Former Fed Chief Yellen Says Rates Could Next Move Up or Down (Implied Rate Forecast Is Down, US Treasury Curve Downward Sloping From 1-3 Years)

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.

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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.

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But in terms of central bank balance sheets, only the US is shrinking their balance sheet.

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There are currently around $9 trillion of bonds trading at negative interest rates.

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As we stand today, the US Treasury yield curve is downward sloping at tenors 1-3 years.

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The current implied policy curve for The Fed is declining (meaning Fed Fund rate cuts are implied in 1-3 years.

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So, former Fed Chair Janet Yellen thinks rates could go up or down.

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The Average Adjustable-rate Mortgage Is Nearly $700,000! (Misleading Because Mortgage Refis Are Essentially Dead)

MarketWatch has the tantalizing headline of “The Average Adjustable-rate Mortgage Is Nearly $700,000.”

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True, the average loan size for ARMs (adjustable-rate mortgages) is substantially higher than for FRMs (fixed-rate mortgages).

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But here is a catch. Mortgage refinancing applications are virutally dead.

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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.

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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.

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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.

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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?

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These guys! (Paul Volker can be excluded from the blame list).

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“Bond King” Gross Retires, Dudley “Amazed and Baffled” About Fed’s Balance Sheet Unwind And World’s Largest Pension Fund Suffers Catastrophic Quarter (Boogie In The Dark?)

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.

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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.

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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.

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Q1 2019 S&P 500 Earnings Growth Rate Forecast To Be NEGATIVE (Markets Drive Me Crazy!)

The Markets Drive Me Crazy!

Q1 2019 &P 500 Estimated Earnings growth rate is -0.8%.

Q1 2019 eps growth rate

And the CHANGE in S&P 500 Quarterly Earnings Per Share (EPS) is … -4.1%.

Change in Q1 EPS feb 2019

At least healthcare, utilities, industrials and real estate are forecast to have positive earnings growth.

earnings growth by sector

Meanwhile, low volatility share’s valuation is nearing its historic high.

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After a record January for stocks, this is not a good thing.

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Opa! Citi’s US Economic Surprise Index Skyrockets As The Eurozone Resembles Saganaki (304k Jobs Added In January)

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.

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The  Eurozone, on the other hand, resembles Saganaki. That is, “Your cheese is on fire!”

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The US economy added another 304,000 jobs in January. A record 100th consecutive month of job gains!

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On the other hand, YoY average hourly earnings slumped.

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I wonder if ECB head Mario Draghi will say Opa!!

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Fed Tightens Agency MBS Holdings Day After Powell Hinted At Stopping QT (Oops, They Did It Again!)

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.

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Again, only Agency MBS was reduced in the amount of just over $7 billion. All other holdings remained the same from the previous week.

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In other words, despite the talk, talk, The Fed is continuing to drain the punchbowl.

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US New Home Sales Fall 7.7% YoY In November, But Rise 16.9% MoM, Most Since 1992 (Months Supply Still Elevated, Median Price Falls)

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.

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But on a YoY basis, new home sales fell 7.7% in November.

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Months supply of new home sales fell in November, but are still at elevated levels.

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And the median price of new home sales fell in November as The Fed’s normalization grabs the housing market with its icy grip.

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“The weather started getting rough, the tiny ship was tossed….”

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Gold Rewards Bulls in January as Fed’s Message Wounds Dollar (Gold Vol Remains Subdued)

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).

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(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.

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Gold volatility remains subdued.

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And yes, Powell wounded the dollar.

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Yes, The Fed benefitted equity and gold investors while wounding the US Dollar.

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For excellent gold charts and analysis, see Jesse’s Cafe Americain site!

US Pending Home Sales Fall 9.5% YoY In December To Lowest Level Since 2014 As Fed Unwinds

As The Federal Reserve continues to unwind its balance sheet, pending home sales YoY declined 9.5% YoY, the worst since 2014.

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Pending home sales got a big boost from The Fed’s third round of asset purchases (QE3), but PHS are feeling the pain of The Fed’s unwind.

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I wonder if “The Savior,” Ben Bernanke, saw this coming. Doctor, doctor (Bernanke), we’ve got a bad case of declining pending home sales.

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Simply Unaffordable! The Fed And Why Apartment Rents Are So High And The 1-Unit Housing Bubble of 2006 Market Distortion

The infamous home price bubble and financial crisis of 2008 is easily blamed on 1) subprime borrowers, 2) Collateralized Debt Obligations (CDOs), 3) financial derivatives, 4) tricked-up ARMs (adjustabe rate mortgages) like pay-option ARMs, 4) lack of regulatory oversight (The Fed claimed that is wasn’t their job!), etc.

But what generally overlooked is the supply response by developers and homebuilders to the sudden decline in interest rates (following the Fed Funds target rate).  A construction boom occured in the early to mid-2000s until The Fed decided to raise rates rapidly again in 2004 that helped result in a crash of 1-unit housing starts that never really recovered. True, subprime borrrowers disappeared (or shifted to FHA-insured loans), and tricked-up ARMs have been discouraged by the Elizabeth Warren brainchild The Consumer Financial Protection Bureau (CFPB). So, now we have increasing 1-unit housing starts at a lower level (fewer borrowers relative to the 2000s) and an over-supply of houses that the US is still trying to work through.

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Multifamily (5+ unit) starts collapsed in 2008 following the foreclosure wave that put thousands of homes on the market, generally at reduced prices. But as wage growth slowed following The Great Recession, the demand for apartments increased (generally more affordable) and the rental vacancy rate is near the lowest level since 2000. Low vacancy rates, rising apartment rates = affordability crisis.

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Why don’t developers and homebuilders (apartments) put up more supply? If some areas, like Northern Virginia, they have responded. But rents in Washington DC and NOVA remain high. (Check out Rent Cafe). But national rents continue to rise as well.

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Another compounding factor is tight land use controls in most major cities, preventing a supply response. This essentially forced some households to the suburbs for more affordable housing (some DC workers actually commute from West Virginia to DC or Virginia cities like Front Royal (great apple cider doughnuts at the Apple House in nearby Linden VA).

So housing in the US remains “simply unaffordable.” And with tight local housing regulations. the US housing market is addicted to gov(ernment).