The U.S. is poised to enter Year Three of the pandemic with both a booming economy and a still-mutating virus. But for Washington and Wall Street, one Covid aftershock is starting to eclipse almost everything else.
Already-hot inflation is forecast to climb even further when November data comes out on Friday, to 6.8%. That would be the highest rate since Jimmy Carter was president in the early 1980s — and in the lifetimes of most Americans.
And the CPI change since last year, according to the Federal Reserve of St Louis FRED is a staggering 16.262%.
And with U.S. Jobless Claims plunge to 52-year low, its about time that The Fed begins removing the humongous monetary stimulus.
After all, largely thanks to Federal Reserve policies, we have seen the greatest wealth redistribution in US history … to the top 1%.
Despite the “Talk, Talk” from The Federal Reserve about balance sheet taper and rate “normalization,” we actually saw the 10-year Treasury yield fall from 1.6651% on 11/23/2021 to 1.343 on 12/3/2021. While the 30-year mortgage rate only fell from 3.31% to 3.3%, it is the SIGNAL that The Fed is sending that people should refinance their mortgages ASAP.
You can see the rise in mortgage refinancing applications of 56% week-over-week (WoW) (white line) with the drop in the 10-year Treasury yield (blue line) despite the relatively small drop in the Mortgage Bankers Association (MBA) tiny drop in their 30-year mortgage rate index.
Ditto for the MBA mortgage purchase application index. The drop in the US Treasury yield (blue line) resulted in a 28% WoW increase in mortgage purchase applications.
Here is the table of MBA data for the week of 12/03.
Please note that the 10-year Treasury yield have jumped since 12/03 indicating that mortgage application activity for the week of 12/10 will be lower.
Here is the MOVE bond volatility index and the US Treasury 10-yield chart. Can you spot the COVID outbreak??
As we are all painfully aware, The Federal Reserve went on a 2nd money printing spree to allegedly stave-off the economic impacts of the COVID outbreak in March 2020. The first money printing spree took place in late 2008 as The Fed tried to stave-off the economic impacts of the housing bubble burst of 2008 and the ensuing financial crisis.
But for now, we have this horrifying chart showing the exploding margin accounts at security brokers and dealers (not, not the Walter White-type dealers, but Wall Street dealers). Notice the 400% surge in M1 Money stock after COVID struck.
Of course, the soaring stock market is feeding the margin loop, encouraged by The Fed. Check out the Shiller Cyclically Adjusted Price Earnings (CAPE) ratio after The Fed’s M1 printing storm.
What can’t money printing fix? How about CMBS prices (or CMBX BBB- S6 prices … down 30.5% since just before COVID struck.
Let’s see if The Fed sucks the 400% growth back to zero.
The Dream Team (Fed Chair Jay Powell and Treasury Secretary Janet Yellen) just can’t believe that inflation struck even after M1 Money Stock increased by 369% from March 2020 to today while interest rates remained near zero.
From The Hill: Federal Reserve Chairman Jerome Powell and Treasury Secretary Janet Yellen on Wednesday said they underestimated how quickly the U.S. economy would rebound from the COVID-19 recession and strain supply chains.
During a Wednesday hearing before the House Financial Services Committee, the top two U.S. economic policymakers acknowledged that high inflation has risen higher and lingered much longer than they expected.
“We understood demand would be strong,” Powell said. “We didn’t understand [the] significant problems of the supply side.”
Both Yellen and Powell said substantial fiscal and monetary stimulus played a role in stoking the higher demand that fueled inflation, but they called it a challenging side-effect of an otherwise fast recovery.
Seriously? The Fed and the Federal government dumped trillions of dollars into an economic system and didn’t think there would be negative consequences??
Look at the surge in M1 Money Stock at the same time asset-backed commercial paper rates are 0.08%. That is, about 1/3rd The Fed Funds Target rate (upper bound). None of this concerned The Dream Team?
An example of what The Dream Team didn’t see happening was the explosion of home prices. Home price growth was about 4% YoY prior to COVID, and is now 19.51% YoY.
Now we have the US Treasury Actives curve inverting like the US Dollar Swaps curve after 20 years.
Calamity Jay Powell testified in front of the US Senate Banking Committee. He rattled markets by going hawkish about inflation, then gave The Fed an out by playing the COVID CARD (the latest Omicron Variant). Aka, the DEATH CARD.
Federal Reserve Chair Jerome Powell said the strong U.S. economy and elevated inflation could warrant ending the central bank’s asset purchases sooner than planned next year, though the new omicron strain of Covid-19 poses a fresh risk to the outlook.
“It is appropriate, I think, for us to discuss at out next meeting, which is in a couple of weeks, whether it will be appropriate to wrap up our purchases a few months earlier,” Powell said Tuesday. “In those two weeks we are going to get more data and learn more about the new variant.”
Powell made the comment in response to questions during a Senate Banking Committee hearing in Washington. The Fed is currently scheduled to complete its asset-purchase program in mid-2022 under a plan announced at the start of November; policy makers next meet Dec. 14-15, where they could make a decision to accelerate the tapering.
On his remarks, the stock market puked.
Well, if Powell followed the Taylor Rule, he would really scare Congress with raising The Fed Funds Target Rate to 14.94% based on an inflation rate of 6.20%.
And then we have HOUSE price inflation of near 20%. But The Fed doesn’t consider than inflation.
Then we have oil prices retreating -4.59%. Not, not due to Biden releasing the National Petroleum Reserve (NPR). Rather it is FEAR of The Fed raising rates and a corresponding slowdown in economic growth.
The latest scare hitting financial markets is the Omicron Variant (or Oh! Macron! Variant in France). While it caused an initial decline in global equity markets {Dow fell 900 points on early reports on Omicron), the Treasury market has been relatively unscathed.
For example, the US Treasury Actives curve dropped last Friday (the orange line represents the Wednesday before Thanksgiving), while the remaining three lines represent last Friday, Monday and Tuesdays (today). In other words, the US Treasury Actives curve has been quiet so far this week after Friday’s flattening.
The US Dollar Swaps curve shows the same dynamics. The dark blue line is last Wednesday, while the remaining lines are last Friday, this Monday and today. Not a lot happening after the initial Omicron fear factor was priced in.
Federal Reserve Chairman Jerome Powell believes that the omicron variant of Covid-19 and a recent uptick in coronavirus cases pose a threat to the U.S. economy and muddle an already-uncertain inflation outlook.
“The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation,” Powell said in remarks he plans to deliver to Senate lawmakers on Tuesday. “Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.”
Do I detect FEAR in Powell’s voice? The odds of rate increases for next year just fell to one rate increase at the September 2022 meeting.
On the equity side, it seems to be all about whether The Fed will withdraw its support. Back in early 2018, then Fed Chair Janet Yellen and the FOMC started to shrink the Fed balance sheet (green line). This resulted in the “Smart Money Index” declining. The S&P 500 index received a jolt with the Fed stimulus around the COVID outbreak and have taken off like a jackrabbit. Despite the Smart Money Flow index being lower than in 2017.
So, is Omicron the “planet killer” or just another mild flu-like outbreak? The data is pointing towards the latter, but FEAR may cause it to be a bigger deal than is warranted.
It has been a grim Friday. The Dow fell 900 points, 10Y Treasury yields fell 16.1 basis points and West Texas Crude fell to $68.17.
Bitcoin tumbled 20% from record highs notched earlier this month as a new variant of the coronavirus spurred traders to dump risk assets across the globe.
The world’s largest cryptocurrency fell as much as 8.9% to $53,624 on Friday during London trading hours. Ethereum, the second-largest digital currency, dropped more than 12%, while the wider Bloomberg Galaxy Crypto Index declined as much as 7.5%. On the other hand, gold rose as cryptos fell, then retreated as cryptos rebounded.
A new variant identified in southern Africa spurred liquidations across markets, with European stocks falling the most since July and emerging markets also slumping.
The Dow is down around 900 points … and look at Europe!
The 10-year Treasury yield is down 16.1 basis points. Most of Europe is down around 8-9 basis points while the UK is down 14.5 BPS.
And West Texas Intermediate crude futures are down to 68.17 from 78.39. No Jen Paski, this isn’t due to Cousin Eddie (Biden) releasing the Strategic Petroleum Reserve (SPR).
Maybe it was all the tryptophan released by eating turkey.
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
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.
Confounded Interest - Anthony B. Sanders 
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