Now we have people like JPMC’s Jaime Dimon speculating about 7 rates increases in 2022 and other bankers speculating about a faster than expected withdrawal of the The Fed’s monetary stimulus in the form of asset purchases, we have to anticipate what the result will be in markets.
Like what will happen to housing starts if and when the stimulus is removed.
Today, we saw 1-unit housing starts fall 2.25% from November to December, but multifamily (5+ unit) starts rise 13.7%.
Of course, home price growth of near 20% YoY combined with declining REAL hourly earnings points to more multifamily housing and less single-family detached housing.
Here is the rest of the story, as Paul Harvey used to say. 5+ unit permits are up 19.9% in December while 1-unit permits are up 1.99%.
The 10-year Treasury Note yield rose to 1.869% this afternoon as Freddie Mac’s 30-year mortgage commitment rate rose to 3.45%.
And if you like The Fed Funds Futures data, it is pricing in 4 rate hikes by The Fed (March, June, September and December). For a grand total of … 100 basis points or 1%.
By keeping rates soooo low for soooo long, The Fed has committed a serious policy error. Or as Kevin Malone calls it, “The Fed’s Famous Chili!”
Well, Omicron is hitting hard. Not the virus itself, but governments’ reaction to the virus. The NY Empire Manufacturing Index has tanked into negative territory.
New orders are down 5%.
On the energy front, West Texas Intermediate Crude Oil futures are up 79% since January 1, 2021 while regular gasoline prices are up “only” 50% over the same period.
How about inflation and the Treasury yield curve? Inflation has soared to 40-year highs under Biden as energy prices (WTI Crude Futures) have soared 79%.
Container ships are still backed-up at LA and Long Beach ports. I thought Mayor Pete was supposed to fix the port congestion problem!
The Chinese Real Estate Developer Debacles continues to spread from Evergrande to other developers as China’s Central Bank cuts rates due to Omicron spread.
First, China’s Central Bank cut their 1 year medium-term lending rate to 2.85% from 2.95%. And the growing malaise in China’s real estate development continues.
Fresh turmoil rocked Chinese property bonds on Monday on concern over the true scale of the industry’s hidden debts, deepening a selloff among higher-rated firms.
A Logan Group Co. note due 2023 sank 14.1 cents to a record low 62.9 cents after Debtwire reported the developer could be on the hook for $812 million of guarantees on outstanding obligations due through 2023. Country Garden Holdings Co.’s bond due 2024 tumbled 12.9 cents to 67.7 cents, extending last week’s selloff for the country’s biggest developer.
Let’s see if the US Federal Reserve follows through with it rates increases when China is cutting their rates.
If you look at the following chart, you can see multifamily (5+ unit) starts remain elevated (pink box) which is not surprising given that home prices at growing at 19.1% YoY nationally (orange circle) and REAL hourly earnings have declined (yellow triangle) thanks to reemergence of inflation after 40 years.
Then we have the humming dragon, rising mortgage rates, that will reduce housing affordability even further.
Since the 2020 Covid outbreak, the top 1% have been on the Stimulypto gravy train. The top 1% in terms of share of total net worth (blue line) is near the all-time high while the bottom 50% share of total net worth (red line) is at the all-time low.
So, you thought all that Covid relief spending along with Fed monetary stimulus would help the bottom 50%?
Inflation is burning out of control. While home price growth has been off the cherts (as Jean-Ralphio would say), commercial real estate has jumped incredibly at 22% YoY. The Bloomberg charting function hasn’t updated for the Q4 NCREIF report yet so I had to manually write-in 22% on the following chart.
So, what will happen IF The Fed follows through with its monetary stimulus reduction? JPMC’s Jaime Dimon warns that The Fed could hike 7 times in 2022 and not be ‘sweet and gentle’.
Start with the UMich Buying Conditions for Houses. It “rose” to 83. Unfortunately, 100 is the baseline and any number below 100 is bad. The reason? The massive increase in US home prices since 2020.
But retail sales are hurting thanks to higher prices. Retail sales less food services and auto are DOWN 3.1% MoM.
Meanwhile, US industrial production fell to -0.3%.
Ever wonder why prices are rising so fast? One reason is that with rapidly rising energy prices under the Biden Administration, the costs are getting passed-through to consumers in the form of higher prices.
According to the Cass Corp Freight Index, the total spent in December on shipping goods to their customers in the US spiked by 43.6% from December 2020 to December 2021. Not surprising since energy prices over the past year have soared by almost 50%.
But at the same time, the Baltic Dry index (The Baltic Dry Index (BDI) is a shipping and trade index created by the London-based Baltic Exchange. It measures changes in the cost of transporting various raw materials, such as coal and steel) is crashing thanks to FEAR created by Omicron.
And yes, energy prices are surging again in 2022 after cooling off in Q4 2021.
Mortgage rates in the U.S. rose for a third straight week, reaching the highest point in almost two years.
The average for a 30-year loan was 3.45%, up from 3.22% last week and the highest since March 2020, Freddie Mac said in a statement Thursday.
Rates tracked a jump in yields for 10-year Treasuries, which climbed to levels not seen since early 2020, before the pandemic roiled financial markets. Signs point to borrowing costs rising further as the job market improves and the Federal Reserve steps up its efforts to tame inflation.
That would increase the burden on homebuyers who are already stretching to afford a purchase. Rates for 30-year mortgages tumbled to a record low of 2.65% a little more than a year ago.
Cheap loans have helped fuel a housing rally that’s still running hot even as home prices soar out of reach for many Americans.
But wait! The REAL 30-year mortgage rate (nominal 30-year rate – CPI YoY) is -3.59%.
Lael Brainard, Biden’s nominee to be Vice Chairman of The Federal Reserve, has been one of the “inflation is transitory” crowd. US Senator Toomey is questioning Brainard in today’s hearing. From Toomey’s opening statement:
Last year, Governor Brainard repeatedly insisted that inflation was transitory. We have now had nine consecutive months where inflation has been more than two times the Fed’s 2% target. That makes it pretty clear that inflation is not transitory. Yesterday’s CPI release of 7.0%—the highest in 40 years—confirms that.
Inflation is a tax that is eroding Americans’ paychecks every day. Even though wages are growing, inflation is growing faster and causing workers to fall further and further behind.
At least the REAL mortgage rate is negative!
I hope Senator Toomey shows Brainard this chart of “transitory” negative wage growth.
Negative wage growth and negative REAL mortgage rates. What a total mess!
Confounded Interest 