Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
As inflation worsens, the University of Michigan survey of consumers fell again as US inflation worsens.
On the housing front, buying conditions for houses fell to 70 as a result of soaring home prices.
MY confidence in Biden and Congress has certainly declined.
This has been a brutal week for consumers. With the Russia/Ukraine conflict raging and Congress seems determined to not allow for additional oil and gas production, and Biden’s anti-fossil fuel edicts still in place, we are seeing dramatic price increases in wheat (UP 89.5% since January 1, 2021), WTI Crude (UP 143% since January 1, 2021), and food stuffs (UP 55% since January 1, 2021).
Bankrate’s 30-year mortgage rate has actually been falling the last several days, which is good for prospective home buyers as the 10-year US Treasury Note yield has been declining.
The USD/Russian Ruble cross is skyrocketing and the USD/Euro is doing likewise. Russians visiting the US will find that their trip is suddenly unaffordable (as do many American citizens will its rampant inflation). As Bruce Willis said in “Die Hard,” “Welcome to the party, pal.”
On Friday, the US Treasury 10-year yield declined 11 bps.
And energy prices continue to soar, particularly UK Natural Gas Futures that rose 19.85% overnight.
The US inflation data will be released on March 10th and the consensus is that February CPI inflation will rise to 7.9% YoY.
But even the latest unemployment rate report (3.8%) is signalling that The Fed should be raising interest rates since it is lower than the Natural Rate of Unemployment or NAIRU (4.44%).
And we have the next Fed policy error on March 16th. The Fed dots plot looks like the glide slope for an aircraft, but the message is that rates will be going up at future meetings.
And just for amusement, I present to you the infamous Hindenburg Omen chart that forecast the 2008/2009 stock market correction. Since that correction, the Hindenburg Omen has been flashing “danger” but the only correction was the COVID-linked correction of early 2020. While the Hindenburg Omen is flashing red right now, The Federal Reserve’s balance sheet (green line) has protected against market corrections. Let’s see what happens if and when The Fed decides to remove the epic monetary stimulus.
Its anyone’s guess as to whether The Fed will actually tighten monetary policy.
Today’s jobs report is a mixed-bag. According to the February Bureau of Labor Statistics (BLS) report …
The good: 678k jobs were added.
The bad: Month-over-month wage earning experienced 0% growth (although YoY growth declined to 5.1%).
The ugly: inflation is still at 40 years highs of 7.5%. Meaning that REAL wage growth is -2.4%.
Here is the jobs report summary.
Of course, the leading sector for job creation was … leisure and hospitality with 179k added. Food services and drinking places (aka, bars) added 124k jobs.
Energy prices are way up … again … which will fuel more price increases. WTI Crude is up over 4% overnight, NYH gasoline futures are up 4.33%, coal is up 22.48%.
Hey bartender! You are the leading job addition.
At least the 30-year mortgage rate is down slightly. Why? Fed Stimulypto is still in place!
The US still has a steeply upward-sloping yield curve, but Russia has the exact opposite: a steeply downward-sloping or inverted yield curve.
Here is a comparison of the US Treasury Actives curve (steeply-upward sloping) compared to Russia’s sovereign curve (steeply-downward sloping).
Russia’s technical default on international bonds has led to its 5.25% coupon international bond (denominated in Euros) to plunge from 131.6 in September 2022 to only 21.75 this morning.
Commodity prices? Commodity prices saw the biggest one-day gain in 13 years on Tuesday.
Between Biden’s anti-fossil fuel executive orders and the Russian invasion of Ukraine, gasoline futures are up 126% since the start of January 2021.
Biden is tapping the US strategic oil reserves releasing 30 million barrels. Unfortunately, this amounts to only 1 1/2 days of US oil consumption. Instead of “Release the Kraken!”, Biden is releasing a Petit Basset Griffon Vendéen. Woof.
This reminds me of “Does your dog bite?”
Like the old E.F. Hutton ads, when Fed Chair Jerome Powell talks, people listen.
Stocks rose, while bonds fell after Jerome Powell said he was inclined to back a quarter-point U.S. rate hike in March to combat inflation that is “too high.”
In a broad-based equity rally, financial and industrial companies led gains in the S&P 500. The two-year Treasury yield — which is more sensitive to imminent Federal Reserve policy moves — was near 1.5%. The Fed chief also noted that the central bank is prepared to be more aggressive if inflation is more persistent than expected, while adding that he’s open to “series of rate increases” in 2022. Investors also assessed the latest geopolitical developments, with oil paring gains after earlier topping $110 a barrel.
WTI Crude futures are up to $107.05 a barrel.
Natural Gas (UK) rose 34.58% to 100.28. Wheat is 7.62% to $1,059.
The 10-year Treasury yield jumped 11 Basis Points on Powell’s comments. And Eurozone yield are up nearly the same amount.
Powell signalling a more moderate rate expansion led to the Dow rising over 500 points (up 1.65%).
Based on core PCE growth of 5.21%, the Mankiw specification of the Taylor Rule model infers that The Fed Funds Target rate should be … 13.40%. Since The Fed’s target rate is only 25 basis points, a 25 basis point increase is modest indeed.
Mortgage rates are down slightly today, but you can see the separation between The Fed’s target rate and the 30-year mortgage rate.
We now know that Russia has invaded Ukraine and President Biden really threw the booklet at Putin in a speech today. Rather than removing Russia from the SWIFT banking system which would have really hurt Russia’s trade with Europe, he gave a surprisingly cogent speech about the US and NATO agreeing to do … not much. He did warn us that energy prices would rise (which he helped do when he took office) and told energy companies not to gauge consumers.
The reaction in Russia? Their stock market tanked over 30% (not because of Biden’s speech, but because of negative costs of war).
Russia’s 10-year sovereign yield rose to 15.23%.
The Russian Ruble crashed and burned.
UK natural gas prices rose 51% today.
And while 17 Euro nations have negative 2 year sovereign yields, Russia has 2-year sovereign yield of 28.65% which is nothing compared to Ukraine’s 75% 2-year yield (in US Dollars).
The SWIFT system, or Society for Worldwide Interbank Financial Telecommunication, facilitates financial transactions and money transfers for banks located around the world. The system is overseen by the National Bank of Belgium and enables transactions between more than 11,000 financial institutions in more than 200 countries around the world. Removing Russia from the SWIFT system would really hurt Russian trade with Europe. I assume that Europe is scared of soaring energy costs, so probably doesn’t want Russia removed from SWIFT.
Queue Creedence Clearwater singing “Lookin’ Out My … Limo Window.”
It has been almost 14 years since The Federal Reserve under Ben Bernanke unleashed zero interest rate policies (ZIRP) and quantitative easing (QE) in late 2008. And Fed monetary stimulypto is still running strong after almost 14 year of monetary mismanagement and asset bubble stimulation.
The Federal Reserve under Bernanke and Yellen raised their target rate exactly once under President Obama before the election of Donald Trump. After Trump was elected, The Fed raised their target rate 8 times, lowered it 5 times. There have been no rate hikes under Biden.
There seemingly never-ending Fed monetary stimulus has resulted in the top 1% seeing their share of total net worth soar relative to the share of net worth of the bottom 50%. But note that starting in 2014 just as The Fed was engaged in QE 3. But the real divergence occurred after The Federal government heaped trillions in fiscal stimulus on top of the skyrocketing monetary stimulus.
In terms of income inequality (as measured by the GINI coefficient), it just keeps getting worse and worse.
Let’s see if The Fed actually delivers by reducing their monetary stimulypto.
In August 1979, when Paul Volcker became chairman of the Federal Reserve Board, the annual average inflation rate in the United States was 11%. Inflation peaked in 1980 at 14.6%. Volcker raised the federal funds rate from 11.2% in 1979 to 20% in June of 1981.
Inflation (defined as CPI YoY) declined from over 14.6% in 1980 to 3.6% by 1985. But 30-year mortgage rates resumed their upward trajectory and peaking in October 1981 at 18.63 before beginning a gradual decline as inflation was tamed.
But will Powell enact another Volcker moment by raising the target rate abruptly?
The bank is joining others on Wall Street in ramping up bets for faster policy tightening, after U.S. consumer prices posted the biggest jump since 1982 in January. Goldman Sachs Group Inc. is forecasting seven hikes this year, up from its earlier prediction of five.
“We now look for the Fed to hike 25bp at each of the next nine meetings, with the policy rate approaching a neutral stance by early next year,” the JPMorgan team, led by chief economist Bruce Kasman, said in a research note.
January U.S. inflation readings “surprised materially to the upside,” the economists wrote. “We now no longer see deceleration from last quarter’s near-record pace.”
On inflation, the economists said a “feedback loop” may be taking hold between strong growth, cost pressures, and private sector behavior that will continue even as the intensity of current price pressures in the energy sector eventually fade.
Strong growth? 1.3% is strong growth??
Be that as it may, the US economy is at a different place today than under President Jimmy Carter. When Volcker started raising The Fed Funds Target rate, US public debt was still under $1 trillion. It has ballooned to over $30 trillion today.
9 rate increases is above what is being priced in The Fed Funds FUTURES market which is 6 rate increases over the coming year.
With 7.5% inflation, the Taylor Rule suggests a target rate of 15.45%. Talk about “Shock and Awful!”
We are starting to see GOLD (gold) surging and Bitcoin (yellow) falling as The Fed prepares “shock and awful” rate hikes and Biden continues to beat the war drums over Russia invading Ukraine.
If The Fed actually raises rates 9 times and dramatically pares back its massive monetary stimulus, it will be “shock and awful.”
Jay “The Revelator” Powell has told us in The Fed minutes that The Fed is ready to raise rates and shrink the balance “soon.” Sort of like saying “Shock and Awe” is coming.
The minutes of the recent Fed Open Market Committee (FOMC) have been released. Yet they only mention “soon.” Just like when my wife asks me to take out the trash and I reply “soon.” At which point she realizes that I have no intention of doing it.
The REAL 10-year Treasury yield is now -5.44%.
And the 30-year mortgage rate has risen to 4.23% while the REAL 30-year mortgage rate has fallen to -3.7%.
Jay The Revelator sings “Soon!”
Another effect of The Federal Reserve’s reckless monetary policy coupled with Biden/Congress reckless spending is bad foreign policy. The US is exporting inflation around the globe.
US export price YoY is at 15.1%. The US is importing less inflation at 10.8% YoY.
Here is the export/import stack.
Things are not well in the US either. The misery index keeps rising under Biden’s Reign of Error.
The Federal Reserve keeps on printing!
Confounded Interest - Anthony B. Sanders 
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