With 8.5% YoY inflation, REAL average hourly earnings growth fell to -3% YoY.
And with The Fed intent on extinguishing their part of the inflation, Bankrate’s 30Y mortgage rate rose to 5.14%.
Energy is the biggest culprit (fuel oil up 70.1% YoY) thanks to the double whammy of 1) Russia’s invasion of Ukraine and 2) Biden’s restrictions on oil and natural gas production. Food at home is up 10% YoY.
Here is a colorful chart of MoM growth in prices.
The Taylor Rule model now says that The Fed Funds Target Rate should be 11.90%. Hence, Fed Stimulypto is still in place with the signal that rates will increase.
How about WTI Crude and Brent Crude soaring over 4% today?
Once again, the Four Horsemen of the Inflation Apocalypse (Biden, Powell, Pelosi, Schumer) overstimulated the economy and financial markets with excessive monetary stimulus (Powell) and excessive Federal spending (Biden, Pelosi, Schumer) where demand soared for products and supply naturally hasn’t caught up.
To make a long story short, a 40-year mortgage, by stretching the payment out from 30 to 40 years, means that the mortgage mortgage payment declines from $1,687 to $1,504.
Given that the US Treasury yield curve only goes out to 30 years, lenders (and Fannie Mae and Freddie Mac) will have to use the US Dollar Swaps curve to price mortgages. And since the swaps curve is downward sloping, we could see 50-year mortgages at a lower rate than 30-year mortgages, ceteris paribus.
But with The Fed planning on taking away the monetary punchbowl, mortgage rates are rising making housing even more unaffordable.
But most things are not equal. The 40-year mortgage results in a slower paydown of the mortgage, increasing the lender’s exposure to property value declines. A 50-year mortgage would even be worse.
But the real problem with the 40-year mortgage is that it can lead to even MORE unaffordable housing. Yes, going from 30-year to 40-year mortgages lowers the mortgage payment, but a 40-year mortgage could increase the demand for housing. And since we already have soaring home prices since Covid (thanks to Fed monetary policy AND Federal government stimulus), we could actually see a worsening of the housing bubble). Particularly since REAL average earnings are declining.
What a mess that has been created by the government’s pursuit of “affordable housing.” Ideally, the Federal government could help raise household earnings through lowering of Federal tax rates, but the Biden Administration wants to raise taxes. Alternatively, lenders (and Fannie Mae and Freddie Mac) could lower lending standards (e.g., lowering required credit scores), or reduce downpayments to 0%. Lowering credit standards and reducing required downpayments are also inflationary and pose serious potential problems with default risk.
Not to mention that a 40-year mortgage increases the duration risk for owner’s of the 40-year mortgage.
And don’t forget that local governments frown on multifamily (apartment) construction (the Not In My Backyard [NIMBY] problem contributing to rising housing prices.
There is a massive divergence between the collapsing US Treasury 10Y-2Y yield curve and the near-term forward spread. The near-term forward spread is the difference between the implied interest rate expected on a three-month Treasury bill six quarters ahead and the current yield on a three-month Treasury bill.
As we already know, the 10Y-5Y yield curve has inverted signaling a coming recession.
This divergence between the Treasury yield curves and the near-term forward spread is occurring as US inflation hits the highest rate in 40 years.
Anticipation about Federal Reserve rate hikes over the next 12 months are seeding mortgage rates soaring and mortgage refinancing applications plummeting.
Mortgage applications decreased 6.8 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending March 25, 2022.
The Refinance Index decreased 15 percent from the previous week and was 60 percent lower than the same week one year ago.
The seasonally adjusted Purchase Index increased 1 percent from one week earlier. The unadjusted Purchase Index increased 1 percent compared with the previous week and was 10 percent lower than the same week one year ago.
Yes, I am surprised at the rise in mortgage purchase applications with rising mortgage rates, unless, of course, people are trying to buy ahead of Fed rate increases.
Overnight, the US Treasury yield rose to 2.38% as the number of forecast Fed rate hikes rose to 8.211. So, enjoy “low” rates while you can.
If we back out the highest inflation rate in 40 years, the REAL 10Y Treasury yield is -5.50%.
And the REAL 30Y mortgage rate is -3.57%.
Of course, the meteoric rise in inflation is due largely to Biden’s attack on the fossil fuel industry (until Russia’s invasion of Ukraine distracted from Biden’s inflation fiasco). Remember, Russia didn’t invade Ukraine until February 2022.
Wait. I thought the purpose of Biden’s executive orders was to reduce dependence on fossil fuels by driving up gasoline and natural gas prices producing a shift to “green energy.” Won’t these “gas rebates” simply continue the consumption of gasoline and natural gas? And increase inflation??
As Winston Churchill once said, “Never let a crisis go to waste.”
Oil prices are soaring as US President Biden pleads like a homeless person to foreign countries for oil rather than let the US produce more oil to drive down prices. Meanwhile, the US Treasury yield curve 10Y-3M is at its steepest (rising 10Y yields while The Fed keeps short rates at near zero).
But if we look at the belly of the beast, so to speak, the 10Y-5Y slope, we can see that the Treasury curve has declined to a mere 0.278 basis points as inflation rages.
Bankrate’s 30-year mortgage rate keeps on climbing and has hit 4.55% as the 2-year Treasury yield rises rapidly.
The US Dollar Index has risen dramatically as US inflation has increased dramatically.
Oil? Oil is up over 4% in the US. Mexican Mix (not a #3 meal at Chuy’s) is up 7.32%.
Gasoline? NY prices are up over 10%.
Russian oil is up 9.35%.
Ah, for the good old days of 30 cents a gallon gasoline, although I always wondered about Gulf’s marketing campaign. “Good Gulf” seems to imply that the other Gulf gasolines aren’t good. And Gulf’s “No-nox” seems to imply that the other Gulf gasolines knock like Biden’s knees as he pleads for foreign oil.
The US Treasury yield curve (10Y-2Y) is rapidly approaching inversion at 20.5 bps (where the 10-year yield is lower than the 2-year yield). But the 10Y-3M curve is generally steepening at 173.33 bps.
Of course, the driving force behind the flattening of the 10Y-2Y curve is the rapidly rising 2-year Treasury yield (orange line). The last time the 10Y-2Y curve inverted was in 2019, prior to the COVID outbreak in early 2020.
The Wu Xia United States Federal Reserve Funds Shadow Rate has finally climbed back into positive territory.
At last look, The Federal Reserve is forecast to raise their target rate 7 times over the coming year. And with the increasing forecast of rate hikes, we are seeing the cryptocurrency Bitcoin fall from near $70,000 to $41,817.
President Biden announced that he will be issuing an executive order to combat rising energy prices (the rising energy prices that he caused in the first place with … executive orders). Let’s see what happens next.
The news just keeps getting worse and worse. Russia is still assaulting Ukraine, WTI Crude prices are above $100 a barrel and climbing, the Cleveland Browns signed Deshaun Watson to replace Baker Mayfield at quarterback, etc.
But back to energy prices. Since Biden was sworn-in as President, WTI Crude Oil futures are up 125%, regular gasoline prices are up 89%, and diesel fuel prices are up 155%. Diesel is important since America uses diesel-powered trucks to transport goods to market.
Globally? The world inflation rate has grown from 2% in January 2021 to 6.82%. Global food prices are up 24%.
Yes, WTI Crude and Brent Crude are above $100 per barrel.
And coal prices are up 256% under Shoeless Brainless Joe.
Mortgage rates? Bankrate’s 30-year mortgage rate is now above 4.50%.
Let’s see if Dr. StrangeFedpolicy raises rates as aggressively as signaled.
The Federal Reserve is not mentioned in the movies “The Big Short” or “Margin Call”, but The Fed’s policy errors played a big role in the demise of Fannie Mae’s and Freddie Mac’s equity prices.
Here is a chart of The Fed’s many policies errors. Let’s start with The Fed lowering rates too fast around the 2001 recession. They pushed their target rate from 6.5% in December 2000 down to 1.75% after one year and then down to 1% (PE1). As home price growth accelerated, The Fed engaged in their second policy error — raising rates too fast resulting in a dramatic cooling of home price growth. Then came Policy Error 3: the dropping of The Fed Funds Target rate from 5.25% in September 2007 to an eventual 0.25% in December 2008.
With the election of President Obama, The Fed engaged in Policy Error 4: keeping The Fed Funds Target rate too low for too long, combined with their massive asset purchase programs (QE).
Finally, The Fed (under Yellen) finally raised The Fed’s target rate ONCE under Obama, but started raising rates once Trump was elected. The Fed also slowed their QE under Trump which as called “Fed policy NORMALIZATION.” Then COVID struck and The Fed engaged in Policy Error 5: keeping rates too low for too long … again while massively expanding their balance sheet.
Fannie Mae and Freddie Mac, the DC mortgage giants were done in by The Fed’s whipsaw Policy Error machine.
Now we are embarking on PE 5: Powell and The Fed Gang not raising rates but signalling that they will. Like the play “Waiting for Godot.”
The US Producer Price Index (PPI) final demand rose 10% YoY in February, further evidence of spiraling inflation under Biden/Pelosi/Schumer’s reign of error.
And speaking of Senate Majority Leader Chuck Schumer (D-NY), the Empire State Manufacturing Survey (General Business Conditions) crashed to -11.8.
And Russia is losing the economic demolition derby with Ukraine (at least for sovereign debt).
I am still trying to figure out what House Speaker Nancy Pelosi (D-San Francisco) meant by “When we’re having this discussion, it’s important to dispel some of those who say, well it’s the government spending. No, it isn’t. The government spending is doing the exact reverse, reducing the national debt. It is not inflationary.”
Really Nancy?
Here is a chart of Federal government outlays and inflation. Massive expenditures and growth in Federal debt and the resulting inflation. Nancy?
Confounded Interest - Anthony B. Sanders 
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