Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
The December new home sales report is good news and bad news.
The good news? US new home sales rose by 2.3% in December from November to 616k units sold SAAR. That is the good news.
The bad news? Since December of 2021, new home sales fell -23% year-over-year (YoY).
The median price of new home sales rose 7.8% YoY, but the trend as The Fed withdraws monetary stimulus (orange line) is not good.
Perhaps there is a communications breakdown between the Biden Administration and The Federal Reserve.
Three regional Fed reports I like to watch are New York’s Empire State Outlook, Philly Fed’s Outlook and Richmond Fed’s outlook. Today, The Richmond Fed released their manufacturing outlook and … it declined to -11.
So the big three are all down (Philly down to -8.9 while NY’s Empire State outlook is down to -32.9.
On the Treasury front, the US 10Y-3M yield curve inverted further (a signal of impending recession) just tanked to -126.462 basis points.
Winter is coming!
Ah, the start of a new week with Treasury Secretary Janet Yellen arguing (with a straight face) that there is no room in the Federal budget for cuts. Apparenly, Yellen never read any of the massive, pork-laden spending bills signed by Biden (no one else did in Congress either, nor did Biden).
Let’s start with the US credit default swap (1 year). It remains high at 68.72 (the price of insuring against a US default). And the US Treasury yield curve (10Y-3M)? It remains deeply inverted at -114 basis points this morning signaling an impending US recession.
Then we have SOFR (Secured Overnight Financing Rate). SOFR futures are pricing for the Federal Reserve to hike rates a few more times and to start cutting before the end of this year. The pricing for the 2023 rate path is little changed from a month ago, but this year the market has priced in deeper cuts in 2024, with SOFR now seen below 3% by early 2025 before stabilizing. The implication is that hedging recession and significant rate cuts in 2024 now seems to be fully priced in, yet there’s a risk that the Fed cuts even deeper than the market is factoring in.
We think the market is partially preparing for the risk of even deeper rate cuts than linear instruments are pricing. To see how dramatic those are, we can look at options on SOFR futures and model what’s being priced by the volatility surface.
We are seeing the same story if we look at Fed Funds Futures data. Fed rate hikes until June, then rate cuts to follow.
How did Biden’s lawyers and now the DOJ figure out that Biden has classified documents all over the place? Probably from reading “The Hardy Boys.” Except that Biden didn’t cleverly hide classifed documents. Rather, he carelessly left them lying around at The Penn Biden Center and his home in Wilmington Delaware that he shared with his son, Hunter. And probably on the Amtrak train he would take from Wilmington to Union Station in DC. And probably at Chinatown Garden, a short walk from The White House.
The first headline I saw when I turned on Bloomberg.com was “DOJ Officials Find More Classified Documents at President Biden’s Home.” This is an improvement! So far, the task has been handled by Biden’s private attorneys who don’t have proper security clearance; at least the Justice Department is finally getting involved!
But back to the US yield curve. It is now the most inverted in 30+ years as M2 Money growth stalls. Inverted yield curves have preceded recessions in the past.
But as China reopens and Europe is experiencing a warmer winter than expected (meaning that Europe has sufficient natural gas reserves) and US inflation cooling,
we are seeing market-implied odds of a recession falling in January.
I am still betting on a recession in the second half of 2023.
First, US default risk as measured by credit default swaps remains elevated (primarily because Biden and Democrats refused to cut wasteful spending or reign in non-retirees on Social Security). And NY Fed’s Reverse Repos remain elevated.
And then we have Citi’s economic surprise index for the US at -17 as The Fed slows money growth to 0%.
I wish I knew a place where inflation and insane Federal government spending and policies doesn’t exist.
The Thrill Is Gone from the US housing market as M2 Money growth fells to 0%.
US Existing Home Sales fell -1.5% from November to December (MoM) to 4.02 SAAR units sold. That translates to a depressing -34% decline since December 2021 (YoY).
On the positive side, these numbers are better than expected (-3.4% MoM expected). Still, these numbers are pretty dismal.
Existing home sales MEDIAN PRICE fell to $366.9k as M2 Money growth vanishes. And inventory of existing homes for sale remains lower than pre-Covid levels.
Let’s see what Powell and the Gang (aka, The Federal Reserve Board of Governors) does with interest rates going forward.
Today, the 10-year Treasury yield is up 7.1 basis points, but the real action is in Europe where sovereign yields are up 11.5 bps in France, 9.8 bps in Germany and 18.6 bps in Italy.
US Treasury Secretary Janet Yellen has signalled that she will “tap” into Social Security to avoid breaching the US debt limit. Of course, if she does, it is unlikely that she will return the dollars.
The Credit Default Swaps 1-year for the US (insurance against default) sits at 68.55, near the highest since 2013 debt ceiling crisis.
Notice that the debt ceiling keeps on climbing once the Kabuki Theater of Democrats and Republicans is over.
The Volatility Cube for the US CDS 1 year signals that it will all be over soon.
So, Yellen and Treasury are threatening us with taking away Social Security and Medicare if we don’t agree with their lavish Pelosi-like spending sprees and debt.
And why exactly is Janet Yellen flying to China? I admit Washington DC has lousy Chinese food, but at least I hope Yellen takes Hunter Biden with her to negotiate the impending US default and debt workout.
December’s housing construction numbers are a mixed bag. On the one hand, US housing starts are down -1.36% from November to December, but down -21,8% since December 2021 (YoY).
The good news? 1-unit (single family detatched) rose 11.26% from November to December (MoM). But 5+ (multifamily) starts are down -18.91% MoM.
But 5+ unit PERMITS are up 7.14%. Perhaps Hunter Biden can now rent an apartment rather than pay his father $50,000 a month in rent for Joe’s Wilmington Delaware house.
KB Homes experienced a 68% cancellation rate in Q4 2022.
Soft landing for the US economy? It is looking less and less likely. The bond market (10-year Treasury yield) just shed -14.1 basis points. As I always told my investments students, any 10 basis point shift in the 10-year Treasury yield is significant.
Let’s start wit the US business leaders survey of current conditions. It just crashed to -21.4
Then we have US industrial production, down -0.7% in December. And is up only 1.65% year-over-year as M2 Money growth stalls.
Capacity Utilization plunged more than expected to 78.7% (79.5% exp).
Biden claiming the US economy is strong is pure Fantasy Island.
Today, Jean Pierre annouced that Biden’s economic plans are working.
The Empire Strikes Out! No, not Klaus Schwab and the World Economic Forum, but the New York State Manufacturing index. For January, the index fell to -32.9.
Then we have Wells Fargo and their crashing mortgage originiations.
Everytime I see Klaus Schwab’s face, I think of Emperor Palpatine from Star Wars.
Confounded Interest - Anthony B. Sanders 
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