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.

Slippin’ Into Darkness! US Treasury 10Y-2Y Curve Inverts To -4.85 BPS (Fed Expected To Reverse Tightening In March 2023)

The US economy is slippin’ into darkness.

The US Treasury 10Y-2Y yield curve steepened after Biden’s inauguration as President, a sign of economic optimism. Then reality began to dawn when inflation began to surge (blue line). Then The Fed stepped in to combat inflation by signaling an increase in their target rate (green line). The result? The 10Y-2Y Treasury curve is inverted at -4.85 BPS, generally an indicator of an impending recession.

But never fear! The Feral Reserve is expected to reverse its rate increases by March 2023.

So, it looks like The Fed will be returning to its “low rider” rate policies in early 2023.

In other words, hold on, The Fed is coming. Again.

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.

The End? Home Sellers Are Slashing Prices in Sudden Halt to Fed’s Stimulypto Boom (Dallas, Phoenix AZ And Las Vegas NV Seeing >20% Price Cuts)

As The Fed raises rates in their attempt to wrangle inflation, we are seeing an about-face in the US housing market.

The pandemic-related Fed monetary stimulypto begat a housing boom that is careening to a halt as the fastest-rising mortgage rates in at least half a century upend affordability for homebuyers, catching many sellers wrong-footed with prices that are too high. It’s an astonishing turnaround. Just a few months ago, house hunters felt pushed to make offers within days, waive inspections and bid way above asking. Now they can sleep on it and maybe even shop for a better deal.

It doesn’t mean real estate is heading for a crash on the order of 2008. But when a market reaches these heights, even a drop toward normalcy will feel steep. And of course, a recession could make everything worse.

Dallas, Phoenix AZ and Las Vegas NV are leading in the price-slashing derby.

Is this the end for the home price bubble?

Or is the music over with The Fed tightening monetary policy to fight inflation.

Wipe Out! Bitcoin Falls Below $20,000 As Crypto Slaughter Continues (Good Luck With Soaring Gasoline And Food Prices On July 4th Weekend!)

Wipe out!

Crypto markets have slumped, adding to a decline that has wiped away some $2 trillion of market value and left market participants uneasy heading into the long Fourth of July weekend.

Bitcoin has fallen below $20,000 as the US Dollar strengthens.

At least Dogecoin is up today.

Enjoy your expensive 4th of July weekend! As long as you don’t eat much due to expensive food prices or drive anywhere due to high gasoline prices.

And government bonds on course for worst year since 1865 and President Abraham Lincoln (then President Andrew Johnson).

At least the Biden Administration is doing what The New World Order is making them do. Or The Liberal World Order.

Biden looks like he is saying “Kiss me you Statist fool!”