One of the world’s most important borrowing benchmarks staged its biggest one-day decline in a decade on Thursday.
The three-month London interbank offered rate for dollars sank 4.063 basis points to 2.697 percent, the largest one-day slide since May 2009. The move may reflect a benchmark that’s making up ground following a repricing of short-end Treasuries and associated instruments in the wake of the Federal Reserve’s dovish pivot in recent weeks.
The 3-month LOIS spread (3-month Libor – Overnight Indexed Swap rate) has been receding … again as of Feb 5th (Libor rates on Bloomberg as not updating on Feb 7).
Typically, Libor rates rise ahead of Fed rate hikes. While the “catching up” explanation is likely, it is also possible that Libor is signalling a cut in the Fed Funds rate coming up.
The stock market is pleading for SLOWDOWN in monetary normalization.
Yes, it is possible that Libor is signalling that The Fed will try to give more oxygen to financial markets.
My favorite Bloomberg headline of all time is: “Former Fed Chief Yellen Says Rates Could Next Move Up or Down.” Wow, how insightful. But of course, she was refering to The Fed Funds Target rate which she kept at 25 basis points seemingly forever. However, current Fed Chair Jerome Powell could either raise, lower of keep rates constant, depending on the state of economy.
But then again, both the ECB and Bank of Japan are currently at zero (ECB) and below zero (BOJ). The US Fed is headed in a direction that differs from other central banks.
While Powell has been increasing The Fed Funds Target rate AND shrinking The Fed’s balance sheet, Europe is drowning in negative target rates (Eurozone, Switzerland, Sweden, Denmark) as is Japan.
But in terms of central bank balance sheets, only the US is shrinking their balance sheet.
There are currently around $9 trillion of bonds trading at negative interest rates.
As we stand today, the US Treasury yield curve is downward sloping at tenors 1-3 years.
The current implied policy curve for The Fed is declining (meaning Fed Fund rate cuts are implied in 1-3 years.
So, former Fed Chair Janet Yellen thinks rates could go up or down.
MarketWatch has the tantalizing headline of “The Average Adjustable-rate Mortgage Is Nearly $700,000.”
True, the average loan size for ARMs (adjustable-rate mortgages) is substantially higher than for FRMs (fixed-rate mortgages).
But here is a catch. Mortgage refinancing applications are virutally dead.
Mortgage purchase applications are relatively sedate but rising following the financial crisis with new rules governing bank lending such as QM (Qualified Mortgage) and other Consumer Financial Protection Bureau (CFPB) rules.
A more relevant chart that the one posted by MarketWatch is a comparison of average loan size by purchase applications and refi applications. Note that following the financial crisis, average loan size for purchases is higher than for refi applications.
For the week ending 02/01/19, mortgage purchase applications SA declined 4.58% while mortgage refis were up 2.6% from the preceding week.
The bottom line is that the MarketWatch piece, while tantalizing, is fundamentally misleading. Mortgage refi applications are nearly dead and mortgage purchase applications are rising again, but are no where near the 2000-2007 levels.
So, who killed mortgage refinancing applications?
These guys! (Paul Volker can be excluded from the blame list).
I feel like investors are doing the “Boogie In The Dark” when it comes to understanding this broken market.
What’s going on?
First, bond king Bill Gross (formerly of PIMCO then Janus-Henderson) has thrown in the towel after 50 years. His success at PIMCO was in the greatest bond bull run in modern history. But his Janus fund started near the peak of The Fed’s QE3 balance sheet expansion. Then his fund underperformed when The Fed started unwinding their balance sheet (and raising their target rate). Translation: The Fed got bond king Gross dizzy … and he retired.
And that brings me to the former New York Fed President William Dudley.
(Bloomberg) — Former Federal Reserve Bank of New York President William Dudley said he’s “amazed and baffled” at the attention the wind-down of the U.S. central bank’s balance sheet has been receiving from investors, pointing to other culprits as the likely cause of recent volatility in financial markets.
Amazed and baffled? Just ask Bill Gross about the importance of Fed’s wind-down.
Then we have the world’s largest pension fund, Japan’s Government Pension Investment Fund that lost 9.1 percent, or 14.8 trillion yen ($136 billion), in the three months ended Dec. 31. The decline in value and the rate of loss were the steepest based on comparable data back to April 2008. Domestic stocks were the fund’s worst performing investment, followed by foreign equities. Assets fell to 150.7 trillion yen at the end of December from a record 165.6 trillion yen in September.
But who helped break the market by distorting asset prices and returns? The Federal Reserve and other global central banks.
With so many uncertainties in global market (Brexit, trade wars, Venezuela’s meltdown, The Fed’s uncertain policy path, Italian debt crisis. etc., …
(Bloomberg) — Italy is preparing to sell as much as 1.8 billion euros ($2.1 billion) of state-owned real estate as it seeks to rein in soaring debt, people with knowledge of the plan said.
investors should hedge their risk exposure across markets … or move to cash or short-term Treasuries. In other words, take out some insurance.
Lastly, down in Virginia, we are suffering through yet another embarrassing governor (Northam) after McAuliffe and his electric call debacle.
Bye, bye Bill Gross. I can’t stand to see you go.
The Markets Drive Me Crazy!
Q1 2019 &P 500 Estimated Earnings growth rate is -0.8%.
And the CHANGE in S&P 500 Quarterly Earnings Per Share (EPS) is … -4.1%.
At least healthcare, utilities, industrials and real estate are forecast to have positive earnings growth.
Meanwhile, low volatility share’s valuation is nearing its historic high.
After a record January for stocks, this is not a good thing.
The US economy is experiencing a sudden surge of economic reports that exceed expectations. So much so that the Citi Economic Surprise index has skyrocketed.
The Eurozone, on the other hand, resembles Saganaki. That is, “Your cheese is on fire!”
The US economy added another 304,000 jobs in January. A record 100th consecutive month of job gains!
On the other hand, YoY average hourly earnings slumped.
I wonder if ECB head Mario Draghi will say Opa!!
Oops, they did it again.
After hinting on January 30th that The Fed is considering halting shrinking of its balance sheet (better known as Quantitative Tightening), The New York Fed reported yesterday that their agency mortgage-backed securities holdings had been reduced by $7 billion. Aparently, The Fed is sticking to autopilot in terms of shrinking their balance sheet, at least for the moment.
Again, only Agency MBS was reduced in the amount of just over $7 billion. All other holdings remained the same from the previous week.
In other words, despite the talk, talk, The Fed is continuing to drain the punchbowl.
Now you know why Fox Business and CNBC no longer invite me to be interviewed. They love the headline “November New Home Sales Surge By The Most Since 1992!”
Let’s start with the +16.9% MoM number, a more cheery, pop the champagne bottle headline.
But on a YoY basis, new home sales fell 7.7% in November.
Months supply of new home sales fell in November, but are still at elevated levels.
And the median price of new home sales fell in November as The Fed’s normalization grabs the housing market with its icy grip.
“The weather started getting rough, the tiny ship was tossed….”
The Federal Reserve’s “maybe we will, maybe we won’t” regarding further shrinking of its balance sheet coupled with keeping its target rate at 2.50% was celebrated by equity investors … and gold investors (including SPDR Gold Shares).
(Bloomberg) — Gold is poised to close out January with a fourth straight monthly gain after the Federal Reserve signaled it’s done raising interest rates for a while, hurting the dollar, and as investors sought a haven against slowing growth and U.S.-China trade disputes.
Spot bullion traded at $1,321.89 an ounce at 10:33 a.m. in London after hitting $1,323.43 on Wednesday, the highest level since May, according to Bloomberg generic pricing. The precious metal is up about 3 percent this month, while the greenback’s decline in January is the most in a year.
Gold volatility remains subdued.
And yes, Powell wounded the dollar.
Yes, The Fed benefitted equity and gold investors while wounding the US Dollar.
For excellent gold charts and analysis, see Jesse’s Cafe Americain site!
Today, The Federal Reserve announced that their target rate remained at 2.5%.
This was expected.
But on further balance sheet unwinding, Fed Chair Thurston Powell III had this to say:
“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,”
Wednesday’s statement from the policymaking Federal Open Market Committee struck a more tepid approach.
The committee lowered its assessment of economic growth from “strong” to “solid” and noted that its inflation gauges “have moved lower in recent months.”
*Fed removes reference to further gradual rate increases
*Fed says it plans to continue with current floor approach
*Fed says it’s prepared to adjust balance-sheet normalization
*Fed reiterates federal funds target is primary policy tool
*Fed says economic activity rising at solid rate, jobs strong
*Fed says labor market strengthened, unemployment remained low
*Fed says spending grew strongly, investment moderated
*Fed says core and headline inflation remain near 2%
The reaction on the Dow? Investors seem to like Powell’s tepid message.
And yield on 10-year Treasury Notes fell on the message.
Fed Chair Thurston Powell III with wife Lovey (aka, Janet Yellen).