10-Year Yields Rise Above 1.5% as Central Banks Turn “Hawkish” (FAANG Stocks Trail S&P 500 As Rates Rise)

Central banks are turning “hawkish” in the face of inflation.

(Bloomberg) — Treasuries fell, sending 10-year yields to a three-month high, as traders braced for a testing week of heavy bond auctions and continued to digest the prospect that central banks in the U.S. and Europe will step up the pace of policy tightening.

The yield on 10-year Treasuries reached 1.51%, the highest since June, before settling at 1.48%. The yield has climbed 16 basis points over the past week as the Federal Reserve signaled it may start reducing its asset purchases in November and raising rates as soon as next year. Yields on two- and five-year Treasuries hit their highest levels since early 2020, with a combined $121 billion of the securities set to be sold Monday. A seven-year auction is due Tuesday. 

While Treasuries briefly extended the selloff after a report showed durable goods orders exceeded economists’ forecasts, they started to pare losses after U.S. equity futures soured. 

Bond yields increased across the globe last week as central banks move to reduce pandemic stimulus. The Bank of England surprised markets by raising the prospect of increasing rates as soon as November, and Norway delivered the first post-crisis hike among Group-of-10 countries. In the U.S., traders pulled forward wagers on an interest-rate increase to the end of 2022 following last week’s Fed meeting. 

On the equity side, FAANG stocks trail the S&P 500 as 10-year Treasury yield climb.

We have the 10-year Treasury yield climbing above the S&P 500 dividend yield.

Here are The Fed and The ECB turning “hawkish.”

The Fed Helped Create Housing Bubble I And Then Helped Create Housing Bubble II: The Sequel (Case Study Of Phoenix AZ Home Price Bubble)

Phil Hall of Benzinga wrote a series of excellent articles in four parts for MortgageOrb (although “The Orb” has removed his name). Here are the links to his stories.

https://mortgageorb.com/the-fall-and-rise-of-the-housing-market-part-one

https://mortgageorb.com/the-fall-and-rise-of-the-housing-market-part-two

https://mortgageorb.com/the-fall-and-rise-of-the-housing-market-part-three

https://mortgageorb.com/the-fall-and-rise-of-the-housing-market-part-four

After re-reading these excellent articles on the housing bubble and crash, I thought I would take the opportunity to present a few charts to highlight the housing bubble, pre-crash and post-crash.

Here is a graph of Phoenix AZ home prices. Note the bubble that peaked in mid 2006. The Phoenix bubble correlates with the large volume of sub-620 FICO lending and Adjustable-rate mortgage (ARM) lending. Bear in mind, many of the ARMs prior to 2010 were NINJA (no income, no job) ARM loans.

What happened? Serious delinquenices at the national levels spiked as The Great Recession set in and unemployment spiked.

Since the housing bubble burst and surge in serious mortgage delinquencies, The Federal Reserve entered the economy with a vengeance. And have never left, and increased their drowning of markets with liquidity.

The Fed whip-sawing of interest rates in response to the 2001 recession was certainly a problem. They dropped The Fed Funds Target rate like a rock, then homebuilding went wild nationally and home prices soared thanks to Alt-A (NINJA) and ARM lending. But now The Fed is dominating markets like a gigantic T-Rex.

Oddly, then Fed Chair Ben Bernanke never saw the bubble coming. Or the burst.

Speaking of pizza, Donato’s from Columbus Ohio is my favorite. Founder’s Favorite is my favorite, but they do offer the dreaded Hawaiian pizza (ham, pineapple, almonds and … cinnamon?)

Bleech!

New Home Sales Beat Expectations As Median Prices Soar 20.1% YoY (Green Man!)

New Home Sales beat expectations thanks to the massive monetary stimulus in the system that The “Hawkish” Fed seems to not want to withdraw. Aka, Greenman!

(Bloomberg) —  Aug. new home sales rose 1.5% to 740,000 annual rate
Forecast range 650k-784k from 60 estimates, median 715k
New home sales rose 11k in Aug. from prior month, the Census Bureau said
Median new home price rose 20.1% y/y to $390,900; average selling price at $443,200
New home sales on pace for 842k this year compared to a 2020 total of 822k
Houses for sale in Aug. rose 3.3% m/m to 378,000
Months’ supply at 6.1 in Aug. compared to 6.0 prior month
The Commerce Department is 90 percent confident that new residential sales were between 644,540 and 835,460.

Greenman!

New York Fed Doubles Reverse Repo Counterparty Limit to $160b, Banks Immediately Respond By Parking $135.2b At The Fed

This will make Fed Chair Powell smile along with Treasury Secretary Janet Yellen!

(Bloomberg) — The Federal Open Market Committee directed the New York Fed’s Desk to increase the size of the counterparty limit for the overnight reverse repo facility, according to a statement.

Per-counterparty limit increased to $160b/day from $80b/day, with the change taking effect Sept. 23

“The increase in the per-counterparty limit from the current level of $80 billion per day helps ensure that the ON RRP facility continues to support effective policy implementation,” according to statement. “All other ON RRP operation parameters remain the same”

And banks didn’t wait long to park $135.2b overnight at The Fed.

When combined with the ongoing expansion of the Fed’s balance sheet, we are seeing to see the expansion of the United States on Liquidity.

The Fed is providing a sea of liquidity. What are the banks afraid of?

US Homeowner Equity Surged +29.3% YoY (California The Biggest Gainer) Thanks Mostly To Federal Reserve

Since Q2 2020, US homeowners have been big winners in terms of home price gains and equity in their homes. Unfortunately, this means that renters are big losers. Once again, The Federal Reserve is benefiting once segment of the population while punishing the other segment.

Homeowner Equity Q2 2021

CoreLogic analysis shows U.S. homeowners with mortgages (roughly 63% of all properties*) have seen their equity increase by a total of nearly $2.9 trillion since the second quarter of 2020, an increase of 29.3% year over year.

*Homeownership mortgage source: 2016 American Community Survey.

Figure 1 National Homeowner Equity YOY Change

National Homeowner Equity

In the second quarter of 2021, the average homeowner gained approximately $51,500 in equity during the past year.

California, Washington, and Idaho experienced the largest average equity gains at $116,300, $102,900 and $97,000 respectively. Meanwhile, North Dakota experienced the lowest average equity gain in the second quarter of 2021 at $10,600.

Figure 4 National Homeowner Equity Average Equity Gain

10 Select Metros Change

CoreLogic provides homeowner equity data at the metropolitan level, in this graphic 10 of the largest cities, by housing stock are depicted. 

Negative equity has seen a recent decrease across the country. San Francisco-Redwood City-South San Francisco, CA, is the least challenged, with Negative Equity Share of all mortgages at 0.6%.

Figure 5 National Homeowner Equity

Loan-to-Value Ratio (LTV)

The graph represents National Homeowner Equity Distribution across multiple LTV Segments.

Figure 6 National Homeowner Equity Loan-to-Value Ratio

Since growing home equity lead to lower default risk (or at least losses to the mortgage holder), we are seeing mortgage delinquencies fall after the Covid surge.

Of the top ten cities, Chicago leads in negative equity.

Maybe Fed Chair Jerome Powell is trying to soothe us, like Sam and Dave.

Hold That Tiger! US Existing Home Sales Decline As Prices Soar Thanks To Limited Inventory And Fed Stimulus

I certainly hope The Federal Reserve starts normalizing interest rates. Hold that Fed tiger!

(Bloomberg) — Sales of previously owned U.S. homes fell in August, suggesting that demand is moderating as lean inventory and high prices squeezed out some buyers.

Contract closings decreased 2% from the prior month to an annualized 5.88 million, in line with economists’ estimates, figures from the National Association of Realtors showed Wednesday.
“Clearly the home sales are settling down but above pre-pandemic conditions,” Lawrence Yun, NAR’s chief economist, said on a call with reporters.

Lawrence Yun is correct. There was a huge spike in existing home sales (EHS) following the Covid outbreak and the overreaction by The Federal Reserve (aka, when the ain’ts went marching in). Despite continuing stimulus, but EHS has simmered down.

At least the median price of EHS YoY slowed to 12.1% YoY as The Fed slows M2 Money growth.

Inventory remains relatively low compared to historic levels while price zooms with Fed stimulus.

Want home price growth to slow its insane growth? Hold that tiger! That is, The Fed has to start normalizing interest rates.

Building Material PVC Rises With Twin Hurricanes (IDA, Jerome [Fed]) Is The US Headed For A Slowdown?

Building materials copper and PVC (pipes) both surged with The Fed’s Cat 5 hurricane approach to liquidity. Then copper backed-off, but PVC rose when Hurricane IDA struck the gulf coast.

The Fed will announcing their plans (maybe) at 2pm today.

What would it take to knock the U.S. recovery off course and send Federal Reserve policy makers back to the drawing board? Not much — and there are plenty of candidates to deliver the blow.

From one direction: U.S. debt-ceiling deadlock, China property slump or simply an extension of Covid caution could hit growth and jobs — taking the Fed’s proposed taper of bond purchases off autopilot, and pushing its first interest-rate increase back to 2024 or later. From the other: Sustained supply-chain snarl-ups could keep inflation stubbornly high and unmoor inflation expectations — forcing an acceleration of the taper, and an early rate liftoff in 2022.

And if shocks arrive from both directions at once, the upshot could be a combination of weak growth and rapidly rising prices — not as severe as the stagflation of the 1970s — but still leaving Fed Chair Jerome Powell and his colleagues with no easy answers.

In the following, we use Bloomberg Economics’ new modeling tool SHOK to explore these scenarios. None of them represents our base case. At a moment of elevated uncertainty, it makes sense to pay more attention to the risks.

Is the U.S. Economy Headed for a Slowdown?
Signs of a slowdown in the U.S. economy aren’t hard to find.

August payrolls — just 235,000 new jobs, one-third of the expected number — were a red flag. The delta variant has made consumers cautious again. The University of Michigan’s index of sentiment plunged in August; only six declines since the modern index was launched in 1978 have been bigger.

Add all these pieces together, and a recovery that looked unstoppable just a few weeks ago now appears to be losing steam. At Bloomberg Economics, we have cut our prediction for annualized third-quarter growth to 5%, from above 7% at the start of the quarter. Others have gone lower, with forecasters at some of the big banks anticipating growth closer to 3%. Even if delta subsides, it’s not hard to imagine scenarios where the slide continues.

One of them involves the partisan impasse over raising the U.S. debt ceiling. The U.S. government is expected to reach the limits of its debt-servicing capacity in October. Default, a potentially catastrophic event for the global financial system, still appears an outside possibility. But even without one, recent history shows that dancing around the possibility — triggering a persistent risk-off period in the markets — can have serious consequences. Separately, a government shutdown starting Oct. 1 would hardly be helpful when the recovery is already struggling to find its footing.

In the three weeks around the 2011 debt-ceiling standoff, the S&P 500 index plummeted more than 15% and corporate borrowing costs spiked. Using SHOK we estimate that a repeat performance would shave about 1.5 percentage points off annualized fourth-quarter growth — and ensure a rocky start to 2022.


Global Risks to the Fed’s Plan

Not all the risks originate so close to home.

Fears of a China housing crash have long haunted global markets. Now, President Xi Jinping’s “common prosperity” agenda has turned that into a real possibility.

Regulators are cracking down on abuses that inflated property values, and tight controls on lending have helped push prices and new construction sharply down. That’s left Evergrande, one of the nation’s biggest developers, on the cusp of a default. The consequences of a wider slump could be severe, because real estate drives demand for everything from steel and concrete to furniture and home electronics — contributing as much as 29% of China’s GDP, all told.

It wouldn’t take a sub-prime style meltdown to send shockwaves around the world and move the dial for the U.S. China’s economy is currently forecast to enter 2022 with growth at around 5%. A property slump could take that down to 3%, triggering a blow to trade partners, a drop in oil and metal prices, and a risk-off moment in global markets. In that scenario, the U.S. would limp into 2022 with the recovery marked down and inflation back below the 2% target.


When Is Jerome Powell Likely to Raise Rates?

Powell has set out the FOMC’s criteria for rates liftoff: maximum employment, and inflation that hits and is set to exceed the 2% target for some time. A blow to employment and demand from a debt-ceiling standoff or China shock might mean those criteria are not met. Rate hikes could be kicked into the long grass, with expectations moving from 2023 out to 2024 or beyond. The test for tapering is less stringent, and a start at the end of this year appears close to baked in. Even so, if the recovery stumbles the Fed might have to make a course correction, introducing discretion into a process that markets expect to run on autopilot.

In 2015, the stock-market and currency slump in China — and the sustained shift to global risk-off sentiment that triggered — was enough to delay the start and slow the pace of the U.S. tightening cycle. In 2021, the Fed might not have that luxury.

China’s residential property slowdown deepened last month, signaling that regulatory tightening and an escalating crisis at the country’s most indebted developer are hurting buyer sentiment. 

Supply-chain breakdowns — from port closures to shortages of semiconductors and lumber — have been one of the main factors pushing U.S. inflation above 5% this summer. That’s enabled Powell to label the price jumps as “transitory” and soothe fears of an upward spiral. The lower CPI reading for August provides some support for that thesis.

It wouldn’t take much, though, for further supply shocks to keep inflation uncomfortably high.
From home electronics to textiles, American consumers load their shopping carts with goods that are made in Asia and delivered via supply chains that crisscross the continent. When the inflation rate for used cars in the U.S. hit 45% this year, driven by semiconductor shortages that threw assembly lines into disarray, it illustrated what can happen when those fragile linkages break down.

All of this adds to the risk of further “transitory” shocks to inflation. One early-warning signal: according to press reports, semiconductor giant TSMC has announced plans for price hikes of as much as 20% next year.

The effects of pandemic-induced supply-chain disruptions are still rippling through businesses and households, reflected in higher prices for goods, delays in receiving them and flat-out shortages.

For the Fed, inflation running hot into 2022 would be troubling on its own, and worse if it triggers a shift in inflationary psychology. If businesses start to feel comfortable setting prices higher, and workers start demanding higher wages to compensate, the risk is a situation reminiscent of the wage-price spirals of the 1970s — when it took a recession engineered by the Volcker Fed to squeeze inflation expectations out of the system. 

Unmoored inflation expectations would very likely trigger an early and aggressive response from the Fed: an accelerated taper, and a rate hike in 2022.


A no-win scenario would be if the two blows — to output and jobs, and to supply chains and prices — landed at the same time, leaving Fed officials in a quandary. Ease policy to support growth and they would add fuel to the inflationary fire. Tighten to bring prices under control, and they would exacerbate the drag on the recovery, throwing more Americans out of work.

Agreement in Congress, or decision by the Democrats to go it alone, could remove the default risk. China has in the past proved skillful at shifting gears to avoid a housing crash. Vaccination rates in Asia are rising. The latest U.S. data — inflation slowed and retail sales rose — have been encouraging.

Hurricane Jerome doesn’t have a whole lotta lovin’ for the average American worker.


S&P 500 Real Earnings Yield Goes Negative (As Technicals SCREAM Bubble) Mystery of The Flying Fed!

The stock market mildly rebounded from yesterday’s mild correction, but a glaring problem remains: S&P 500 real earning yields are negative.

With all the Federal government fiscal stimulus and Federal Reserve monetary stimulus, we are seeing inflation and that inflation is eating away at S&P 500 earnings yield.

The S&P 500 is still well above key technical support levels.

However, the Buffet ratio is raging along with Fed stimulus.

And the Hindenburg Omen is flashing RED!

The mystery of the Flying Fed is whether they will withdraw their massive monetary stimulus or not.

U.S. Housing Starts Rose by More Than Forecast in August (Home Price Growth >4x Hourly Earnings Growth) Will The Thrill Be Gone When Stimulus Is Remove?

The unorthodox monetary stimulus from The Federal Reserve and stimulypto-level spending by the Federal government has resulted in a surge in US housing starts. But that thrill may be gone if the stimulypto is removed.

(Bloomberg) -By Olivia Rockeman- U.S. housing starts rose by more than expected in August, suggesting that the supply and labor constraints that have been holding back construction eased in the month.

Residential starts rose 3.9% last month to a 1.62 million annualized rate after an upwardly revised July print, according to government data released Tuesday. The median estimate in a Bloomberg survey called for a 1.55 million pace. 

Building permits, meanwhile, increased 6% in August, the biggest gain since January, reflecting a sizable jump in multi-family units. Permit applications for single-family homes also edged higher.

The data suggest that builders are making some construction headway despite limited availability of land, labor and materials, which has slowed residential starts from a 15-year high in March. Despite the bottlenecks, housing starts remain mostly above pre-pandemic levels, which is expected keep construction activity elevated for some time.

1-unit (single family detached) starts got a tremendous jolt from The Fed’s monetary stimulus and Federal governments fiscal stimulus. But government stimulus wears out.

Given the high cost of housing in the USA, particularly in coastal metro areas, we see home price growth raging at over 4 times hourly earnings growth.

As a result, we are seeing a burst of 5+ unit (multifamily) housing starts. Note the burst of 5+ housing starts prior to Covid striking in early 2020.

Permits for 1-unit housing are up only slightly but 5+ unit permits are up 19.7%.

Remember, the withdrawal of fiscal stimulus will lead to a big fiscal cliff.

Is the thrill gone from owning a single-family detached home?

Kind Of A Drag! The Taper That Will Really Bite Into U.S. Growth Isn’t the Fed’s (As The Fed’s Repo Facility Hits An All-time High)

Kind of a drag … when Federal government stimulus fades just as The Fed tries to decide on slowing its balance sheet expansion.

(Bloomberg) — In the coming Year of the Taper, it’s the fiscal version that will really bite.

The chatter in U.S. financial markets is all about the Federal Reserve’s yet-to-be-announced reduction of its bond purchases. That’s obscuring something important: the already-under-way cutback of the federal government’s budgetary support — which is likely to have a much bigger impact on economic growth next year.


The U.S. expansion looks set to slow sharply in the second half of 2022 as measures that propped up the economy during the pandemic — from stimulus checks for households to no-cost financing for small companies — fade from view.

That will be the case even if President Joe Biden manages to win Congressional approval for the bulk of his $3.5 trillion Build Back Better agenda. The spending will stretch over years, with limited impact in 2022. It will also be at least partly paid for by tax increases that slow the economy down rather than speed it up.

And then the is Treasury Secretary Janet Yellen renewing her call for Congress to raise or suspend the U.S. debt ceiling, saying the government will otherwise run out of money to pay its bills sometime in October.

We can see the CDS market reacting … slightly … to Yellen’s concerns.

But next to Argentina’s CDS, the US looks positively tame.

And there is a little disturbance in the Fed Funds Futures volatility.

Then we have the volatility cube showing The Fed’s rate suppression at the short end and expected volatility in the future.

And there we have The Fed’s temporary repo facility hitting an all-time high.

Mercy, mercy, mercy!