We’re Going Down! US Treasury 10yr-2yr Yield Curve Inverts To -54.4 BPS, Lowest Since Volcker’s War On Inflation

We’re going down!

As The Federal Reserve battles inflation (caused by excessive monetary stimulus since 2008), Biden’s green energy policies and excess Federal government spending), we can see that the US Treasury 10yr-2yr yield curve has inverted to -54.4 basis points, the lowest since 1982 after Fed Chair Paul Volcker’s war on inflation.

The US Treasury 10yr-2yr yield curve typically inverts (or goes below zero) several months prior to a recession and is most inverted since 1982.

Fed Funds futures data points to the target rate rising to 4.613% by the May ’23 FOMC meeting … then declining.

Since this is rather miserable news for the economy, I will now play my favorite Bruce Springsteen tune, Sherry Darling.

At least the Dow Jones mini-me futures are up this morning.

The US Dollar/Euro cross currency is rising with Fed tightening.

US Treasury Yield Curve Inverts Most Since 1982 And Fed Chair Volcker (S&P 500 Declines -1.8% On Fed Announcement)

Well, ain’t this a kick in the head!

The US Treasury yield curve inverted by the most since 1982 and Fed Chair Paul Volcker. Of course, inverted yield curves occurs before recessions.

Then we have the S&P 500 index dropping -1.8% today.

Fed Raises Target Rate By 75 BPS As Recession Looms, DOT Plots Signals Rates Rising To 4.625% In 2023 Then Reverting Back To 2.5% (Mortgage Rate Rises To 6.38%)

As expected, The Federal Reserve raise their target rate by 75 basis points today. While that sounds like an inflation (blue line)-crushing rate hike, look at the slowly shrinking Fed Balance Sheet (gold line).

Of course, the risk of a recession (dark blue line) is on the increase.

Given the increasing likelihood of a recession, The FOMC’s Dots Project shows The Fed’s target rate increasing to 4.625% in 2023, then gradually declining to 2.5% in the long run.

Fed Funds Futures data points to a peak in May 2023.

And with The Fed’s tighten-up, Bankrate’s 30yr mortgage rate rose to 6.38%.

Why is The Fed so slow to reduce its prodigious balance sheet if they REALLY wanted to fight inflation? So we can’t really say that The Fed has been turned loose to fight inflation.

Fed Garbage? MBA Applications Rise As Households Panic About The Fed Raising Rates (Refi Applications Still 83% Lower YoY, Purchase Applications 30% Lower YoY)

As people are painfully aware, The Federal Reserve is on a mission … to hike interest rates to tame inflation back to 2%.

So, we saw a small surge in mortgage applications last week as the expectations of Fed rate hikes sinks in and households try to lock in mortgage rates.

Mortgage applications increased 3.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 16, 2022. Last week’s results include an adjustment for the Labor Day holiday.

The Refinance Index increased 10 percent from the previous week and was 83 percent lower than the same week one year ago. The seasonally adjusted Purchase Index increased 1 percent from one week earlier. The unadjusted Purchase Index increased 11 percent compared with the previous week and was 30 percent lower than the same week one year ago.

At least the percentage of ARMs remained the same, 9.1%.

The Federal Reserve has a line on you! Or noose.

By the way, the theme song for the US version of the TV show “The Office” was written by Jay Ferguson, the primary singer for the ’60s band Spirit (that performed “I’ve Got A Line On You!”).

Here is Jay Ferguson singing the Spirit song “Fresh Garbage.” A fitting song for The Federal Reserve. Fed Garbage??

Today will be another Fed rate hike, expected to be a whopping 75 basis points. The S&P 500 tends to rally (green line) after the FOMC announcement. What will happen today?

Slipping Into Darkness! US Real GDP Forecast Barely Above 0% Growth (Atlanta Fed GDPNow At 0.3%) With Less Than Two Months Until Midterm Elections

Slipping into darkness … with less than two months until the US midterm elections.

Latest estimate: 0.3 percent — September 20, 2022

The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the third quarter of 2022 is 0.3 percent on September 20, down from 0.5 percent on September 15. After this morning’s housing starts report from the US Census Bureau, the nowcast of third-quarter residential investment growth decreased from -20.8 percent to -24.5 percent.

The culprit? US Housing starts!

We knew from this morning that housing starts declined -0.01% YoY as The Fed’s Stimulypto wears off.

Yikes! German PPI Soars To 45.8% YoY (The New Russian Front?)

The war in Ukraine is still going on and Russia is punishing Germany in terms of energy supply.

It is almost as if the Ukraine war is the NEW Russian front for Germany. The German Producer Price Index YoY surged to 45.8% YoY.

German buyers on Monday briefly reserved capacity to receive Russian gas via the Nord Stream 1 pipeline for the first time since the line was shut down three weeks ago, German data showed, but this was later revised and no gas has been flowing.

It was not immediately clear why buyers had submitted requests for capacity when Russia has given no indication since it shut the line that it would restart any time soon.

Russia, which had supplied about 40% of the European Union’s gas before the Ukraine conflict, has said it closed the pipeline because Western sanctions hindered operations. European politicians say that is a pretext and accuse Moscow of using energy as a weapon.

But German inflation, using CPI, is only 7.9%. Something has to give!

On the western front (US), the US Treasury 10yr yield is up +10.2 bps. And sovereign yields in Europe are all above 10 bps.

The Core! US 30y Mortgage Rate Rises (US Futures Fall as Traders Eye Supersized Fed Hike)

Even Obama’s economic advisor, Larry Summers, is wondering why Biden won’t allow pipelines to be build to reduce energy prices and reduce inflation.

Having said that, US mortgage rates are now the highest since 2008 and continue to rise with the expectation of more Fed rate hikes this year. Even core inflation is on the rise motivating The Fed to do more tightening since they aren’t receiving any help from Biden on energy or Congress in terms of massive spending of our money.

Mortgage payments for a median existing home in the US is back to the mid-1980s.

Data from Fed Funds futures implies that The Fed will raise their target rate to 4.50% by March 2023, then slowly lower rates.

Futures are down with the prospect of a 75 basis point bump in rates tomorrow. The Dow Jone Mini is down -167 points.

Powell’s Famous Chili! National Association of Home Builders Market Index Falls More Than Expected To 46 As Fed Tightens Monetary Noose (Lowest Since 2012, Excluding Covid Crash)

The National Association of Home Builders market index fell more than expected in September to 46, the lowest reading since 2012 (if I exclude the Covid economic shutdown).

Note that the NAHB market index is declining along with at the increase in the 30yr mortgage rate.

Lifeforce? US Debt Load At 123% Of GDP As M2 Money Velocity Nears All-time Low (Will The Fed Sound The Alarm?)

The Federal Reserve’s Open Market Committee (FOMC) will announce their latest round of rate increases on Wednesday, September 21st, at 2pm EST. Will the members of the FOMC discuss the fact that the US debt load is now at a whopping 123% of GDP?? Or will the FOMC only discuss inflation in its deliberations?

The Fed is expected to raise the upper-bound of their target rate to 3.25%, a 75 basis point increase in a futile attempt to cool inflation. Yet the rampant spending by Biden, Pelosi and Schumer (3 of the 4 Horsemen of the Economic Apocalypse) has raised the Federal Debt to GDP ratio to 123%. Even more disturbing, M2 Money Velocity (GDP/M2 Money) is near the all-time low. Meaning that rampant Federal spending is doing little to increase GDP.

Now for the worse news! Federal debt held by the public is expected to rise to 185% of GDP in 2052.

I feel like I am watching the movie “Lifeforce” where The Fed tries to breath life into an economy without killing it.

Fed Tilts Toward Third 75 Basis-Point Hike on Stubborn Inflation (Fed’s Target Rate Expected To Hit 4.395% By March ’23 Then Fall, Mortgage Rates Rising)

Inflation is stubborn because “goin’ green!” by 1) restricting US fossil fuel production and exploration and 2) Biden/Congress endless spending splurge since Covid. So, The Federal Reserve has a tough problem: cooling inflation while US energy prices are up 54% under Biden. And those higher energy prices have percolated through the entire economy in terms of food prices and heating prices.

Where do we sit? The US Treasury 10yr-2yr yield curve remains inverted (a sign of impending recession). Mortgage rates are the highest in 14 years as The Fed tightens.

If we look at Fed Funds Futures data, we can see that traders expect The Fed’s target rate to rise to 4.395% by March 2023’s FOMC meeting. Then traders expect The Fed to take their enormous foot off the tightening pedal.

Yes, inflation is crushing the middle class and low-wage workers. Average hourly earnings YoY after we subtract inflation are negative.

Taylor Rule? Currently, the Taylor Rule based on Core inflation of 4.56% YoY suggests a Fed target rate of 9.14%. Since traders anticipate the target rate to peak at 4.395%, The Fed will almost be halfway towards cooling inflation.

The problem is … Fed Chair Powell and Treasury Secretary Yellen don’t like rules limiting their “power.” Powell and Yellen think the Taylor Rule is a New Jersey ham product.