Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
Good news on the wage front. Sort of .
US REAL average hourly earnings rose in September to -0.8% YoY.
Too bad that REAL home prices are growing at a 14.4% YoY clip.
The Federal Reserve’s new motto: making home unaffordable! With help from the US Treasury.
At least the Atlanta Fed’s President Raphael Bostic finally admitted that inflation isn’t as transitory as he previously believed. The Fed dumped trillions in liquidity into an economic system that was unprepared for it, and he is surprised that prices are going nuts?
The consumer price index increased 0.4% from August, according to Labor Department data released Wednesday. Compared with a year ago, the CPI rose 5.4%, matching the largest annual gain since 2008. Excluding the volatile food and energy components, so-called core inflation rose 0.2% from the prior month.
U.S. headline inflation rose more than forecast in September.
Source: Bureau of Labor Statistics, Bloomberg survey
The median estimate in a Bloomberg survey of economists called for a 0.3% monthly gain in the overall measure and a 0.2% advance in the core rate.
A combination of unprecedented shipping challenges, materials shortages, high commodities prices and rising wages have sharply driven up costs for producers. Many have passed some portion of those costs along to consumers, leading to more persistent inflation than many economists — including those at the Federal Reserve — had originally anticipated.
The pickup in price growth seen last month reflected higher food and shelter costs. Meantime, measures of used cars and trucks, apparel and airfares cooled.
U.S. equity futures fluctuated and Treasury yields were little changed following the report.
The CPI data reflects crosscurrents in the economy. Hotel fares fell, reflecting the impact of the delta variant on travel, but inflation is broadening out beyond categories associated with reopening.
Higher home prices are now starting to filter through in the data. Rent of primary residence jumped 0.5%, the most since 2001, while a measure of homeowners’ equivalent rent posted the biggest gain in five years. Shelter costs, which are seen as a more structural component of the CPI and make up about a third of the overall index, could prove a more durable tailwind to inflation.
The report will likely reinforce the Fed’s inclination to soon start tapering its asset purchases, especially as the supply-chain challenges plaguing businesses show little signs of abating. Minutes from last month’s Federal Open Market Committee meeting — out Wednesday afternoon — will provide further insight on policy makers’ views toward progress on employment and inflation goals for tapering.
A New York Fed survey out Tuesday showed U.S. consumers’ expectations for inflation continued to rise in September, with 1-year and 3-year expectations accelerating to record highs.
American consumers are also experiencing higher prices for new vehicles and household furnishings and supplies, which increased by a record 1.3%, the report showed. And looking ahead, elevated energy prices are set to take an additional bite out of workers’ paychecks.
While we know that apartment rents are growing at 15.5% YoY, the CPI for Owner’s Equivalent Rent only rose by 3.2% YoY.
Powell: Whoops, did I do that?
金融政策に限界があるとは考えておりません
(I do not believe that there is a limit to the effect of monetary policy.)
Haruhiko Kuroda, Bank of Japan, 13 April 2016
The Bank of Japan is one of the top three Quantitative Easing (QE) Monsters in terms of the absolute amount of assets it purchased. The Fed and the ECB round out the trio. The BoJ started QE over 20 years ago, and went hog wild under Abenomics, which became the economic religion of Japan in 2013. But the era of Prime Minister Shinzo Abe ended in September 2020, and Abenomics is now finished.
What’s left of it is that the BoJ (and Bank of Japan Governor Haruhiko Kuroda) now holds about half of the huge pile of the central government’s debt. With their target rate at -0.10% and a gargantuan balance sheet, what could go wrong?
But BOJ’s QE has ended. The BoJ’s overall assets stopped growing, and its holdings of government bonds have started to decline.
As of the BoJ’s balance sheet dated September 30, released on Thursday, total assets declined to a still monstrous ¥724 trillion ($6.4 trillion), below where it had been in May 2021.
But look at Japanese home prices with the growth of the BOJ’s balance sheet and general decline in mortgage rates. Like the USA, there was a balance sheet spike associated with Covid and a resulting spike in home prices.
The USA? We also saw a surge in home prices following The Fed’s monetary “stimulypto.”
But will The Fed follow BOJ’s lead and stop asset purchases? Not yet, anyway. It seems that The Fed can’t turn market forces loose and let interest rates rise.
Bear in my that the US Misery Index is above 10% (U-3 unemployment + inflation).
And if I define the US Misery Index as U-3 unemployment + home price growth, we can see we are at record misery rates. Miserable for households that don’t own a home or are trying to move to a higher housing price area).
What I like about The Fed’s monetary policies?? Nada.
The Atlanta Fed GDPNow tracker just fell to 1.3% on today’s lousy jobs report.
Just 194K jobs added in September while 338K dropped out of labor force.
Like the poem, Casey At The Bat, the US economy struck out with a shockingly bad jobs report for September.
Oh, somewhere in this favored land the sun is shining bright;
The band is playing somewhere, and somewhere hearts are light,
And somewhere men are laughing, and somewhere children shout;
But there is no joy in Mudville USA—mighty Casey Biden has struck out.
The U.S. economy added fewer jobs than forecast for a second straight month in September. Nonfarm payrolls increased by just 194,000 last month after an upwardly revised 366,000 gain in August, Labor Department figures showed Friday. 500K was expected.
The U-3 unemployment rate declined to 4.8% (meaning that the labor force shrank due to people dropping out of the labor force). In fact, 338,000 people dropped out of the labor force.
Average hourly earnings YoY rose to 4.6%. While that is an improvement, but it is lower than the inflation rate of 5.25% YoY and house price inflation of 20% YoY.
This miserable jobs report is a victory for Fed doves that don’t want to raise rates or slow down the balance sheet growth.
Where were the jobs created? Leisure and hospitality, as usual, leads in job gains.
Mighty Biden’s economic policies have struck out. Good night, Irene.
It was great to be a “Master of the Universe” (Treasury and MBS trader) since October 1981 when the US 10Y Treasury yield peaked at 15.84% and mortgage rates peaked at 18.63%. Treasury and mortgage rates have generally fallen ever since. But what happens if Treasury and mortgage rates rise?
Bond investors are piling back into short positions, motivated not only by the specter of inflation but also by the risk that yields are approaching levels that will unleash a wave of new selling by convexity hedgers.
That level is around 1.60% in the U.S. 10-year Treasury yield, less than 10 basis points from its current mark, according to Brean Capital’s head of fixed income strategy, Scott Buchta. It’s the mid-point of “a key threshold” between 1.40% to 1.80%, an area “most critical from a convexity hedging point of view.”
Convexity hedging involves shedding U.S. interest-rate risk to protect the value of mortgage-backed securities as yields rise, slowing expected prepayment rates.
It’s already begun to pick up as yields stretched past the 1.40% level. Another wave is expected at around 1.6% — a point of “maximum negative convexity” in agency MBS, “where 25bp rallies and sell-offs should have an equal effect on convexity-related buying and selling,” Buchta says.
Signs that short positions are accumulating include Societe Generale’s “Trend Indicator.” Among its 10 newest trades are short positions in Japanese 10-year debt, German 5-year debt futures, U.K. 10-year gilts, U.K. short sterling and U.S. 2- and 5-year notes. Meanwhile, CFTC positioning data for U.S. Treasury futures show asset managers flipped to net short in 10-year note contracts in the process of dumping the equivalent of $23 million per basis point of cash Treasuries over the past week. Hedge-fund shorts also remain elevated in the long-end of the curve, as measured by net positions in Bond and Ultra Bond futures.
“Bond-bearish impulses remain in place,” says Citigroup Inc. strategist Bill O’Donnell in a note, citing tactical and medium-term set-ups. Traders should be aware of short-covering rallies in the meantime, however, he says.
“Potentially extreme short-term positioning and sentiment set-ups could easily allow for a counter-trend correction under the right conditions,” he said.
U.S. 10-year yields topped at 1.57% this week, the cheapest level since June, spurring the breakeven inflation rate for 10-year TIPS to 2.51%, the highest since May. Friday’s September jobs report could add fuel to this inflationary fire, rewarding bond shorts.
Here is a chart of the rising 10Y Treasury yield against The Fed’s 5Y forward breakeven rate.
Here is a Fannie Mae 3% coupon MBS. Note the rise in Modified Duration with an increase in interest rates.
Convexity for the FNMA 3% MBS?
There is something on the wing. Some-thing.
Initial jobless claims dropped below their recent range last week, falling to the second lowest level since the COVID-lockdowns crushed the economy. Only 326k Americans filed for jobless benefits for the first time last week, down from 364k last week and below the 348k expectation.
The massive Covid stimulus for employment has worn out. Note the decline in Pandemic Unemployment Insurance and Pandemic Emergency Claims. The thrill is gone … of pandemic unemployment benefits.
Continuing claims also declined from the previous week, again largely from Pandemic Unemployment Assistance and Pandemic Emergency Claims programs ending.
On a related note, Challenger job cuts were down -84.9% YoY. But for September, there was a surge in low-paying retail jobs and transportation jobs as Panademic stimulus ran out and governments have pretty much stopped their destructive government shutdowns of economies.
So this is where all the Pandemic claimants have gone?
Well, Janet, we are headed there anyway with GDP crashing to a measly 1.33%.
The fear of not approving a debt ceiling increase (laughable since Democrats can do it on their own) has caused there to be a “little dipper” in the US Treasury actives curve. Meaning that the 1-month T-bill yield is higher than the 1-year T-bill yield.
How bizarre is this getting?
The Atlanta Fed’s real-time GDP tracker fell … again … to 1.33% as The Federal Reserve continues its bizarre monetary stimulus.
The culprits? Declining auto sales, manufacturing, etc.
I have discussed soaring prices since Biden’s election (food, energy, housing, rent, etc). But another soaring price component is shipping costs. Up 315% since mid-February.
While Trump’s slogan was “Make American Great Again”, Biden and The Fed’s slogan should be “Make America Far More Expensive For The Middle Class.” But that won’t fit on a bumper sticker.
And Biden/Democrats now want to RAISE taxes!
The Atlanta Fed has interesting research paper on the housing market.
Key points
The latest reading of an Atlanta Fed measure and US housing trends show home ownership is becoming out of reach for many buyers and resistance to higher prices is building. More than 80 percent of US metro areas had a drop in affordability.
Where is housing most and least affordable?
ddd
Of course, the one chart that The Fed never includes is home price growth and Fed monetary policy.
So, if The Fed is so concerned with median-income households being priced out of housing markets, why are the still sticking with their unorthodox monetary policies?
Confounded Interest - Anthony B. Sanders 
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