One of the world’s most important borrowing benchmarks staged its biggest one-day decline in a decade on Thursday.
The three-month London interbank offered rate for dollars sank 4.063 basis points to 2.697 percent, the largest one-day slide since May 2009. The move may reflect a benchmark that’s making up ground following a repricing of short-end Treasuries and associated instruments in the wake of the Federal Reserve’s dovish pivot in recent weeks.
The 3-month LOIS spread (3-month Libor – Overnight Indexed Swap rate) has been receding … again as of Feb 5th (Libor rates on Bloomberg as not updating on Feb 7).
Typically, Libor rates rise ahead of Fed rate hikes. While the “catching up” explanation is likely, it is also possible that Libor is signalling a cut in the Fed Funds rate coming up.
The stock market is pleading for SLOWDOWN in monetary normalization.
Yes, it is possible that Libor is signalling that The Fed will try to give more oxygen to financial markets.
My favorite Bloomberg headline of all time is: “Former Fed Chief Yellen Says Rates Could Next Move Up or Down.” Wow, how insightful. But of course, she was refering to The Fed Funds Target rate which she kept at 25 basis points seemingly forever. However, current Fed Chair Jerome Powell could either raise, lower of keep rates constant, depending on the state of economy.
But then again, both the ECB and Bank of Japan are currently at zero (ECB) and below zero (BOJ). The US Fed is headed in a direction that differs from other central banks.
While Powell has been increasing The Fed Funds Target rate AND shrinking The Fed’s balance sheet, Europe is drowning in negative target rates (Eurozone, Switzerland, Sweden, Denmark) as is Japan.
But in terms of central bank balance sheets, only the US is shrinking their balance sheet.
There are currently around $9 trillion of bonds trading at negative interest rates.
As we stand today, the US Treasury yield curve is downward sloping at tenors 1-3 years.
The current implied policy curve for The Fed is declining (meaning Fed Fund rate cuts are implied in 1-3 years.
So, former Fed Chair Janet Yellen thinks rates could go up or down.
MarketWatch has the tantalizing headline of “The Average Adjustable-rate Mortgage Is Nearly $700,000.”
True, the average loan size for ARMs (adjustable-rate mortgages) is substantially higher than for FRMs (fixed-rate mortgages).
But here is a catch. Mortgage refinancing applications are virutally dead.
Mortgage purchase applications are relatively sedate but rising following the financial crisis with new rules governing bank lending such as QM (Qualified Mortgage) and other Consumer Financial Protection Bureau (CFPB) rules.
A more relevant chart that the one posted by MarketWatch is a comparison of average loan size by purchase applications and refi applications. Note that following the financial crisis, average loan size for purchases is higher than for refi applications.
For the week ending 02/01/19, mortgage purchase applications SA declined 4.58% while mortgage refis were up 2.6% from the preceding week.
The bottom line is that the MarketWatch piece, while tantalizing, is fundamentally misleading. Mortgage refi applications are nearly dead and mortgage purchase applications are rising again, but are no where near the 2000-2007 levels.
So, who killed mortgage refinancing applications?
These guys! (Paul Volker can be excluded from the blame list).
The US economy is experiencing a sudden surge of economic reports that exceed expectations. So much so that the Citi Economic Surprise index has skyrocketed.
The Eurozone, on the other hand, resembles Saganaki. That is, “Your cheese is on fire!”
The US economy added another 304,000 jobs in January. A record 100th consecutive month of job gains!
On the other hand, YoY average hourly earnings slumped.
I wonder if ECB head Mario Draghi will say Opa!!
Oops, they did it again.
After hinting on January 30th that The Fed is considering halting shrinking of its balance sheet (better known as Quantitative Tightening), The New York Fed reported yesterday that their agency mortgage-backed securities holdings had been reduced by $7 billion. Aparently, The Fed is sticking to autopilot in terms of shrinking their balance sheet, at least for the moment.
Again, only Agency MBS was reduced in the amount of just over $7 billion. All other holdings remained the same from the previous week.
In other words, despite the talk, talk, The Fed is continuing to drain the punchbowl.
Now you know why Fox Business and CNBC no longer invite me to be interviewed. They love the headline “November New Home Sales Surge By The Most Since 1992!”
Let’s start with the +16.9% MoM number, a more cheery, pop the champagne bottle headline.
But on a YoY basis, new home sales fell 7.7% in November.
Months supply of new home sales fell in November, but are still at elevated levels.
And the median price of new home sales fell in November as The Fed’s normalization grabs the housing market with its icy grip.
“The weather started getting rough, the tiny ship was tossed….”
Today, The Federal Reserve announced that their target rate remained at 2.5%.
This was expected.
But on further balance sheet unwinding, Fed Chair Thurston Powell III had this to say:
“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,”
Wednesday’s statement from the policymaking Federal Open Market Committee struck a more tepid approach.
The committee lowered its assessment of economic growth from “strong” to “solid” and noted that its inflation gauges “have moved lower in recent months.”
*Fed removes reference to further gradual rate increases
*Fed says it plans to continue with current floor approach
*Fed says it’s prepared to adjust balance-sheet normalization
*Fed reiterates federal funds target is primary policy tool
*Fed says economic activity rising at solid rate, jobs strong
*Fed says labor market strengthened, unemployment remained low
*Fed says spending grew strongly, investment moderated
*Fed says core and headline inflation remain near 2%
The reaction on the Dow? Investors seem to like Powell’s tepid message.
And yield on 10-year Treasury Notes fell on the message.
Fed Chair Thurston Powell III with wife Lovey (aka, Janet Yellen).
As The Federal Reserve continues to unwind its balance sheet, pending home sales YoY declined 9.5% YoY, the worst since 2014.
Pending home sales got a big boost from The Fed’s third round of asset purchases (QE3), but PHS are feeling the pain of The Fed’s unwind.
I wonder if “The Savior,” Ben Bernanke, saw this coming. Doctor, doctor (Bernanke), we’ve got a bad case of declining pending home sales.
The infamous home price bubble and financial crisis of 2008 is easily blamed on 1) subprime borrowers, 2) Collateralized Debt Obligations (CDOs), 3) financial derivatives, 4) tricked-up ARMs (adjustabe rate mortgages) like pay-option ARMs, 4) lack of regulatory oversight (The Fed claimed that is wasn’t their job!), etc.
But what generally overlooked is the supply response by developers and homebuilders to the sudden decline in interest rates (following the Fed Funds target rate). A construction boom occured in the early to mid-2000s until The Fed decided to raise rates rapidly again in 2004 that helped result in a crash of 1-unit housing starts that never really recovered. True, subprime borrrowers disappeared (or shifted to FHA-insured loans), and tricked-up ARMs have been discouraged by the Elizabeth Warren brainchild The Consumer Financial Protection Bureau (CFPB). So, now we have increasing 1-unit housing starts at a lower level (fewer borrowers relative to the 2000s) and an over-supply of houses that the US is still trying to work through.
Multifamily (5+ unit) starts collapsed in 2008 following the foreclosure wave that put thousands of homes on the market, generally at reduced prices. But as wage growth slowed following The Great Recession, the demand for apartments increased (generally more affordable) and the rental vacancy rate is near the lowest level since 2000. Low vacancy rates, rising apartment rates = affordability crisis.
Why don’t developers and homebuilders (apartments) put up more supply? If some areas, like Northern Virginia, they have responded. But rents in Washington DC and NOVA remain high. (Check out Rent Cafe). But national rents continue to rise as well.
Another compounding factor is tight land use controls in most major cities, preventing a supply response. This essentially forced some households to the suburbs for more affordable housing (some DC workers actually commute from West Virginia to DC or Virginia cities like Front Royal (great apple cider doughnuts at the Apple House in nearby Linden VA).
So housing in the US remains “simply unaffordable.” And with tight local housing regulations. the US housing market is addicted to gov(ernment).
The good news? The US economy is growing above the long-run trend. But without sustained inflation.
At the last reading Core Personal Consumption Expenditure (PCE) growth was only 1.88%. Compare that to home prices growing at 4.7% YoY (CS) and FHFA’s Purchase Only YoY at 5.76%.
Zillow’s rent index for all homes YoY is only 0.485, well below The Fed Funds Target rate and Core PCE growth. And The Fed Funds Target rate is above Core PCE growth.
Here is a closer look at the past year. Rising Fed Funds Target rate, stable inflation (Core PCE YoY), decling house price growth and continued balance sheet undwinding.