Gut-wrenching inflation is already priced in, but yet another COVID outbreak (and the possibility of more economic shutdowns, more vax mandates and more stern lectures from Anthony Fauci) are spooking markets.
Down Futures are down 777 as I write this note.
The 10-year Treasury yield is down 11.2 basis points.
And West Texas Intermediate crude prices are down 6.62%.
Its Thanksgiving in the USA! Confession: I don’t like turkey. Prime rib with horseradish sauce? You bet!!
Anyway, Treasuries ended mixed Wednesday with the yield curve sharply flatter after a raft of U.S. economic data and minutes of the November FOMC meeting bolstered expectations for an earlier start to Fed rate increases. Two- and 5-year yields reached YTD highs, and 5s30s spread reached narrowest since March 2020.
Over the past week, the Treasury actives curve rose 13.85 basis points at the 2 year tenor.
Yields ended richer by ~6bp across long-end of the curve, while front-end cheapened almost 3bp; 2s10s flattened more than 5bp, 5s30s more than 6bp; 10-year yields shed ~3bp to ~1.635% Release of Nov. 2-3 FOMC meeting minutes drew minimal market reaction, as flatter curve held its shape.
The US Dollar Swaps curve rose from the previous week as well.
Minutes said participants considered elevated inflation as likely transitory, “but judged that inflation pressures could take longer to subside than they had previously assessed”
Earlier, front-end and belly sold off after a heavy slate of U.S. economic data including the lowest initial jobless claims tally since 1969
Also during U.S. morning, Fed’s Daly said she would support accelerated tapering of asset purchases, which added to pressure across front-end Treasuries
Subsequently, eurodollars traded heavy over the session as rate-hike premium continued to ramp up in 2022 and 2023; overnight index swaps showed 30% chance of a March hike, while around three hikes — or 75bp — were priced in by the end of next year
While some economists are cheering the post-COVID economic recovery, I am not among them. Rampant inflation and bad economic policies are plaguing the non 1% of the population.
For example, new home sales dropped -23.1% YoY in October. As consumer sentiment for housing crashed to 63 (baseline of 100).
Why are consumers bummed-out about buying housing? How about rapidly accelerating new home prices???
Renters in the US are getting clobbered by inflation.
The US Zillow Rent Index All Homes YoY + CPI YoY is one measure of renter misery.
The classic misery index (CPI YoY + U-3 unemployment rate) is 10.80%.
Then there is inflation in food prices, gasoline, heating oil, natural gas, etc.
While Biden is releasing the Strategic Petroleum Reserves (SPR) in order to mitigate the problem that he created by terminating the energy pipelines and oil/natural gas drilling permits in the name of “Going Green!” But on the announcement of tapping the SPR, crude oil futures actually rose.
I remember the surge in securitization of loans, receivables, etc during the housing bubble of the mid-to-late 2000s. Today seems like 2007 all over again.
(Bloomberg) — Bankers are repackaging everything from fast food franchises to fitness-center fees into bonds at the fastest clip since the global financial crisis as investors chase yield and inflation protection.
This year’s sales of U.S. asset-backed securities have already surpassed $300 billion, according to data compiled by Bloomberg — and more is expected by year-end. Post-crisis issuance records have also been set in private-label commercial mortgage bonds and collateralized loan obligations, which are also seen accelerating.
“Solar, consumer loans, container lease and whole business transactions to some degree all offer attractive yields and spreads,” said Dave Goodson, head of securitized credit at Voya Investment Management. “These so-called esoteric sectors remain well supported with plenty of money to invest.”
On Monday, Self Esteem Brands, a franchiser of businesses including its flagship gyms Anytime Fitness, priced a $505 million ABS that was backed by franchise agreements, royalties and fees. In whole business securitizations like these, companies mortgage virtually all their assets.
Last month, fried chicken restaurant chain Church’s Chicken sold a $250 million securitization backed by franchise and royalty collateral. Golden Pear Funding recently securitized litigation fees related to financial settlements on everything from personal injury cases to wrongful convictions. And Oasis Financial priced a similar deal linked to payments on medical liens.
Then we have this headline that will send chills through the CMBS market for retail space, particularly at a time when commercial real estate (particularly RETAIL) are trying to recover from COVID lockdowns and the growth of online shopping.
“Retailers Sound Alarm on Organized Theft as States Warn of Rise”
Retailers say shoplifting is getting more brazen in the U.S.: A California Nordstrom store was recently hit by a flash mob of more than 80 people who made off with designer goods, while more than a dozen people pilfered from a Louis Vuitton location in a suburb of Chicago.
On Tuesday, the impact of shoplifting reached Wall Street, with Best Buy Co. shares plunging after the electronics retailer said widespread theft contributed to a decrease in one gauge of profitability. Last month, Walgreens said it would close five San Francisco stores after theft rates there spiked.
Seemingly, no one learns from history. Or as the zen master Yogi Berra once said “It’s like déjà vu all over again.”
Or “You better cut the pizza in four pieces because I’m not hungry enough to eat six.”
President Biden nominated Jerome Powell for a second term as Fed Chair and nominated Lael Brainard as Deputy Chair to replace Richard Clarida. The US House of Overlords (aka, the US Senate) will hold hearings on the nominees (with Elizabeth Warren opposing Powell and supporting Brainard’s nomination).
Treasury yields jumped and U.S. index futures signaled a continued selloff in technology shares as traders pruned bets for a dovish-for-longer Federal Reserve after the renomination of Jerome Powell as its chair.
Contracts on the Nasdaq 100 Index fell 0.3% after Monday’s last-hour selloff in technology stocks. The subgroup was the worst performer in Europe Tuesday, sending the region’s benchmark to a three-week low. A currency crisis deepened in Turkey, with the lira weakening past 13 per U.S. dollar. Zoom Video Communications Inc. lost 9% in premarket trading on slowing growth.
Investors are reducing expectations for a deeper dovish stance by the Fed after Powell was selected for a second term. The chair himself sought to strike a balance in his policy approach saying the central bank would use tools at its disposal to support the economy as well as to prevent inflation from becoming entrenched.
Fed rate hike premium is added after Powell confirmed as next Fed Chair:
Change in Fed’s interest-rate target implied by overnight index swaps and eurodollar futures.
Fed Bank of Atlanta President Raphael Bostic said Monday the U.S. central bank may need to speed up the removal of monetary stimulus and allow for an earlier-than-planned increase in interest rates.
Translation: Markets are pricing in MORE hawkish Powell over uber-dove Brainard. The 10-year Treasury yield has risen from 1.52% to 1.65%
And the 10Y-3M Treasury curve has risen from 83 basis points at the beginning of 2021 to 160 basis points today. I will this the Biden Inflation Effect (BIE).
Let’s see if Powell & Company deliver on removing the excessive stimulus from the market, particularly with midterm elections approaching.
The Misery Index, inflation plus unemployment, is over 10% at 10.80%.
Unemployment has been steadily declining since the COVID shutdowns of 2020. The real culprit has been rapidly rising since COVID as well. At this point, inflation improvements (that The Fed is chasing) have been overwhelmed by inflation (which is being caused by The Fed’s monetary policy and Federal policies).
Powell has said that he is not going to raise rates until unemployment has improved, but risk more explosive inflation in striving to improve unemployment.
How I feel about Biden announcing Powell’s reappointment and uber-dove Brainard appointment as Deputy Fed Chair.
President Biden has decided to nominate Fed Chair Jerome Powell for a second term in an effort not to rock the boat. Lael Brainard is nominated for Deputy Chair.
To quote Gomer Pyle USMC, “Surprise, surprise, surprise!”
The humongous spending bill awaiting Joe Manchin to sign off on it will cost almost double what the CBO said it would. Why? Because spending programs in Washington DC never get cancelled, they only grow.
“We estimate the House Build Back Better Act includes roughly $2.4 trillion of spending and tax cuts along with roughly $2.2 trillion of offsets.However, the bill relies on a number of sunsets and expirations to keep the official cost down. If the plan’s temporary policies were made permanent, we find the cost would increase by as much as $2.5 trillion.As a result, the gross cost of the bill would more than double from $2.4 trillion to $4.9 trillion.
The Build Back Better Act relies on a number of arbitrary sunsets and expirations to lower the official cost of the bill. These include extending the American Rescue Plan’s Child Tax Credit (CTC) increase and Earned Income Tax Credit (EITC) expansion for a year, setting universal pre-K and child care subsidies to expire after six years, making the Affordable Care Act (ACA) expansions available through 2025, delaying the requirement that businesses amortize research and experimentation (R&E) costs until 2026, and setting several other provisions – from targeted tax credits to school lunch programs – to expire prematurely.
Excluding changes to the state and local tax (SALT) deduction, we estimate the Build Back Better Act would cost $2.1 trillion as written. We estimate making all of these temporary policies permanent would cost roughly $2.2 trillion, more than doubling the gross cost of the bill to $4.3 trillion through 2031.”
When asked about the Center for a Responsible Budget saying the bill could be twice as expensive, Manchin replies “it’s concerning. Sure. It’s concerning.”
Surprise, surprise, surprise! And it is certainly more expensive than the estimate Biden gave: $0.
Welcome to The Fed’s Gilded Age … for housing! The gilded age refers to the thin-veneer of gold covering up problems in the late 1800s.
Today’s gilded age is largely fueled by The Federal Reserve’s uber-easy monetary policies combined with absurd Federal government policies. The result? Thanks to inflation, REAL home prices are growing at 14.6% YoY while REAL hourly earnings are declining (-0.41% YoY).
Redfin predicts a more balanced housing market in 2022. Part of their rationale is that they predict mortgage rates will rise to 3.6%. This growth in the mortgage rate is predicted to slow home price growth to 3.2% from double digit growth currently.
While this scenario is plausible, it will require a change in direction of the 10-year Treasury yield which has been declining since 1981. 5.39% YoY inflation may encourage The Fed to raise rates.
Today’s REAL 30-year mortgage rate is -3.08% while the REAL 10-year Treasury yield is -4.67%. It will require a reduction in inflation AND an increase in the nominal rate to get to 3.6%.
With the Freddie Mac 30-year survey rate at 3.10, will a 50 basis point increase in mortgage rates send the market crashing? Not likely.
After all, the US economy is under the thumb of The Federal Reserve.
Confounded Interest - Anthony B. Sanders 
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