Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
Biden’s green energy policies (limiting supply) caused a tremendous surge in energy prices and food prices (one has to pay to get food shipped!). But in order for The Fed to cool inflation, they are in the process of tightening their loose monetary policy since late 2008.
One of the consequences (intended or unintended) is that as mortgage rose, homebuyer mortgage payments rose 45.5% YoY.
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.
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.
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.
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 … with less than two months until the US midterm elections.
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.
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.
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.
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.
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.
Confounded Interest - Anthony B. Sanders 
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