Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
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.
I call this The Federal Reserve’s Missouri Boat Ride.
Meaning that The Fed has kept monetary stimulus in play for too long since late 2008 helping to lower mortgage rates from over 6% in November 2008 to 2.98% in November 2021. Then came “The Missouri Boat Ride” as The Fed signaled monetary tightening, leading to mortgage rates skyrocketing to their highest level since 2010.
The result of rising home prices AND mortgage rates? Housing acquisition prices (home prices * 30 year mortgage rates) have skyrocketed.
Between rising home prices and rising mortgage rates, we see that number of prices reductions increasing at nearly 70% YoY (chart courtesy of WolfStreet.com).
Of course, Congress and the media will never ask Janet Yellen (former Fed Chair [2013-2018] and current Treasury Secretary) WHY she kept massive monetary stimulus around for so long. Or why current Fed chair Powell did the same with Covid-related monetary stimulus.
This is not the legacy that will endear President Biden to voters. Regular gasoline prices have risen 101% under Biden.
But it not just gasoline and diesel that are soaring (while the rest of us are sore!), CRB Foodstuffs are up 58% under Biden while the 30-year mortgage rate is up 89% under Biden.
And this morning, WTI crude futures are up +1.71%.
And up 142% under Biden.
Prices are sizzling and clobbering the American middle class and low wage workers. But former Federal Reserve Chair and current US Treasury Secretary Janet Yellen never saw it coming.
Biden’s just killing us. And Powell is making up for Yellen’s keeping monetary stimulus too high for too long. Price? Mortgage rates are soaring.
Instead of President Ronald Reagan saying ““Mr. Gorbachev, tear down this wall” we need someone to tell President Biden and Federal Reserve Jerome Powell to “Stop driving up prices and making housing unaffordable.” Unfortunately, The Fed thinks that raising interest rates will temper price increases — it won’t. But it could tamper home price growth.
So what we are left with is soaring home prices AND soaring mortgage rates, leaving this scary chart. The housing cost index has risen 114.5% under Biden.
Its only going to get worse from here.
Today’s jobs report for May showed that the U-3 unemployment rate remained the same as April, 3.60%. However, that is lower than the NATURAL rate of unemployment of 4.445% indicating that the labor market is overheated. Historically, The Fed has tightened monetary policy by raising rates when this has happened. So, look for The Fed to keep raising rates.
As I have mentioned before, REAL hourly wage growth is negative since March 2021, just after Biden signed his executive orders canceling drilling on Federal lands and cancelling the Keystone Pipeline. Later, he canceled off-shore drilling permits and Alaska drilling. Now we have REAL average hourly wages declining at -2.8% YoY as The Fed has been reducing M2 Money supply YoY.
Listings of homes is up 11% YoY, the highest in several years.
Let’s see how the housing market does with soaring mortgage rates.
How do you spell stagflation? M-O-N-E-Y … tightening.
The Federal Reserve Board of Governors playing “Hurting housing two times.”
There are two faces of today’s employment report.
But let’s start with US average hourly earnings growth less inflation (aka, REAL hourly earnings). It printed at -2.8% YoY, meaning that inflation is causing REAL hourly earnings to fall.
The good news is that jobs added in the latest report printed at +390k in May. This is only one face of employment. Yesterday’s ADP jobs added report was considerably lower at only 128k.
Labor force participation rose to 62.3%, but remains below pre-Covid levels.
The unemployment rate remains the same at 3.6%, but the underemployment rate rose to 7.1%.
Jobs added?
As usual, employment in leisure and hospitality led the way.
I cannot stress the importance of declining REAL wage growth on housing (both owner-occupied and rental).
The reaction in the bond market? The 10-year Treasury yield is up (white line) along with forecast Fed rate hikes (green).
Or a bad day for the US economy.
First, ADP US jobs added flopped (only 128.2k jobs added, the lowest reading under Biden and the massive Federal Reserve stimulus). Much lower than the expected 300k. Second, nonfarrm labor productivity fell in Q1 -7.3%. Third, unit labor costs soared to +12.6%.
M2 Money stock YoY is falling, but remains at 8% YoY.
Here is the summary table for today.
And then we have the Atlanta Fed GDPNow, real-time GDP tracker for Q2 at 1.3%.
As M2 Money growth slows, US GDP is slowing as well. Is this a monetary hangover??
And, of course, rents are soaring for the American middle class and low wage workers.
Confounded Interest - Anthony B. Sanders 
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