Blitzkrieg Bop! ECB to Activate First Line of Defense in Bond Market July 1 (Lagarde Calls For Monetary Maginot Line) WIRP Forecasts US Rate Hikes Until March 2023, Then Declining Rates

The ECB is planning on a Blitzkrieg Bop, monetary style.

When Lagarde talks about the first line of defense, all I can picture is The Maginot Line in France, a failed defensive line that was easily bypassed by the German Wehrmacht (army).

The European Central Bank will activate the bond-purchasing firepower it’s earmarked as a first line of defense against a possible debt-market crisis on Friday, according to President Christine Lagarde.

Applying “flexibility” to how reinvestments from the ECB’s 1.7 trillion-euro ($1.8 trillion) pandemic bond-buying portfolio are allocated is aimed at curbing unwarranted turmoil in government bonds as interest rates are lifted from record lows to curb unprecedented inflation.

Net buying under a separate asset-purchase program is also set to end on Friday.

In other words, Euro-area inflation has exploded in 2021, just like the USA.

But the US also has an inflation problem caused in part by Covid and the government’s reaction to Covid: economic shutdown and massive Federal monetary and fiscal stimulus. The stimulus is still in play.

The bond market is already anticipating an about-face by The Federal Reserve (implied overnight rate peaking at the March 2023 FOMC meeting, then receding.

Again, nothing has been the same since the Covid outbreak of 2020 and Fed monetary blitz. Here is the US Dollar Swaps curve before Covid (yellow line) and today’s Fed-enhanced curve (green).

Mortgage rates in the US have climbed to 6% then backed-off slightly. The good ole Back-off Boogaloo as The Fed attempts to unwind its monetary stimulypto.

The French Maginot Line, easily bypassed by German tanks. The Federal Reserve is the US’s Maginot Line. The Yellenot Line??

More On Fed’s Bullard’s “Consumers Healthy” Remark (Consumer Sentiment At Lowest Level Since 1977 While Unemployment Rate At Only 3.6%)

St. Louis Fed President Bullard made a remark the other day that consumers are healthy so a recession is unlikely.

Consumers are healthy? It is true that the US U-3 uemployment rate is low (3.6% versus 14.70% in April 2020 thanks to government shutdowns over Covid). But even though unemployment is low, consumer sentiment is at its lowest point since 1977.

Generally, consumer sentiment is high when unemployment is low, but not this time around. Currently, inflation is at the highest level since March 1980 even though consumer sentiment bottomed-out in April 1980.

Here is my chart showing that REAL average hourly earnings growth YoY is negative and getting worse, hardly a sign of “healthy consumers.”

Of course, rising gasoline and diesel prices have risen dramatically since 2021, but are declining slightly thanks to the global economic slowdown (read “lower demand”).

And a M2 Money Stock (green line) declined, US rents (blue line) declined as well.

We are truly living in Birdland. As in bird-brain land.

Already Gone! Russia Defaults on Foreign Debt for First Time Since 1918 (Europe Sov Yields UP 10+ BPS)

Already gone!

Russia defaulted on its foreign-currency sovereign debt for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors.

For months, the country found paths around the penalties imposed after the Kremlin’s invasion of Ukraine. But at the end of the day on Sunday, the grace period on about $100 million of snared interest payments due May 27 expired, a deadline considered an event of default if missed.

It’s a grim marker in the country’s rapid transformation into an economic, financial and political outcast. The nation’s eurobonds have traded at distressed levels since the start of March, the central bank’s foreign reserves remain frozen, and the biggest banks are severed from the global financial system.

But given the damage already done to the economy and markets, the default is also mostly symbolic for now, and matters little to Russians dealing with double-digit inflation and the worst economic contraction in years.

War is hell and Ukraine is paying the price as well.

Meanwhile, European sovereign bond yields are up over 10 basis point this morning, but not UK and Sweden (non-ECB nations).

Alarm! Fed’s Bullard Says US Recession Fears Overblown With Consumers Healthy (My Response In One Chart: REAL Average Wage Growth At -3.34% YoY, Real GDP Growth At … 0%)

Alarm!

No problemo, says James “Bully” Bullard, President of the St Louis Federal Reserve. Bullard said that US recession fears are overblown with consumers “healthy.”

Really Jim?

Inflation is so bad they REAL average hourly earnings growth keeps falling and is now -3.34% YoY.

Apparently, real GDP growth of ZERO doesn’t bother Bullard either.

Apparently, we are still Under The Thumb of The Federal Reserve.

WTI Crude Oil Futures Breaks $110 Barrier As Crack Spread UP 535% Under Biden (Diesel Fuel UP 121%)

The US is a movin’ on up to the high side … of energy prices.

Today, WTI crude oil futures broke through the $110 barrier.

The WTI Crude crack spread, the differential between the price of crude oil and petroleum products extracted from it, is up 535% under President “I HATE OIL!” Biden and diesel fuel is up 121%.

WTI crude is up 1% today.

“Crack? I thought crack was something that Hunter did!” – Joe Biden

Opening Hell! Markets In Sea Of Red Thanks To Global Slowdown And Fed Signals Of Tightening (Global Markets In Sea Of Red)

Today’s opening bell is “Opening Hell!”

US Treasury 10Y yields are up +12.1 basis points as of 9:40am EST. And rising across the globe.

Equity markets? Dow is down -621.93 points and the NASDAQ is down almost -3%. But equity markets are down across the globe.

Commodities? Once again, all commodities in the red except corn (which I don’t eat) and natural gas.

Speaking of opening hell. The US Treasury 10Y-2Y yield flattened to 7 basis points.

And then we have Markit’s Credit Default Swaps index rising to the highest level since Covid (April 2020).

Markets are in a “Sea of Red.”

Alarm! Nasty Inflation Report Leads To No-bid For MBS (Duration Risk Has Extended To 7 From <1 On August 2, 2021 With Rising Inflation)

Alarm!

The CPI news on Friday was so awful that it changed the bond market’s view of Fed trajectory, and the weakest sector broke. In bond jargon, MBS went “no-bid.” No buyers for MBS. Then a few posted prices beyond borrower demand, not wanting to buy except at penalty prices. (Courtesy of Cherry Creek Mortgage)

Despite what Treasury Secretary Janet Yellen has said, Friday’s inflation report demonstrated that inflation is no longer transitory. And with that realization, there was a dearth of bidders for Agency Mortgage-backed Securities (Agency MBS) on Friday.

As a result, agency MBS 2.5% dropped to under $90 as markets expect The Fed to keep raising rates to combat inflation.

Duration of the FNCL 2.5% agency MBS has been extending with growing inflation. Duration was under 1 on August 2, 2021 but is now 7 times greater at almost 7.

Note to Yellen: inflation seems be permanent, not transitory. Or at least inflation will remain high for the foreseeable future, crushing the life out of Agency MBS.

March Madness! Case-Shiller National Home Price Index Soars To +20.55% YoY In March (Fastest In History) As Fed Keeps Monetary Stimulus In Place

Yes, its the housing market’s version of “March Madness!”

The Case-Shiller National Home Price Index for March was released this morning and it was a doozy. The Case-Shiller National home price index YoY accelerated to a whopping +20.55%.

And at +20.55%, it is the fastest price growth in history! Even the peak of the infamous 2000s housing bubble was only +14.51% in September 2005.

Why do we have historic highs in home price growth? The Federal Reserve’s monstrous Covid stimulus (green line) is still in place.

Washington DC is the slowest growing metro area in the US while Tampa FL, Phoenix AZ, Miami FL and Dallas TX are all above 30% YoY.

Let’s see what happens when The Fed FINALLY removes its Covid stimulus as mortgage rates rise.

Remember, Janet Yellen (who left monetary stimulus in place for too long under Obama) is now US Treasury Secretary.

The Biden Bowl! US Personal Savings Declines -65% YoY In April As Inflation Rages (Credit Card Debt Soars As Personal Savings Collapses)

Americans’ Savings Rate Drops to Lowest Since 2008 as Inflation Bites.

Yes, inflation really bites. In fact, as US inflation is near the 40-year high, US personal savings declined -65% YoY as consumers try to cope with rising prices.

Its not only that personal savings is crashing in the face of inflation, revolving debt has soared as consumers try to cope with rising prices. I call this chart “The Biden Bowl.” Soaring consumer credit card debt with crashing personal savings.

US Q1 Real GDP Worse Than Expected -1.5% QoQ, Price Inflation Worse Than Expected 8.1% QoQ (At Least Personal Consumption Was Up 3.1%)

Today’s US Real GDP was worse than economists expected.

US Real GDP Annualized QoQ printed at -1.5%. And GDP prices QoQ printed at 8.1%, also higher than expected.

At least Personal Consumption printed higher than expected at 3.1%.

Import prices (goods) led the way at 20.9%. Part of Biden’s brilliant strategy of reducing domestic oil production and import expensive energy from overseas?

Consumers are spending more, but the personal savings rate is down to the lowest level since 2013 at 6.2% as consumers try to cope with inflation.