Since the Covid outbreak in early 2020, The Federal Reserve lowered their target rate and super-spiked their balance sheet. Helping to lower bank deposit rates to near zero.
But despite near zero bank deposit rates, we seeing bank deposits are larger than bank credit such as commercial and industrial loans, residential mortgages loans, car loans, etc. Normally, bank credit EXCEEDS bank deposits.
The problem? One of them is negative growth in commercial and industrial lending. It declined 13.5% YoY in August. Of course, The Federal government extended emergency business loans that were counted as C&I loans, hence the spike in C&I loan growth in May 2020. But now we are seeing a real slowdown in C&I lending.
Residential lending is down 2.1% YoY as of September 10 (for August).
Commercial real estate lending? At least it is growing at a 2.9% YoY pace for August.
Credit cards and other revolving plans increase steadily since 2014 and then declined after the Fauci Flu struck. But credit cards and revolving credit has started to rise again.
The Fed’s massive overreaction to Covid caused a storm surge in C&I lending that has subsided. But other bank lending has slowed as well.
Lots of bank assets with nowhere to go.
No wonder M2 Money Velocity (GDP/M2 Money) is at historic lows.
Remember, Federal Reserve Chair Jerome Powell is up for reappointment and President Biden must make a decision on his reappointment.
(Bloomberg) — Prices paid to U.S. producers increased in August by more than forecast as persistent supply chain disruptions squeeze production costs higher.
The producer price index for final demand increased 0.7% from the prior month and 8.3% from a year ago, a fresh series high, Labor Department data showed Friday. Excluding the volatile food and energy components, the so-called core PPI advanced 0.6%, and was up 6.7% from August of last year.
PPI Final Demand prices rose 8.3% YoY in August.
Given that there are shortages in the economy, why is The Federal Reserve pumping so much money into the system? It is like repeatedly flushing a clogged toilet hoping it will clear.
The correct way to clear a clogged economic toilet.
Not The Fed way of clearing clogged toilets. Pumping trillions of dollars into a clogged economic system.
Covid struck in early 2020 and The Fed spiked the punchbowl with a massive surge in M2 Money. Like a storm surge.
Today’s unemployment report showed initial jobless claims and continuing jobless claims ALMOST at pre-Covid levels.
So it appears that The Fed’s job is done (under the assumption that The Fed had anything to do with the recovery).
So did The Fed almost violently overreact to the Covid crisis? The Atlanta Fed’s Raphael Bostic says it is too early to withdraw while St Louis Fed’s James “Bully” Bullard says it is time to taper.
Really Raph? 18.8% price growth is not enough for you?
According to Deutsche Bank, 85% of the US High Yield market has a yield below the current rate of inflation.
Its not only high-yield bonds that have negative REAL yields, but even The Fed Funds Target rate is negative at -5.12%. The real 10-year government bond yield is -4.01% and the REAL Freddie Mac 30-year mortgage survey rate is -2.5%.
The jump is the largest 12-month gain in the index since the series began 45 years ago. On a month-over-month basis, home prices increased by 1.8% in July from June.
“Home price appreciation continues to escalate as millennials entering their prime home buying years, renters looking to escape skyrocketing rents and deep pocketed investors drive demand,” said Frank Martell, president and CEO of CoreLogic, a global property-information firm.
The rush of home buyers — amid extremely low mortgage rates — has caused a lack of supply, which is unlikely to be resolved over the next five to 10 years “without more aggressive incentives for builders to add new units,” he said in a statement.
But it is the forecast for July 2022 that is interesting. A slowdown in home price growth across the board.
Lets see what happens to wage growth are three out of four Americans lose their Covid benefits as of today.
What if inflation is actually transitory like The Federal Reserve has been saying? Or is The Fed really telling us about an impending economic slowdown after the Fed’s and Federal government stimulypto wears off?
Iron ore prices have slowed noticeably after peaking earlier this year. Lumber futures (random length) have crashed to pre-Covid levels.
On the other hand, food stuffs and raw industrials remain elevated, but the growth in price has stalled (see pink box).
President Biden, aka The Kabul Klutz, is now recommending tax increases as a result of the terrible jobs report from Friday. Rather than focus on The Fed’s monetary stimulus not working for the labor market.
The problem with fiscal stimulus is that the debt lasts forever but the GDP effects are short-lived. And The Fed is a crazy train.
Well, after the dismal ADP print we knew that the August jobs numbers would be worse than imaginable. And they were!
A big miss on the topline job creation number — the establishment survey suggested only 235,000 jobs were created in August, versus expectations for 733,000 — has undercut what little chance there was left of a Fed announcement on tapering later this month. It should make for a very interesting debate among policy makers about forward momentum in the labor market.
The shocker was in the leisure and hospitality sector, which created zero new jobs on net in August after figures of around 400,000 in each of the previous two months. There was a dip in hiring in other service sectors too, but nowhere near as significant. That could perhaps be due to some early impact from the spread of the delta variant in recent weeks.
On the household survey, the numbers looked better. According to those figures, the unemployment rate fell to 5.2%, in line with estimates, thanks to a 509,000 increase in reported employment. That also propelled the prime working-age employment to population ratio to 78%, from 77.8% in July.
Disparities narrowed in August as well, according to prime working-age EPOP ratios by race and ethnicity. Prime working-age Black EPOP, in particular, jumped to 73% from 72.2% the month before — outpacing the rest.
Equity futures pared a modest gain after the release, with contracts on the S&P 500 Index flat as of 9:09 a.m. in New York. With wages climbing, Treasury yields rose, with those on 10-year notes rising 4 basis points to 1.33%. The Bloomberg Dollar Index was down 0.3%.
The unemployment rate dropped which a misleading headline. That simply means that more people dropped out of the labor force than were unemployed. Not a good way to lower the unemployment rate.
Alternative investments silver, Bitcoin and Ethereum rose on the lousy jobs report as the US Dollar dropped.
The good news? US Average Hourly Earnings All Employees Total Private YoY rose to 4.28%! The bad news? US home prices are rising at a 18.61% pace.
The bad news? Black unemployment rose to 8.8% in August while white unemployment fell to 4.5%. This represents a widening of the employment gap that is higher in August than pre-Covid.
There are still over 100 million NOT in the labor force, higher than pre-Covid.
So, The Fed’s plans to begin tapering have gone up in smoke.
Since the original model of The Federal Reserve was to purchase Treasuries and Agency MBS in an effort to push down interest rates, it will be quite difficult to delink the two: taper the balance sheet while not raising short-term rates.
(Bloomberg) — Bond investors may not wait long to start pushing back against Federal Reserve Chair Jerome Powell’s efforts to delink the start of asset-purchase tapering from the countdown to eventual policy-rate hikes.
Since Powell last week said the central bank could begin reducing its monthly bond buying this year, traders have stuck with early 2023 as the likely timing for the Fed’s liftoff from zero interest rates, and Treasury yields have barely budged.
But that calm faces a test starting Friday. The potential for volatility comes from the fact that when Fed officials gather this month, they will release fresh projections for the fed funds rate for the next few years. And with the labor market pivotal for Fed policy now, Friday’s August jobs report is seen as laying the foundation for these forecasts — collectively known as the dot plot — especially as some Fed officials have already been pushing for an early taper.
The upshot is that a robust reading Friday could have investors pulling forward tightening bets regardless of Powell’s efforts last week in his virtual speech at the Fed’s Jackson Hole symposium. The risk is traders will prepare for a repeat of June, when a hawkish signal via the dot-plot took markets by surprise and triggered an abrupt unwinding of wagers on a steeper yield curve.
If the employment report is “even deemed acceptable, regional presidents will be back on the tape in a flash,” sounding hawkish again, said Jim Vogel, an analyst at FHN Financial. “And you may have more officials penciling in a 2022 hike. And that would have to flatten the yield curve.”
Expectations for a hawkish shift would lift 5-year Treasury yields in particular, shrinking the gap with 30-year rates, Vogel said. That spread was around 114 basis points Wednesday, down from about 140 just before the Fed met in mid-June.
Dots Math
Officials’ June quarterly forecasts not only showed a median funds rate projection of two hikes in 2023 — after the March dot plot indicated no tightening until at least 2024 — but that seven participants saw at least one increase next year. This time around, it will take just three officials to raise their dots for 2022 for a full hike to be the new median for next year, assuming everyone else keeps their projections where they were.
Traders responded to the Fed’s June rate projections by driving 5-year yields up the most in almost four months. That was even as Powell said in his press conference that the dot plot should be taken with a “big grain of salt” and discussion about raising rates would be “highly premature.”
Powell last week said “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.”
But the leadup to the Fed decision on Sept. 22 may culminate in a dot-plot unveiling that yet again presents a communication challenge for policy makers, as has been seen several times since the Fed introduced the projections in 2012.
“There’s information in the dots, and generally it’s good information,” said Shahid Ladha, head of Group-of-10 rates strategy for the Americas at BNP Paribas SA. It makes sense for the Fed, regarding tapering and rate hikes, “to try to separate them, but I don’t think they’ll be ultimately successful in separating them.”
Trouble Ahead
Even some Fed officials are wary of being able to disentangle the tapering from rate hikes, minutes from the July Fed meeting showed.
Kevin Flanagan, head of fixed-income strategy at WisdomTree Investments Inc., which runs exchange-traded funds with assets of $75 billion, sees trouble for the Fed.
His view is that the labor market will keep gaining ground in its rebound from the pandemic, and that the median September dot may show a hike in 2022. That bodes for higher yields, a flatter curve and makes floating-rate notes appealing, he said.
The median of economists’ projection is for a gain of 725,000 jobs in August, a slowdown from June and July but well above the average for 2021. Of course, with millions still out of work relative to pre-pandemic levels, the Fed may prove to take longer to lift rates than traders expect, especially given the central bank’s “broad and inclusive” maximum-employment goal. But the market may be about to challenge that approach.
Note: Yesterday’s ADP jobs gain was forecast to be 625k jobs added in August, but only 374k jobs were actually added.
Fed Faces ‘Ugly Fight’ Over Jobs Goal in Next Big Policy Debate
“We are going to be all of a sudden talking about rate hikes potentially next year, and that is where the focus of the bond market is going to go,” Flanagan said. “The dot plot will be the Fed’s initial message for its forward guidance on rates. And then it will begin to come from Fedspeak — which is when the rubber will really meet the road.”
And with the stock market, particularly technology stocks, rising with Fed asset purchases, I wonder if The Fed forecasts that assets prices will keep going if they withdraw the punch bowl?
Let’s see if Powell and The Gang can forecast the stock market if they taper the balance sheet and raise rates.
At the annual Jackson Hole (aka, J-Hole) Economic Symposium, Federal Reserve Chairman Jerome Powell reiterated that the Fed is in no hurry to either taper asset purchases immediately or aggressively. Additionally he made crystal clear that even when the Fed does eventually start tapering asset purchases (likely November or December), it should not be taken as signaling interest rate hikes will follow on some preset course. Indeed, Fed Chairman Powell continues to claim that inflation is transitory. Finally, he said that part of the mandate (employment) is still far from being achieved. So, expect more SNAKE JUICE.
The shape of the yield curve has been highly influential recently in relative performance trends between various areas of the market. From last summer through May of this year, the steepening of the yield curve coincided with healthy outperformance of cyclical stocks. Since May, the flattening of the curve has coincided with more defensive (or at least high quality) leadership out of the tech and health care sectors. The logic goes, therefore, that a re-steepening of the curve should coincide with a shift back to cyclicals. Indeed, that shift may be in the early innings.
Let’s take a look at the US Treasury 10Y-2Y curve slope over the past twelve months against the Citi Economic Surprise Index for the US. You can see curve fatigue starting in April 2021 as the Citi Economic Surprise Index turns negative.
The the more cyclical and smaller skewed S&P 500 equal weight index has started to outperform the S&P 500 again, right on queue with the yield curve re-steepening.
Industrial stocks are under-performing the broader S&P 500 index as the curve flattens.
Real estate stocks? They are outperforming the broader S&P 500 index.
Mining stocks like gold mines? They are underperforming the broader S&P 500 index.
Financial stocks? Not surprisingly, The Fed’s dovish behavior is causing financial stocks to outperform the broader S&P index.
Likewise, information technology stocks are outperforming the broader S&P 500 index.
So, by Powell delaying any balance sheet slowdown and rate increases, we have clear winners (real estate, financials, information tech) and clear losers on a relative basis (industrials, retail, metals and mining).
The Others! Due to volatility differences, I wouldn’t over-interpret this chart. But Bitcoin as a ratio of the S&P 500 index is “kicking ass!” Gold and housing as a ratio of the S&P 500 index seemingly can’t keep up with the S&P 500 index.
The financial markets are overstimulated like a cranky child after too much sugar (aka, sugar rush). So what will happen to overstimulated markets if Fed Chair Powell announces withdrawal of monetary stimulus?
The famous Hindenburg Omen is already flashing WARNING ahead of this week’s Fed meeting at Jackson Hole. Will Powell take the punch bowl away?
The Shiller CAPE ratio is at a high since the financial crisis and stock market correction in 2008 and early 2009.
I would expect Powell to walk softly since he has the opportunity to terrify financial markets. But I expect Powell will announce a small adjustment to the growth of The Fed’s balance sheet in line with The Fed’s DOTS project signalling interest rate increases in the futures.
Throw Covid, a slowing China and Europe into the mix, and Powell and the gang had better think long and hard about they are going to withdraw the record monetary stimulus from the cranky financial markets.
Meanwhile I hope that have a few beers from Bond’s Brewing Company, the best beer in Laramie, Wyoming!!
Confounded Interest - Anthony B. Sanders 
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