The Heat Is … Off! FHFA Home Prices YoY, Smart Money Flow Index Slow With Fed Unwinding

As the late Glenn Frey almost sang, The Heat Is Off.

As The Fed unwinds its $4+ trillion balance sheet, the Smart Money Flow Index and the FHFA Purchase Only Home Price Index YoY are declining.

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In other words, the housing asset bubble is Already Gone.

I wonder if it is time for Fed Chair Jerome Powell to emulate Frank Booth from “Blue Velvet” and take another hit of oxygen.

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Breaking Bad! Pound, Dow Get Pounded After UK PM May Delays Brexit Vote (UST 5Y-3Y Curve Inverts, 5Y Breakeven Inflation Rate Collapsing)

Its a wonderful day in the financial markets.  …. NOT. In fact, financial markets are breaking bad.

Where to begin?

U.S. equities extended a sell-off and the pound tumbled as traders took a grim view of the outlook for global growth and trade after UK Prime Minister Theresa May delayed a crucial Brexit vote.

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Meanwhile, the Great Britain Pound got pounded.

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And the 5Y – 3Y Treasury curve inverted.

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And the US Breakeven 5 Year Inflation Rate is collapsing.

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Yes, financial markets are breaking bad.

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Monsters In The Gelatin! Fed’s QE Unwind Reaches $364 Billion As Fed Funds Rate Continues To Climb (Volatility Express!)

Since the beginning of the QE unwind — or “balance sheet normalization,” as the Fed calls it — in October 2017, the Fed has now shed $364 billion.

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Of course, The Fed still have a long way to go to unwind its $4 trillion balance sheet. But The Fed is, at the same time, raising its target rate (although through confusing messaging).

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The S&P 500 index and the NAREIT All Equity (Real Estate Investment Trust) indices are soaring along nicely with The Fed’s balance sheet expansion (aka, low interest rates), but are experiencing rather dramatic volatiity in the face of a shrinking balance sheet and rising Fed target rate.

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And yes, volatility is increasing with Fed unwind and target rate increases.

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SMART Money Flow Index? The decline coincides with The Fed’s unwinding on its Treasury positions.

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Bubble you ask? Instead of “bubble” or “collapse,” the Fed uses “valuation pressures” and “broad adjustment in prices.”

To quote the late, great Isaac Hayes from Reindeer Games, “There are monsters in the gelatin!!”

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Fed Gov Brainard Sees Gradual Fed Hikes Still Appropriate in ‘Near Term’

Despite gloom on the housing front, declining core inflation and a volatile (and declining) stock market, Fed Gov Lael Brainless still wants to keep raising interest rates.

(Bloomberg) — Federal Reserve Governor Lael Brainard said U.S. economic momentum is strong and a gradual approach to interest-rate increases remains appropriate for now.

“The gradual path of increases in the federal funds rate has served us well by giving us time to assess the effects of policy as we have proceeded,’’ Brainard said Friday at a conference at the Peterson Institute for International Economics in Washington. “That approach remains appropriate in the near term, although the policy path increasingly will depend on how the outlook evolves.”

Party on, Lael. Party on Jerome.

 

 

 

Fed Changes Course … Again To “Wait And See” Strategy As Dow Continues To Tank (UMich Buying Conditions For Housing Lowest Since 2008)

The Dow is falling again. This time on the less-than-awesome jobs report. 155k jobs added versus the expected 198k jobs added.

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Resulting in a decline to the Dow.

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Yesterday, the Dow sell-off eased after The Wall Street Journal reported that the Federal Reserve is considering breaking with its current approach of steady interest rate hikes, favoring a wait-and-see approach. That was relief to investors worried that the Fed might raise interest rates too fast, which could choke off economic growth.

And the the University of Michigan Buying Conditions for Houses fell to it lowest level since December 2008. Although the might be Michigan getting destroyed by Ohio State 62-39.

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In other words, The Fed is signalling “Hard to starboard!!!”

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Venezuelaization: Chicago Levies PlayStation Tax To Pay For Bankrupt Municipal Pension System And Massive Deficits

Chicago IL (should be ILL) is the poster child for an insane pension program (mostly to municipal workers and public school teachers). But not only in the city of Chicago, but the state of ILLinois as well.

Consider that the unfunded liability in the state’s combined retirement systems has risen in 11 of the state’s past 12 years—despite a roaring stock market, despite a steady increase in contributions that now amount to a stunning $8 billion or so a year, and despite passage several years ago of a plan that markedly reduces benefits for those hired after Jan. 1, 2011. Between 2004 and 2016 (the last year for which audited financials are available) unfunded liability quadrupled, to $123.8 billion, according to the Illinois Commission on Government Forecasting and Accountability, the Legislature’s financial watchdog unit.

Quadrupled!

So, how will Chicago ILL and the State of ILL pay for this pension morass? TAX ANYTHING THAT MOVES!!!!!!!

Chicago is one of the most heavily taxed cities in the country. In addition to holding the title for the highest sales tax nationwide, the city also levies additional taxes on bottled water and cell phones.

The amusement tax was actually passed several years ago and included almost all forms of entertainment. Whether residents are looking to spend an evening at the theater, see a concert, cheer on their favorite sports team, go to a nightclub, or even catch a movie, they are on the hook for an additional 5 percent tax.

The city has had to get creative when it comes to extorting money from its residents.

In 2015, the amusement tax was expanded as city officials realized they could bring in additional revenue with the creation of a “cloud tax.” Capitalizing on the popularity of streaming services, the city began instituting a 9 percent tax for using platforms like Netflix, Hulu, Spotify, and others. And thanks to the inclusion of the streaming services, the amusement tax now brings in about $12 million annually. It also applies to anyone whose billing address is within city limits.

The city of Chicago is currently operating on a $400 million deficit. It’s no wonder, then, that the city has had to get creative when it comes to extorting money from its residents. The amusement tax was created as a means of decreasing the deficit and aiding the city in paying for additional expenditures, which essentially means that Chicago dwellers are once again on the hook for the government’s poor decisions.

To make matters worse, Chicago is also a city with a horrible reputation for government corruption, and especially corruption within the local police force. When Democratic Mayor Rahm Emanuel approved the additional tax on streaming services, it was done so with the explicit purpose of helping to fund the $530 million increase given to Chicago’s police force. However, even with the increased funding, Chicago law enforcement has still been unable, or unwilling, to combat the city’s skyrocketing crime rates.

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According to a new report by Moody’s Investors Service, Illinois’ unfunded pension liabilities equaled 601 percent of state revenues in 2017, a U.S. record!!

And now PlayStation begins collecting amusement tax from Chicago users.

Nicolas Maduro: “I approve of Chicago’s message!”

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Trouble In River Cities! Eurozone GDP, China Manufacturing PMI Diving

While the US economy is humming along nicely, there is trouble brewing in River Cities (that is, the Yangtze River in China and The Rhine River in Europe).

Both the Eurozone GDP forecast and China Manufacturing PMI are falling like a paralyzed falcon.

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Yes, we got trouble in River Cities … overseas.

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NY Fed’s Williams Says Strong Economy Warrants Further Rate Hikes (As Dow Crashes 800 Points And 10Y-2Y Slope Flattens To 10 BPS)

The Dow crashed 800 points today, most after noon.

Which is it? The fear that the Trump-Xie tariff truce is a big nothing burger? Or that NY Fed President came out after noon saying that inflation and jobs look good and isn’t worried that markets have dialed back ’19 hikes? Or both?

My bet is on Williams’ announcement of economic optimism and the likelihood of further rate hikes.

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And the Treasury 10Y-2Y curve flattened further to 10 BPS.

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And the 90-day Treasury bill yield keeps on smokin!

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Is Jerry Gergich running The Federal Reserve? 

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Ted Day! Ted Rises, 10Y-2Y Slope Flattens As US-China Trade Optimism Wanes (Curve Inversion Accelerates)

Ted Day! The Ted spread (3m Treasury yield- 3m LIBOR) is rising … again.

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Why?

The optimism that drove gains for riskier assets appears to be quickly dissipating as investors scramble to figure out exactly what, if anything, was agreed between the U.S. and China on trade at the weekend. Treasury Secretary Steven Mnuchin and President Donald Trump’s top economic adviser, Larry Kudlow, dialed back expectations and added qualifiers when asked about the outcome of talks between Trump and Chinese President Xi Jinping. China has said nothing about the commitment to remove car tariffs flagged by the U.S., nor did its statement mention the 90-day timeline for talks the Americans have specified.

In the Treasury market, all eyes remain on the yield curve after three-year yields climbed above those of their five-year peers on Monday, potentially foreshadowing the end of the Federal Reserve’s tightening campaign. The more closely watched part of the curve — the gap between two-year and 10-year yields — remains upwardly sloped.

Yes, but flattening like a pancake.

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Or getting dunked in cold water like Ted.

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Alarm! Treasury Term Premiums Are Slip Slidin’ Away

US Treasury term premiums are slip slidin’ away.

The decline in the benchmark 10-year Treasury yield since early November has come amid a drop in term premium, according to Federal Reserve Bank of New York data through Nov. 29. The measure — a gauge of the extra yield compensation investors demand to own the maturity compared to rolling over a shorter-dated obligation over the same time period — has fallen as investors also scaled back their outlook for the pace of Fed tightening in 2019. Term premium is trading near its lowest since September, before the central bank’s last rate increase.

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Alarm!

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