Logan (Un)Lucky? China Cuts Rates As Omicron Worsens And Chinese Developer Bond Rout Deepens on Hidden Debt Concerns

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.

Simply Unaffordable! Fannie Mae Multifamily Financing Grew 23% … While Home Prices Grew 19.1% And Real Hourly Earnings Fell -2.36% (Rising Mortgage Rates Make The Affordability Problem WORSE)

Mortgage Orb has the tantalizing headline: “Fannie Mae’s Financing for Multifamily Affordable Housing Grew Over 23%.” At first, this sounds amazing … until you realize how simply unaffordable housing is much of urban/suburban America.

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.

Home ownership has become simply unaffordable much like steaks. Doctor, doctor (Yellen), we got a bad case of unaffordable home ownership.

Inflation Nation! Commercial Real Estate Returns UP 22% YoY For Q4 2021 (Versus 19.66% YoY For Case-Shiller National Home Price Index)

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.

To quote Dean Martin, “Ain’t that a kick in the head.” Commercial real estate returns are now higher than house price growth.

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’.

But The Fed seems to be stuck in underworld and doing a terrible job at signalling their intentions if Dimon thinks that The Fed could raise rates 7 times in 2022.

UMich Housing Sentiment “Rises” To 83 As Inflation Hurting Retail Sales (Industrial Production Declines -0.3%)

That Bidenflation is really hurting Americans.

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%.

Shipping Blues! Cass Freight Index Expenditures Rose 43.6% In 2021 While Baltic Dry Index Has Crashed Since October 2021 (Omicron Strikes!)

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.

Covid strikes!

Mortgage Rates in the U.S. Soar to the Highest Since March 2020 (3.45% Nominal Rate, -3.59% REAL Rate)

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!

Inflation Nation! US PPI Final Demand Soaring At 9.7% YoY As CPI Soared 7.0% YoY (Energy Prices Lessened In Q4 But Are Surging Again In 2022)

Yesterday’s inflation report was the worst in 40 years. But at least today’s Producer Price Index Final Demand is down slightly from November. But PPI Final Demand YoY is still roaring at 9.7%.

The producer price index for final demand increased 0.2% from the prior month and 9.7% from a year earlier, Labor Department data showed Thursday. The annual advance was the largest in figures back to 2010. 

Excluding the volatile food and energy components, the PPI climbed 0.5% in December and was up 8.3% from a year earlier. 

Too much Federal government spending, too much Fed monetary stimulus, Omicron helping created labor shortages, etc. But the real killer has been ENERGY prices. Note that natural gas, gasoline and WTI crude oil were falling in November/December helping to slow PPI growth by a smidge. BUT energy prices are skyrocketing in January. So … look for higher PPI in January.

Here is the painting by Thomas Hart Benton that drove “Brokeback Biden” to try to destroy fossil fuel production. Or at least this is Washington DC’s idea of what Oklahoma and Texas are like.

Waiting For Godot: US Inflation Jumps To 7% YoY As Real Hourly Earnings Growth Crashes To -2.32% (Taylor Rule Now 17.84% Versus Current Fed Funds Target Rate Of 0.25%)

This is like the Samuel Beckett play “Waiting For Godot.” Except we are waiting for Jerome Powell and The Federal Reserve to do something.

December’s consumer price index (CPI) is out and its a doozy, though expected. The CPI year-over-year (YoY) rose 7% in December.

If we exclude food and energy, CPI rose by 5.5% YoY.

Thanks to Biden’s assault on the energy sector, energy prices are up nearly 50% YoY.

REAL average hourly earnings YoY? It has crashed to -2.32%.

And with 7% inflation, the Taylor Rule model suggests a Fed Funds Target rate of … 17.84%. Bear in mind that the current target rate is 0.25%.

Meanwhile, grocery store shelves remain empty like we are living in Venezuela. Bidenzuela??

Meanwhile, we are waiting for Godot Powell to start taking action instead of jawboning.

Mortgage Purchase Applications Rise 51.2% From Previous Week Despite Rising Mortgage Rates (Refi Apps Up 42.77%)

US mortgage purchase applications rose 51.2% from previous week, despite mortgage rates rising.

Of course, the first weeks of most years see large increases in mortgage purchase applications.

Mortgage refinancing applications were up 42.77% from the previous week.

Here is the MBA data.

So, the US housing market is off to a fast (and hot) start to 2022.

Will Omicron Kill The Fed’s Tightening? (Covid Drums Along The Potomac)

With the US Senate now trying to jam in vaccine passports in their Federalization of voting bill, it is clear that Washington DC is letting the Omicron variant terrify US citizens. But will the fear of the Omicron variant halt The Fed in its tracks?

Where do we currently stand? For the March meeting, it looks pretty likely that The Fed will raise its target rate.

And it seems likely that there will be 2 rate hikes by the June meeting.

Will The Fed ignore the “COVID drums along The Potomac” and raise rates (and shrink their whopping balance sheet)?