75 basis points.
And the venerable Dow (DJIA) is down -152 points today.
Markets are anticipating an increase of The Fed Funds target rate from 1% to 1.568%, less than the rumored 75 basis point increase being bandied about.
At least Columbus Ohio home prices are growing slower than the national average.
If Biden is wildly optimistic about the economy, then he needs to get out of The White House and talk to average Americans and not people like Robert De Niro.
It was closing hell for a terrible day in markets as investors struggle to process the dreadful and seemingly endless inflation report on Friday.
What happened today? The NASDAQ tanked -4.58% and the 10-year Treasury yield jumped 22.2 basis points. Gulp.
The 22.2 bps jump in the 10-year Treasury yield has led to Agency MBS prices pulling a Titanic and sank.
Somehow, I don’t think that Biden and Congress are going to help the middle class and low-wage workers.
Today’s opening bell is “Opening Hell!”
US Treasury 10Y yields are up +12.1 basis points as of 9:40am EST. And rising across the globe.
Equity markets? Dow is down -621.93 points and the NASDAQ is down almost -3%. But equity markets are down across the globe.
Commodities? Once again, all commodities in the red except corn (which I don’t eat) and natural gas.
Speaking of opening hell. The US Treasury 10Y-2Y yield flattened to 7 basis points.
And then we have Markit’s Credit Default Swaps index rising to the highest level since Covid (April 2020).
Markets are in a “Sea of Red.”
The CPI news on Friday was so awful that it changed the bond market’s view of Fed trajectory, and the weakest sector broke. In bond jargon, MBS went “no-bid.” No buyers for MBS. Then a few posted prices beyond borrower demand, not wanting to buy except at penalty prices. (Courtesy of Cherry Creek Mortgage)
Despite what Treasury Secretary Janet Yellen has said, Friday’s inflation report demonstrated that inflation is no longer transitory. And with that realization, there was a dearth of bidders for Agency Mortgage-backed Securities (Agency MBS) on Friday.
As a result, agency MBS 2.5% dropped to under $90 as markets expect The Fed to keep raising rates to combat inflation.
Duration of the FNCL 2.5% agency MBS has been extending with growing inflation. Duration was under 1 on August 2, 2021 but is now 7 times greater at almost 7.
Note to Yellen: inflation seems be permanent, not transitory. Or at least inflation will remain high for the foreseeable future, crushing the life out of Agency MBS.
Inflation, the bane of the middle class and working families, just rose to 8.6%.
Core inflation, that excludes energy and food, actually declined slightly to 6% from 6.2% in April. But since most families are concerned with gas prices and food, (not to mention home prices growing at 21.17% YoY), core inflation really underestimates the suffering.
Under Biden’s leadership in cooperation with eternal Fed stimulus (until now), inflation started at 1.4% YoY and has increased to 8.6% YoY. The Fed’s balance sheet has increased by 20.27% (more monetary Stimulypto!), Case-Shiller home prices started at 10.44% YoY and has now doubled to 20.55% YoY. Regular gasoline started at $2.57 and is now at $5.42, up 102%. Food is up 61%.
The Fed is expecting two half-point hikes followed by quarter-point increases.
And mortgage rates keep rising as The Fed fights the inflation fire.
Here is a video of Milton Friedman speaking on inflation.
On the hotter than expected inflation news, the US Treasury 10Y-2Y curve flattened to 12 bps.
Here is my version of their chart since 2000 where you can seen the seismic shift in the balance sheet (toxic green slime line), particularly with The Fed’s response to Covid. The Fed is signaling a tightening in monetary policy to help reduce inflation (blue line).
But notice that M2 Money Velocity (GDP/M2) is now near the all-time low along with consumer purchasing power.
How BIG is The Fed’s balance sheet? Try more that a third of size of US GDP.
And as The Fed signals its inflation-fighting intentions, mortgage rates have shot up to 5.51%, the highest mortgage rate since June 2009.
Speaking of seismic shifts, the Atlanta Fed’s Q2 GDP tracker just fell to +0.9%.
The Fed’s noose is tightening on the economy.
Confounded Interest - Anthony B. Sanders 
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