Alarm! US Mortgage Purchase Applications Tank 14% From Previous Week As Fed Turns Up Rate Heat (Refi Applications Index Down 80% YoY)

Alarm!

The Federal Reserve is reversing its excessive monetary stimulus policies left over from the financial crisis of 2008 (and Covid) and the mortgage industry and potential home buyers are paying the price.

Mortgage applications decreased 1.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending July 8, 2022. This week’s results include an adjustment for the observance of Independence Day.

The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. The unadjusted Purchase Index decreased 14 percent compared with the previous week and was 18 percent lower than the same week one year ago.

The Refinance Index increased 2 percent from the previous week and was 80 percent lower than the same week one year ago.

The Shallows! Traders Fully Price 75-Basis-Point Fed Hike at July Meeting As Mortgage Rates Decline Slightly (Fed Fighting Inflation At All Costs!)

Here we go loop de loop! Traders are pricing in a 75 basis point rate increase at the July FOMC meeting despite collapsing Fed 5-year inflation breakeven rates.

Money markets are betting on a three quarter-percentage point hike by Federal Reserve officials later this month, wagering the US will need to ramp up the pace of monetary tightening to tame inflation.

The repricing comes ahead of a key inflation report due Wednesday. The headline figure for June is set to accelerate to 8.8% year over year, the highest since 1981.

Bankrate’s 30Y mortgage rate fell slightly ahead of today’s inflation report with the expectation of The Fed hiking their target rate by 75 basis points to 2.338% at the July 27th Fed Open Market Committee meeting.

Trader expectations from Fed Funds Futures data:

Last night I watched “The Shallows” on Peacock TV. I thought from the title that it was going to be a biography of The Federal Reserve, but it was a film about a surfer being attacked by a shark.

The Great Divide … In Affordability! REAL Rents Rising At 6.16% YoY As REAL Hourly Earnings Declining At -3.47% YoY (Growing Homelessness And Rise In Home Sale Cancelled Transactions)

We are across the great divide! In terms of house prices and affordability.

We are all aware that inflation is soaring, since the Covid outbreak in 2020 and the massive overaction by The Federal Reserve and Federal government in terms of stimulus spending and economic lockdowns.

Things were “normal” before Covid in that REAL housing rent (white line) and REAL average hourly earnings YoY (yellow line) moved together. But after Covid shutdowns and Federal stimulus “relief” (orange line), we see that inflation (blue line) took off along with the growth in housing rent. The problem, of course, is that REAL average hourly earnings YoY has been declining. I call this “The Great Divide in housing affordability”.

The question, of course, is whether The Federal Reserve will continue their “war on inflation” with a 75 basis point rate increase.

Inflation is at its fastest pace in 40 years, and is expected to increase even higher in tomorrow’s inflation report.

Gasoline prices have been dropping recently, but remain above $4.50 per gallon (regular gas price was $2.40 per gallon on Biden’s inauguration day. And no, it wasn’t the Biden Administration selling nearly 1 million barrels of crude oil from the strategic petroleum reserve to the Chinese government-owned Sinopec that Biden’s son Hunter is an investor (so, The Big Guy aka Joe Biden gets a 10% piece of the action). It is a slowing global economy that is helping to lower gasoline prices.

Between soaring gasoline prices and soaring home rents, it is little wonder that there is a serious homeless problem in places like New York and California.

With rising mortgage rates, we are seeing a surge in pending home sales cancellations.

Atlanta Fed’s Raphael Bostic thinks that the US economy is so strong that it can easily handle a 75 basis point increase at the next FOMC meeting. Fortunately, he is not a voting member.

I wonder if Joe Biden sings “Carry On My Wayward Son” to Hunter?

Hurt So Good? Copper Down -27% Since March 3rd, Bitcoin Down -70% Since Nov ’21 (Is The Fed Killing Off The Economy Or Just Removing “Free Money”?)

In the court of The Copper King!

Copper, one of the economic measures of a growing economy, is down -27% since March 3, 2022 as recession looks more likely.

Let’s compare copper with another famous asset, Bitcoin. Bitcoin, a cryptocurrency, is down 70% since November 9, 2021.

As I discussed yesterday, The Fed’s five-year forward breakeven inflation rate has plunged to its lowest levels under Biden as the global economy is slowing.

Notice that copper prices fit pretty well with The Fed’s 5-year breakeven inflation rate.

It looks like The Fed is killing-off the economy in their quest to tame inflation.

The Biden economy doesn’t hurt so good. It hurts bad!

Inflation Nation! Fed’s 5Y Forward Breakeven Inflation Rate Plunges To Lowest Of Biden’s Presidency As Fed Hikes Rates (Mortgage Rates Resume Soaring)

US inflation is the highest in 40 years, yet inflation may be slowing as 1) The Fed cranks up interest rates and 2) the global economy is slowing.

US inflation data in the coming week may stiffen the resolve of Federal Reserve policy makers to proceed with another big boost in interest rates later this month.

The closely watched consumer price index probably rose nearly 9% in June from a year earlier, a fresh four-decade high. Compared with May, the CPI is seen rising 1.1%, marking the third month in four with an increase of at least 1%.

While persistently high and broad-based inflation is seen persuading Fed officials to raise their benchmark rate 75 basis points for a second consecutive meeting on July 27, recession concerns are mounting. There are signs, though, that price pressures at the producer level are stabilizing as commodities costs — including energy — retreat.

But the expectations of inflation, as measured by The Fed’s 5-year forward breakeven inflation rate, just crashed to 1.8437%.

The breakeven inflation rate is a market-based measure of expected inflation. It is the difference between the yield of a nominal bond and an inflation-linked bond of the same maturity.

The USD Inflation Swap Forward 5Y5Y is also falling like a rock as The Fed hikes their target rate (green line).

Could it be that inflation is cooling with Fed rate hikes (but not the shrinking of their $8 trillion balance sheet)?

Currently, Fed Funds Futures are pointing to a Fed target rate of 3.552% by February 2023. And with that, Bankrate’s 30-year mortgage rate rose to 5.75%. Once again, like velociraptors from Jurassic Park, The Fed’s balance sheet is still out in force.

Fed Chair Jerome Powell and Atlanta Fed President Raphael Bostic are keeping The Fed’s balance sheet at near $9 trillion as they hunt assets to inflate.

Money! About That June Jobs Report (The Fed’s Balance Sheet Still Out In Force!)

The Federal Reserve’s policies remind me of the Cabaret tune “Money.” There is still almost $9 trillion in monetary stimulus outstanding.

For all the economic cheerleaders out there like CNBC about the June job report, they generally ignore what is driving the jobs report: The Federal Reserve!

Take the US U-3 unemployment rate. The Biden Administration is proud of the unemployment rate of 3.6%. But if you look at the chart of unemployment relative to The Fed’s balance sheet expansion due to Covid lockdowns, there is still almost $9 trillion of Fed stimulus outstanding.

Of course, the lockdowns were pure economy killers, so opening the economies again led to the unemployment rate falling to 3.6% which is still higher than before the Covid outbreak. But The Federal Reserve has been painfully slow at shrinking its balance sheet, leaving almost $9 trillion in monetary stimulus outstanding.

Take average hourly earnings growth. The media is all smiles as US wage growth declined to 5.1%, much higher than pre-Covid.

Then we have inflation, at 40-years highs thanks to massive Fed stimulus (and Federal spending).

And if we deduct inflation from average hourly wage growth, we see REAL wage growth declining at a -3.25% YoY clip.

Lastly, we have the US Dollar. Nothing has been the same since the financial crisis of 2008 and the entrance of The Federal Reserve distorting the economy and prices. Not to mention the US Dollar.

The Fed leaving its monetary stimulus out in force for so long is a major policy error. So what happens when The Fed actually gets serious about withdrawing the monetary stimulus (likely after the midterm elections)?

US Mortgage Rates Fall To 5.30% As Q2 Real GDP Falls To -1.9% (The Economy Is Falling To Pieces)

Mortgage rates are falling … to pieces. Along with the US economy.

As the US approaches recession and the Atlanta Fed real-time GDP tracker falls to -1.9%, we are seeing mortgage rates falling to 5.30%.

Real Q2 GDP? Still in the doldrums at -1.9%.

Biden is likely walking after midnight trying to find someone to blame for his declining economic prospects ahead of the midterm elections.

Alarm! Challenger Job Cuts Rise 58.8% YoY As Real Wage Growth Is Negative At -3.34% YoY (10Y-2Y Yield Curve SCREAMS Recession)

Alarm!

As most economists are aware, unemployment rates are not a leading indicator of a recession. But job cuts ARE a leading indicator.

Challenger US job cuts rose 58.8% YoY in June. Combine that with negative REAL wage growth (-3.34% YoY) and we have a problem.

Unemployment rate (U-3) is a poor leading indicator of recession since unemployment rates are the lowest before a recession.

Further signaling problems for the might US economy is the US Treasury yield curve (10Y-2Y). It is inverting.

In this slowing economy, there will be fewer people singing “Take This Job And Shove It!”.

Ted Day! Spread Between 3M Libor And 3M Treasury Yield Rising Fast (Recession Alert!)

Its Ted Day!

TED refers to the difference between the three-month Treasury bill and the three-month LIBOR based in U.S. dollars, a measure of fear in the market.

The 3-month TED spread is rising awfully fast. A sign of impending recession.

US bank credit default swaps (CDS) are rising fast as inflation gets ugly.

The US Treasury 10Y-3M curve is bumping against the zero barrier.

I am still shaking my head at President Biden chastising gasoline stations for not lowering prices at the pump when refiners are near full capacity and the Biden Administration is doing nothing to increase the supply of US-source non-green energy.

But what the heck. It’s Ted Day!

Heartaches On Heartaches! US Court Ruling May Take 70,000 Truckers Off Road, Spur Jams (Diesel Prices UP 118% Under Biden, Things Just Keep Getting Worse)

Hey, I thought Mayor Pete Buttigieg, the US Transportation Secretary, was supposed to unclog the supply-chain crisis! Instead, we get heartaches on heartaches as diesel prices rise 118% under Biden AND now the bottle-necks may get a lot worse.

A US Supreme Court decision that could force California’s 70,000 truck owner-operators to stop driving is set to create another choke point in already-stressed West Coast logistics networks, a truckers’ organization said. 

“Gasoline has been poured on the fire that is our ongoing supply-chain crisis,” the California Trucking Association said in a statement following the Supreme Court’s decision to deny a judicial review of a decision of a lower court, a process known as certiorari.

“In addition to the direct impact on California’s 70,000 owner-operators who have seven days to cease long-standing independent businesses, the impact of taking tens of thousands of truck drivers off the road will have devastating repercussions on an already fragile supply chain, increasing costs and worsening runaway inflation,” the CTA said.

The association asked the Supreme Court for a review of a case challenging California’s Assembly Bill 5, a law that sets out three tests to determine whether a worker is an employee entitled to job benefits or an independent contractor who isn’t. The trucking industry relies on contractors, and has fought to be exempt from state regulations for years because of federal law.

With few exceptions, the relationship between independent truckers and their carriers, brokers and shippers will be governed by the tests. 

As if US consumers aren’t getting crushed by rising prices already. In response to the Covid outbreak, The Fed slammed its foot on the money accelerator along with Federal government stimulus. Throw in Biden’s anti-drilling executive orders, and we have a nightmare.

Consumer confidence is already crumbling under inflation and rising energy prices.

Let’s get ready to stumble.