Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
Nothing from nothing beats the numbers coming out of Washington DC.
Despite enormous Fed monetary stimulus, Q1 Real GDP fell to -1.6% QoQ while prices rose 8.2%.
And if it weren’t for real estate, it would have been worse.
Personal consumption growth in real terms QoQ declined to 1.8% as Fed money printing slows.
Can the US economy survive without Uncle Spam’s printing press?
Cleveland Fed’s Mester is channeling The Carpenter’s song “We’ve only just begun … to raise rates.”
Financial markets are anticipating what Mester is saying: rapidly rising interest rates. But as you can see from the following chart, gasoline prices (orange line) are driving rising US prices. So it is doubtful that monetary tightening will slow price increases. But Mester and company can only control monetary stimulus.
Mortgage rates have soared as The Fed attempts to crush inflation. And mortgage purchase applications fell -21% WoW in the most recent Mortgage Bankers Association survey.
The Refinance Index increased 2 percent from the previous week and was 80 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 0.1 percent from one week earlier. The unadjusted Purchase Index decreased 21 percent compared with the previous week and was 24 percent lower than the same week one year ago.
It almost seems like Mester is following the Taylor Rule (not really). But using CPI YoY, the Taylor Rule is saying that The Fed Funds Target Rate should be … 22.10%. It is only 1.75% after years of excessive stimulus following the banking crisis of 2008/2009. And Yellen who seemingly never met a rate hike that she liked.
If we use core PCE as our measure of inflation, the Taylor Rule is still high at 13.25%, a whopping 11.50 spread over the current target rate.
Will The Fed drive up rates and risk a recession ala Paul Volcker? Are we sitting on top of the world or about to get fried?
Bear in mind that gasoline prices are up 104% under the Biden Administration and mortgage rates are up 105%.
US pending home sales declined -12% YoY in May as The Fed cranked up mortgage rates. That was 11 out of the last 12 months had declining pending home sales.
How about something a little more upbeat … like Gary US Bonds and New Orleans?
St. Louis Fed President Bullard made a remark the other day that consumers are healthy so a recession is unlikely.
Consumers are healthy? It is true that the US U-3 uemployment rate is low (3.6% versus 14.70% in April 2020 thanks to government shutdowns over Covid). But even though unemployment is low, consumer sentiment is at its lowest point since 1977.
Generally, consumer sentiment is high when unemployment is low, but not this time around. Currently, inflation is at the highest level since March 1980 even though consumer sentiment bottomed-out in April 1980.
Here is my chart showing that REAL average hourly earnings growth YoY is negative and getting worse, hardly a sign of “healthy consumers.”
Of course, rising gasoline and diesel prices have risen dramatically since 2021, but are declining slightly thanks to the global economic slowdown (read “lower demand”).
And a M2 Money Stock (green line) declined, US rents (blue line) declined as well.
We are truly living in Birdland. As in bird-brain land.
Russia defaulted on its foreign-currency sovereign debt for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors.
For months, the country found paths around the penalties imposed after the Kremlin’s invasion of Ukraine. But at the end of the day on Sunday, the grace period on about $100 million of snared interest payments due May 27 expired, a deadline considered an event of default if missed.
It’s a grim marker in the country’s rapid transformation into an economic, financial and political outcast. The nation’s eurobonds have traded at distressed levels since the start of March, the central bank’s foreign reserves remain frozen, and the biggest banks are severed from the global financial system.
But given the damage already done to the economy and markets, the default is also mostly symbolic for now, and matters little to Russians dealing with double-digit inflation and the worst economic contraction in years.
War is hell and Ukraine is paying the price as well.
Meanwhile, European sovereign bond yields are up over 10 basis point this morning, but not UK and Sweden (non-ECB nations).
No problemo, says James “Bully” Bullard, President of the St Louis Federal Reserve. Bullard said that US recession fears are overblown with consumers “healthy.”
Really Jim?
Inflation is so bad they REAL average hourly earnings growth keeps falling and is now -3.34% YoY.
Apparently, real GDP growth of ZERO doesn’t bother Bullard either.
Apparently, we are still Under The Thumb of The Federal Reserve.
The US economy is out of time.
As a recession approaches, we are seeing the WIRP implied Fed o/n rate (green line) declining. And with The Fed chickening-out, we saw a surge in equities (NASDAQ composite index in blue).
Gasoline prices are falling too (orange line), but due to rising global economic slowdown. But notice that The Fed’s balance sheet (yellow line) is still growing despite repeated signals that Covid stimulus would be removed (I call this Quantitative Frightening).
As I mentioned above, The Fed has stopped trimming their balance sheet despite signals to the market of getting rid of the Covid stimulus. As Billy Preston sang, “Nothing From Nothing.”
The Atlanta Fed GDPNow Q2 forecast is for … 0% GDP growth despite the massive monetary stimulus and fiscal stimulus from Biden/Pelosi/Schumer.
And yes, the S&P 500 has officially entered a bear market under the leadership of Joe “The Bear” Biden.
So, Biden’s economic agenda (read, just spend more money and inflation declines?) is failing. Hence, The Fed is backing off a bit helping to drive up stock prices.
US markets are addicted to gov.
The talk of a gasoline tax “holiday” out of Washington DC is pure Kabuki theater. It is purely a sign of the times with Biden still trying to blame Putin for rising gasoline prices and inflation and ignoring his anti-fossil fuel policies that helped drive energy prices AND inflation through the roof.
Daily regular gasoline prices have dipped below $5.00 to $4.94 while diesel fuel, the lifeline of the shipping industry, rose slightly to $5.80. I guess the folks shipping food and other goods don’t get a holiday.
Note that the implied Fed target rate has fallen a bit as the probability of a recession increases.
And why are banks stashing so much money at The Fed in the form of reverse repos? Fear of recession, perhaps?
The Biden Administration is settling all kinds of records, and none are good.
Despite what Biden and his muppets say, there is a good chance that the US will slip into recession over the next 24 months. And with that, we are seeing a slight drop in US mortgage rates.
Inflation is surging, and The Fed seems intent on “inflation fighting” but may have to pause that fight the impending recession. This is called a “U-turn” although Powell didn’t mention that is his testimony yesterday.
According to Mortgage News Daily, the 30-year fixed dropped below 6% to 5.88%.
Europe is signaling their u-turn to recession fighting as 10-year sovereign yield have dropped over 10 basis points this morning. Australia and New Zealand are dropping hard as well.
Here is the Federal Reserve’s open market committee deciding on the direction of interest rates … inflation fighting or recession fighting?
The US is a movin’ on up to the high side … of energy prices.
Today, WTI crude oil futures broke through the $110 barrier.
The WTI Crude crack spread, the differential between the price of crude oil and petroleum products extracted from it, is up 535% under President “I HATE OIL!” Biden and diesel fuel is up 121%.
WTI crude is up 1% today.
“Crack? I thought crack was something that Hunter did!” – Joe Biden
Confounded Interest - Anthony B. Sanders 
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