Confounded Interest – Anthony B. Sanders
Financial Markets And Real Estate
Well if the Atlanta Fed’s GDPNow forecast is accurate, The Federal Reserve is going to have to think about its 5 upcoming rate cuts. Because its Crying Time for the Biden Administration.
Stagflation anyone?
This news will not be well received by Country Joe Biden.
No, not the Klaus von Bulow type of “reversal of fortune” (when he killed his wife). I am talking about a reversal in fortune for America.
Let’s look at the 10Y-2Y Treasury curve. It typically falls below 0 basis points before every recession. Except the mini-COVID recession of 2020. But notice that the Treasury curve did not recover from the COVID recession as it typically did. More along the lines of 1984-1985.
Speaking of Reversal of Fortune, everything changed once Fed Chair Powell started to speak after Tuesday’s FOMC meeting.
Hmm. Midterm elections, possible Russian invasion of The Ukraine, further problems in China, etc. While The Fed Funds Future data implies that The Fed may raise their target rate 5 times over the coming year, we’ll see.
I happen to agree with Fannie Mae’s Doug Duncan who says that he is less bullish about the housing market in 2022.
If 2021 was a great year for the US housing market, 2022 faces “a new normal” marked by a slowing down of home price rises, job layoffs in the mortgage industry, and concerns over rising inflation and interest rate hikes, according to Douglas Duncan (pictured), Fannie Mae’s senior vice president and chief economist.
Duncan said “a shift” was underway in the market and the wider economy, which would result in far more moderate home price appreciation, expected to be between 7% and 7.5% this year due to the ending of fiscal and monetary stimulus.
“One of the elements of the shift is that you’re going to see house prices up, but not nearly as far as they were in the last two years because that was driven hugely by the fiscal and monetary stimulus (now) being removed,” he told MPA.
Ominously, he added that low interest rates “may never be seen again”. Or at least until Biden appoints more doves to The Federal Reserve Board of Governors.
This is a case of “Too much money” in the economy, courtesy of The Federal Reserve.
(Bloomberg) — U.S. inflation-adjusted consumer spending fell last month by the most since February, suggesting that Americans tempered their outlays amid the latest Covid-19 wave and the fastest inflation in nearly 40 years.
Purchases of goods and services, adjusted for changes in prices, decreased 1% from November, the Commerce Department said Friday.
The personal consumption expenditures price gauge, which the Federal Reserve uses for its inflation target, rose 0.4% from a month earlier and 5.8% from December 2020, the most since 1982. Unadjusted for inflation, spending fell 0.6%, while incomes rose 0.3%.
Yes, the PCE Deflator YoY rose to 5.8% as M2 Money Stock is growing at a 13.1% YoY clip.
REAL personal spending declined 1% in December as prices rose in part thanks to the 13.1% growth in M2 Money stock YoY.
Too much money! Time to slow down, Jay Powell! Stop sucking the life out people with inflation.
Pending home sales in the USA tanked 6.64% YoY. Yes, it was for December, but down 6.64% YoY means that pending home sales are lower than last December.
And the stock market was up across the board as Powell refused to take his foot off the monetary gas pedal.
Gold is down along with Bitcoin for you ALT investment types.
Yes, The Federal Reserve could have raised their target rate at their January meeting, but chose not to raise rates. Instead, Chairman Powell said that rate increases are a comin’!
I hope Powell wasn’t hoping for a slowdown in inflation, because today’s Q4 GDP report showed a surge in GDP to 6.9% QoQ. But with that GDP surge we also got a surge in prices paid by consumers to 6.9% as well. Thanks to the continuing massive Federal stimulus being poured into markets.
Despite the positive news on Q4 GDP, we are still seeing 7% inflation and a diving 10Y-2Y yield curve.
Along with that surprising GDP report, we are seeing the Bloomberg Commodity Index rising like a bat out of hell (RIP, Meatloaf).
Powell apparently found paradise by the dashboard light. So, why rock the boat? Oh yes. INFLATION.
Should Powell be renamed Meatloaf?
Is this the bubble burst many were expecting once The Federal Reserve starting raising rates?
Well, if today’s market opening is an indication, the answer is yes. The NASDAQ Composite Index is down 1.36% and West Texas Intermediate Crude Oil futures prices are down 2%.
The S&P 500 index is down over 10% since January 3rd.
Drawdown is taking place.
But if you think the US equities are deflating, look at European equities. The Euro Stoxx 50 index is down 4.04%.
Is this a Don Ho “Tiny Bubble” burst? Or a slow deflation of asset prices as The Fed removes its stimulus?
It has been a tough 7 days for Bitcoin, Ethereum and the NASDAQ composite index as The Fed is anticipated to raise their target rate AND engage in quantitative tightening.
While the NASDAQ composite index has been deflating over past 7 days, Bitcoin and Ethereum plunged in recent days. What is going on??
The Russell 2000 value (white) and growth (green) indices are both deflating.
With regards to anticipated Fed rate increases, Fed Funds Futures are signaling almost 4 rate hikes in 2022 and 4 by the February 2023 meeting.
Then we have the massive increase in The Fed’s balance sheet after COVID struck in early 2020. Now, with the S&P 500 skyrocketing (until 7 days ago), why is The Fed buying sooooo much Agency MBS??
With the supply chain broken thanks to Congress/Biden/The Fed pouring trillions into an economic system that was working … we now have an economic system that is broken. Clogged ports, meat-packing labor shortages, etc. It’s as if Park’s and Recreation’s Jerry Gergich is running the economy as opposed to Ron Swanson.
Let’s see how The Federal Reserve is going to compete with other central banks when 19 European nations have negative 2-year sovereign yields. Call them the “Nervous 19.” Note that France has the lowest 2Y yield of the big 3 (France -0.664%, Germany -0.593% and Italy -0.092%).
True, The Fed’s reaction to COVID shutdowns was more extreme than the ECB’s reaction.
The ECB’s main refinancing rate is 0% and The Fed’s target rate is 0.25%.
Unlike the US with its 4 expected rate increases, the Eurozone is pricing in only 1 rate increase for 2022 … in October.
The ECB’s monetary policy is as stiff as French President Emmanuel Macron.
Treasury Secretary Janet Yellen is having trouble with the curve (yield curve, that is). It keeps inching up, meaning that Treasury’s cost of debt financing is inching up too.
As Treasury yields keep rising, so does the problem of financing the massive Federal debt load. Here is a chart showing the interest outlays in the Federal budget against the cost of Federal funding at the 10-year and 2-year tenors.
Now, The Fed is predicted to raise their target rate 4 times in 2022 (according to Fed Funds Futures data) and it looks like a whopping 100 basis points (or 1%). Holding the rest of the yield curve constant, this will considerably flatten the 10Y-3M Treasury curve. Resulting in a more expensive refinancing of the Federal Debt load.
If we look at The Fed’s System Open Market Holdings (SOMH), we can see that The Fed’s holdings are primarily Treasuries with non-Treasuries (primarily agency mortgage-backed securities) not maturing (or running off) until 2050.
The majority of The Fed’s COVID expansion was picked-up by The Fed (light blue line).
How about the Treasury Inflation-protected Securities curve? Negative yields across the tenor range.
With Congress trying to spend trillions more (since Build Back Broke failed, Democrats are producing MORE spending legislation with the voting act included, of course), Treasury is going to have progressively more trouble with the (Treasury) curve.
The 10-year Treasury Note yield rose to 1.869% this afternoon as Freddie Mac’s 30-year mortgage commitment rate rose to 3.45%.
And if you like The Fed Funds Futures data, it is pricing in 4 rate hikes by The Fed (March, June, September and December). For a grand total of … 100 basis points or 1%.
By keeping rates soooo low for soooo long, The Fed has committed a serious policy error. Or as Kevin Malone calls it, “The Fed’s Famous Chili!”
Confounded Interest - Anthony B. Sanders 
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