Treasuries Curve Flattens Sharply After Data Dump, Fed Minutes (Market Update)

Its Thanksgiving in the USA! Confession: I don’t like turkey. Prime rib with horseradish sauce? You bet!!

Anyway, Treasuries ended mixed Wednesday with the yield curve sharply flatter after a raft of U.S. economic data and minutes of the November FOMC meeting bolstered expectations for an earlier start to Fed rate increases. Two- and 5-year yields reached YTD highs, and 5s30s spread reached narrowest since March 2020.

Over the past week, the Treasury actives curve rose 13.85 basis points at the 2 year tenor.

Yields ended richer by ~6bp across long-end of the curve, while front-end cheapened almost 3bp; 2s10s flattened more than 5bp, 5s30s more than 6bp; 10-year yields shed ~3bp to ~1.635%
Release of Nov. 2-3 FOMC meeting minutes drew minimal market reaction, as flatter curve held its shape.

The US Dollar Swaps curve rose from the previous week as well.

Minutes said participants considered elevated inflation as likely transitory, “but judged that inflation pressures could take longer to subside than they had previously assessed”

Earlier, front-end and belly sold off after a heavy slate of U.S. economic data including the lowest initial jobless claims tally since 1969

Also during U.S. morning, Fed’s Daly said she would support accelerated tapering of asset purchases, which added to pressure across front-end Treasuries

Subsequently, eurodollars traded heavy over the session as rate-hike premium continued to ramp up in 2022 and 2023; overnight index swaps showed 30% chance of a March hike, while around three hikes — or 75bp — were priced in by the end of next year

Wishing you a happy Thanksgiving! In my dreams!

US New Home Sales Decline 23.1% YoY In October As UMich Home Sentiment Plummets

While some economists are cheering the post-COVID economic recovery, I am not among them. Rampant inflation and bad economic policies are plaguing the non 1% of the population.

For example, new home sales dropped -23.1% YoY in October. As consumer sentiment for housing crashed to 63 (baseline of 100).

Why are consumers bummed-out about buying housing? How about rapidly accelerating new home prices???

Renter Misery Index At 17.42% With Traditional Misery Index At 10.80% (Biden Says $5 TRILLION “Build Back Better Boondoggle” Will Relieve Inflation Over 10 Years)

Renters in the US are getting clobbered by inflation.

The US Zillow Rent Index All Homes YoY + CPI YoY is one measure of renter misery.

The classic misery index (CPI YoY + U-3 unemployment rate) is 10.80%.

Then there is inflation in food prices, gasoline, heating oil, natural gas, etc.

While Biden is releasing the Strategic Petroleum Reserves (SPR) in order to mitigate the problem that he created by terminating the energy pipelines and oil/natural gas drilling permits in the name of “Going Green!” But on the announcement of tapping the SPR, crude oil futures actually rose.

But never fear! Biden claims that his $5 TRILLION Build Back Better Boondoggle (BBBB) will ease inflation … over 10 years. And he claims that “17 Nobel Prize winners in economics have said that my plan will “ease inflationary pressures.”” I sincerely doubt that any of them actually read the 2,500 page BBBB. Rather, they likely just read the White House talking points and said “Hey, that sounds good!” Mo money, less problems?

Here is Joe Biden breaking the legs of America’s renters. Or is that multi-millionaire Nancy Pelosi?

Securitization Frenzy! Wall Street Repackaging Of Loans, Franchise Agreements, Royalties Surging As Alarm Sounds For Commercial Retail

Alarm!

I remember the surge in securitization of loans, receivables, etc during the housing bubble of the mid-to-late 2000s. Today seems like 2007 all over again.

(Bloomberg) — Bankers are repackaging everything from fast food franchises to fitness-center fees into bonds at the fastest clip since the global financial crisis as investors chase yield and inflation protection.

This year’s sales of U.S. asset-backed securities have already surpassed $300 billion, according to data compiled by Bloomberg — and more is expected by year-end. Post-crisis issuance records have also been set in private-label commercial mortgage bonds and collateralized loan obligations, which are also seen accelerating.

“Solar, consumer loans, container lease and whole business transactions to some degree all offer attractive yields and spreads,” said Dave Goodson, head of securitized credit at Voya Investment Management. “These so-called esoteric sectors remain well supported with plenty of money to invest.”

On Monday, Self Esteem Brands, a franchiser of businesses including its flagship gyms Anytime Fitness, priced a $505 million ABS that was backed by franchise agreements, royalties and fees. In whole business securitizations like these, companies mortgage virtually all their assets.

Last month, fried chicken restaurant chain Church’s Chicken sold a $250 million securitization backed by franchise and royalty collateral. Golden Pear Funding recently securitized litigation fees related to financial settlements on everything from personal injury cases to wrongful convictions. And Oasis Financial priced a similar deal linked to payments on medical liens.

Then we have this headline that will send chills through the CMBS market for retail space, particularly at a time when commercial real estate (particularly RETAIL) are trying to recover from COVID lockdowns and the growth of online shopping.

“Retailers Sound Alarm on Organized Theft as States Warn of Rise”

Retailers say shoplifting is getting more brazen in the U.S.: A California Nordstrom store was recently hit by a flash mob of more than 80 people who made off with designer goods, while more than a dozen people pilfered from a Louis Vuitton location in a suburb of Chicago.

On Tuesday, the impact of shoplifting reached Wall Street, with Best Buy Co. shares plunging after the electronics retailer said widespread theft contributed to a decrease in one gauge of profitability. Last month, Walgreens said it would close five San Francisco stores after theft rates there spiked.

Seemingly, no one learns from history. Or as the zen master Yogi Berra once said “It’s like déjà vu all over again.”

Or “You better cut the pizza in four pieces because I’m not hungry enough to eat six.”

Biden Picks Powell Over Brainard, 10-Year Treasury Yields Rise (10Y-3M Treasury Curve Rose From 83 BPS At End Of 2020 To 160 BPS Today)

President Biden nominated Jerome Powell for a second term as Fed Chair and nominated Lael Brainard as Deputy Chair to replace Richard Clarida. The US House of Overlords (aka, the US Senate) will hold hearings on the nominees (with Elizabeth Warren opposing Powell and supporting Brainard’s nomination).

Treasury yields jumped and U.S. index futures signaled a continued selloff in technology shares as traders pruned bets for a dovish-for-longer Federal Reserve after the renomination of Jerome Powell as its chair.

Contracts on the Nasdaq 100 Index fell 0.3% after Monday’s last-hour selloff in technology stocks. The subgroup was the worst performer in Europe Tuesday, sending the region’s benchmark to a three-week low. A currency crisis deepened in Turkey, with the lira weakening past 13 per U.S. dollar. Zoom Video Communications Inc. lost 9% in premarket trading on slowing growth.

Investors are reducing expectations for a deeper dovish stance by the Fed after Powell was selected for a second term. The chair himself sought to strike a balance in his policy approach saying the central bank would use tools at its disposal to support the economy as well as to prevent inflation from becoming entrenched.

Fed rate hike premium is added after Powell confirmed as next Fed Chair:

Change in Fed’s interest-rate target implied by overnight index swaps and eurodollar futures.

Fed Bank of Atlanta President Raphael Bostic said Monday the U.S. central bank may need to speed up the removal of monetary stimulus and allow for an earlier-than-planned increase in interest rates.

Translation: Markets are pricing in MORE hawkish Powell over uber-dove Brainard. The 10-year Treasury yield has risen from 1.52% to 1.65%

And the 10Y-3M Treasury curve has risen from 83 basis points at the beginning of 2021 to 160 basis points today. I will this the Biden Inflation Effect (BIE).

Let’s see if Powell & Company deliver on removing the excessive stimulus from the market, particularly with midterm elections approaching.

The Fed’s Gilded Age: A Tale of Today’s Housing Market (REAL Home Prices Rising At 14.6% YoY As REAL Hourly Earnings Fall (-0.41% YoY)

Welcome to The Fed’s Gilded Age … for housing! The gilded age refers to the thin-veneer of gold covering up problems in the late 1800s.

Today’s gilded age is largely fueled by The Federal Reserve’s uber-easy monetary policies combined with absurd Federal government policies. The result? Thanks to inflation, REAL home prices are growing at 14.6% YoY while REAL hourly earnings are declining (-0.41% YoY).

Redfin predicts a more balanced housing market in 2022. Part of their rationale is that they predict mortgage rates will rise to 3.6%. This growth in the mortgage rate is predicted to slow home price growth to 3.2% from double digit growth currently.

While this scenario is plausible, it will require a change in direction of the 10-year Treasury yield which has been declining since 1981. 5.39% YoY inflation may encourage The Fed to raise rates.

Today’s REAL 30-year mortgage rate is -3.08% while the REAL 10-year Treasury yield is -4.67%. It will require a reduction in inflation AND an increase in the nominal rate to get to 3.6%.

With the Freddie Mac 30-year survey rate at 3.10, will a 50 basis point increase in mortgage rates send the market crashing? Not likely.

After all, the US economy is under the thumb of The Federal Reserve.

Is The US At Full (Realistic) Employment? If So, Why Isn’t The Fed Raising Rates?

Is the US at full employment? That is, is the US at REALISTIC full employment? And if the US is at realistic full employment, why is The Federal Reserve keeping rates at 25 basis points??

Let’s start with the “quits” data. An estimated 3% of American workers quit their jobs in September, the Bureau of Labor Statistics reported last week.1That’s the highest percentage since the BLS started keeping track two decades ago.

Front-line and low-wage workers are leaving at rates higher than historical norms while higher-paid office workers aren’t. College-educated workers haven’t been quitting or dropping out of the workforce at higher rates than before the pandemic, but less-educated workers have.

The quits rate in professional and business services was just 0.4 percentage points higher in September than before the pandemic in February 2020. In financial activities it was unchanged. In the information sector, made up of telecommunications, publishing, broadcasting, motion pictures, software and most internet companies, the quits rate was down 0.3 percentage points.

The biggest increases in quit rates were in sectors such as leisure and hospitality where office workers are few, working remotely seldom an option and wages low. Within manufacturing, the quits-rate increase has been much bigger in lower-paying nondurable goods (of which food manufacturing is the biggest part) than in higher-paying durable goods.

In particular, fast food restaurants are offering above minimum wage salaries to attract workers. Burger King was even offering college tuition (not to University of Chicago, but to the local community college).

Labor force participation crashed with COVID and has struggled to recover, despite the staggering monetary stimulus. If this a sign that the US is at full employment (or very difficult to entice workers to enter and stay in the labor force)?

Speaking of colleges, business schools in particular, here are the top 85 business schools in the US according to Bloomberg/Business Week. I had the honor of teaching at University of Chicago in the 1990s which is currently ranked at #4.

I saw this headline this morning: “More Americans Than Expected File for Jobless Benefits.” Odd since so many jobs are available.

I guess Johnny Paycheck’s “Take This Job and Shove It” is the new national anthem under Biden.

Slipping Into Darkness? Inflation + Growing Recession Probability = Stagflation?

Is the US slipping into darkness?

The smoothed US recession probability just rose to 44.40%. Meanwhile, the CPI YoY rose to 6.24% YoY.

The Fed has been lowriding rates since late 2008.

Why can’t The Fed be friends with the middle class instead of just the top 1%?

Playing “Cisco Kid” to chill.

What’s Wrong With This Picture? M2 Money Growth “SLOWS” To 12.8% YoY As Real Earnings Growth Slows To -1.6% YoY (Will Omarova As Comptroller Make This Better??)

Highlights for Children has a popular segment called “What’s Wrong With This Picture?”

I give you my economics version of “What’s Wrong With This Picture?” It features The Federal Reserve’s M2 Money year–over-year compared with Real Average Weekly Earnings year-over-year.

Yes, M2 Money growth has “slowed” to 12.8% YoY while US Real Average Weekly Earnings YoY is now -1.6%. In other words, while M2 Money is still growing at a rapid pace, real weekly earnings growth is NEGATIVE.

The Fed continues to pump money into a bottle-necked economy while The Federal government pays people NOT to work.

The US Senate has a plan to fix the problem: Biden has nominated Saule Omarova, a dingbat law professor from Cornell (alma matter for The Office’s Andy Bernard), who proposes the following:

(1) Moving all bank deposits from commercial banks to so-called FedAccounts at the Federal Reserve;

(2) Allowing the Fed, in “extreme and rare circumstances, when the Fed is unable to control inflation by raising interest rates,” to confiscate deposits from these FedAccounts in order to tighten monetary policy;

And Ohio Senator Sherrod Brown (D-of course) thinks there is NO MORAL HAZARD PROBLEM with The Fed confiscating bank deposits for its own use?????

If I was attending Omarova’s confirmation hearing, my verdict would be ..

US Mortgage Rates Falls Below 3% (REAL Mortgage Rate Falls To -3.13%)

The Freddie Mac 30-year mortgage survey rate fell below 3% today to 2.98%.

And with today’s abysmal inflation report, the REAL 30-year mortgage rate fell to -3.13%.

Yes, President Biden is asking his economic council to do something about inflation. How about 1) telling The Fed to back off its outrageous and damaging stimulus and 2) stop shutting down pipelines.

Here is Joe Biden (aka, the Skipper) eyeing inflation from the White House.