Gut-wrenching inflation is already priced in, but yet another COVID outbreak (and the possibility of more economic shutdowns, more vax mandates and more stern lectures from Anthony Fauci) are spooking markets.
Down Futures are down 777 as I write this note.
The 10-year Treasury yield is down 11.2 basis points.
And West Texas Intermediate crude prices are down 6.62%.
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
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.
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 Misery Index, inflation plus unemployment, is over 10% at 10.80%.
Unemployment has been steadily declining since the COVID shutdowns of 2020. The real culprit has been rapidly rising since COVID as well. At this point, inflation improvements (that The Fed is chasing) have been overwhelmed by inflation (which is being caused by The Fed’s monetary policy and Federal policies).
Powell has said that he is not going to raise rates until unemployment has improved, but risk more explosive inflation in striving to improve unemployment.
How I feel about Biden announcing Powell’s reappointment and uber-dove Brainard appointment as Deputy Fed Chair.
President Biden has decided to nominate Fed Chair Jerome Powell for a second term in an effort not to rock the boat. Lael Brainard is nominated for Deputy Chair.
To quote Gomer Pyle USMC, “Surprise, surprise, surprise!”
The humongous spending bill awaiting Joe Manchin to sign off on it will cost almost double what the CBO said it would. Why? Because spending programs in Washington DC never get cancelled, they only grow.
“We estimate the House Build Back Better Act includes roughly $2.4 trillion of spending and tax cuts along with roughly $2.2 trillion of offsets.However, the bill relies on a number of sunsets and expirations to keep the official cost down. If the plan’s temporary policies were made permanent, we find the cost would increase by as much as $2.5 trillion.As a result, the gross cost of the bill would more than double from $2.4 trillion to $4.9 trillion.
The Build Back Better Act relies on a number of arbitrary sunsets and expirations to lower the official cost of the bill. These include extending the American Rescue Plan’s Child Tax Credit (CTC) increase and Earned Income Tax Credit (EITC) expansion for a year, setting universal pre-K and child care subsidies to expire after six years, making the Affordable Care Act (ACA) expansions available through 2025, delaying the requirement that businesses amortize research and experimentation (R&E) costs until 2026, and setting several other provisions – from targeted tax credits to school lunch programs – to expire prematurely.
Excluding changes to the state and local tax (SALT) deduction, we estimate the Build Back Better Act would cost $2.1 trillion as written. We estimate making all of these temporary policies permanent would cost roughly $2.2 trillion, more than doubling the gross cost of the bill to $4.3 trillion through 2031.”
When asked about the Center for a Responsible Budget saying the bill could be twice as expensive, Manchin replies “it’s concerning. Sure. It’s concerning.”
Surprise, surprise, surprise! And it is certainly more expensive than the estimate Biden gave: $0.
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.
The Marty Stuart/Travis Tritt song “This One’s Gonna Hurt You (For A Long, Long Time)” seems appropriate for the plight of the middle and lower income classes in the face of high inflation. How do you spell the combination of President Biden’s policies and The Fed’s inaction on inflation? T-R-O-U-B-L-E … for the middle and lower income classes.
Over the past year, since the election of Joe Biden, the household consumption bundle (food, rent, heating, gasoline) have all risen dramatically in terms of prices. Food is up 33%, heating oil is up 89%, regular gasoline is up 61%, and effective apartment rents are up 33%.
Meanwhile, the 1% are sitting high on a mountain top obvious to the pain caused by The Federal Reserve and Biden Administration. Here is the growth in wealth by the 1% since the housing bubble burst and financial crisis compared with the bottom 50%.
A problem facing renters is the rapid growth of home prices particularly since the COVID epidemic. At least M2 Money has “slowed” to 12.80% YoY while home prices are raging at almost 20% YoY. But hopefully home price growth will slow with declining M2 growth.
Compendium of Fed Chair Jerome Powell and President Biden on vacation.
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)?
Confounded Interest - Anthony B. Sanders 
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