Taylor Rule Calls For Negative Rates Of -10%, Powell Says No

Fed Chair Jerome Powell is adamant that the US will not go where other Central Banks have gone before … to negative rates.

Even though the Mankiw specification of the Taylor Rule model says that The Fed Funds Target rate should be -10.01% based on the surge in unemployment (14.70%) and the lack of core inflation (1.70%). The Fed Funds Target rate remains at 0.25%.

trnef

As unemployment surges (green line) with the lockdown, banks are expecting a tsunami of loan delinquencies and defaults. Hence, bank excess reserves have spiked as well (white line fever).

u3cal

Hopefully with states opening up again, this is simply temporary.

Instead of losing my blues, Powell is giving me the blues.

queenjanetprincejerry

 

US GDP Forecast To Decline -34.9% QoQ (S&P 500 Sez “Meh”)

Now ain’t this a kick in the head. The Covid-19 and the government shutdown response is leading to a crushing decline in US GDP for Q2 2020 of … -34.9% QoQ.

Screen Shot 2020-05-09 at 7.17.14 PM

The recent dismal wholesale trade report sent forecast Q2 GDP down -34.9% QoQ.

Screen Shot 2020-05-09 at 7.39.22 PM

The reaction to the declining US GDP? Meh.

discoinnect

The good news? NMHC rent payment tracker finds 80.2% of apartment households paid rent as of May 6.

U-6 Unemployment Rate Spikes To 22.8% As Average Hourly Earnings Spikes To 7.9% YoY

A sign of the times. As governments around the globe shut down economies to prevent the spread of the Covid-19 condition.

The US unemployment rate rose to 14.7% in April, up from 4.4% in March.

ecojons

Yes, 20.5 millions jobs were lost in April.

unwmplirec

The U-6 unemployment rate (or full-time plus partial unemployment rate) rose to an astronomic 22.8%!

u6228

Average hourly earnings YoY rose to 7.9% YoY.

ahe

But look at the US employment total in labor force. Covid-19 / gov’t shutdown has wiped out labor force gains since 1999 and The Clinton Administration.

laborforceclinton

I wish I knew a place that was open in Virginia, but I don’t.

milton

 

Oyster Stew! WTI Crude Spot Rises 21%, US Jobless Claims Up 4.43 Million (But Slowing), New Home Sales Decline -15.4% MoM In March

I feel like we are in the Three Stooges film “Oyster Stew.” Every time we look for good news, more bad news come out.

But here is some good news.

WTI Crude oil is up 21.26% this morning .. to $16.71 a barrel (still low).

commodthur

And while US jobless claims rose 4.43 million the past week, the US is several weeks past the peak. (Knock on wood).

peakpast

But back to crude. Saudi oil is still negative for heavy and medium crudes to the USA.

saoil

Now for the oyster eating the cracker.

US new home sales fell -15.4% MoM in March.

nhs154

As I said, oyster stew.

Screen Shot 2020-04-23 at 10.05.59 AM

WTI Cushing Oil Plunges Below $11, Hotel Occupancy Rate Declines 69.8% YoY To 21% (All Time Record Lows)

My Corona!

The lack of demand for oil (and incredible supply build-ups) had led to WTI Crude oil to fall below … $11!

bspotoil

WTI Crude (Cushing, OKLA) is now at an all-time low.

wticrudelow

Crude oil prices in the Middle East are … negative?

middleeastoil

On the hotel front (government lockdowns are pretty bad for travel and hotels!), in comparison with the week of 7-13 April 2019, the industry recorded the following:

Occupancy: -69.8% to 21.0%
• Average daily rate (ADR): -45.6% to US$74.18
• Revenue per available room (RevPAR): -83.6% to US$15.61

What I like about the government shutdown of the US economy? NOTHING!

Even Jack Torrance can’t get a drink from Lloyd in the shutdown.

lloyd

 

 

 

 

Dow Finishes Worst Week Since 2008 (Dow Down 913 On Friday) As LOIS Spread Erupts [What Can The Fed Do?]

How far will Central Banks go to save the economy (or banks)? The Fed Funds target rate is back to Bernanke (BtoB?) in late 2008.  And The Fed’s balance sheet keeps rising (after a momentary respite).

indufed

But it seems that all the stimulus (Federal government and Federal Reserve) is having trouble saving the market.

worstweelsince2008

The S&P 500 hasn’t done so well either with today’s drop falling below the lowest P/E band.

spxpe

US Treasuries rose again today and 10-year Treasury yields dropped almost 30 basis points.

wmbfriday

And the spread between the 3 month Libor rate and the NY Fed’s Secured Overnight Finance rate is going up … and up.

sofrsp

Treasury Repo collateral … again?

repocollateral

They will do it on Fed Time!

LOIS (LIBOR-Overnight Indexed Swap) Spread Spikes As Fed Adds $4.5 Trillion To Its Balance Sheet

Historically, when the spread between LIBOR and the safer OIS (overnight indexed swap)  widened, it meant that banks were having trouble borrowing and was a warning of danger for the economy. And the LOIS spread is widening!

lois

The Federal Reserve has reversed course on its balance sheet unwind, but the reversal  started in September of 2019, well ahead of the known corona-virus outbreak in Wuhan China. In fact, The Fed has added $4.5 trillion in recent weeks.

doomloop

Apparently at the December 11, 2019, the Fed’s Open Market Committee (FOMC) only saw Fed Funds target rate increases coming.

dotplots

Treasury Repo collateral has spiked recently.

repocoll

And we are seeing both short and long rates crashing (but the short rates are crashing faster than long rates,

crashrates

leading to a steepening of the Treasury yield curve.

tactivecv

Treasury volatility is on the rise again.

movefed

The coronavirus is NOT a good thing.

Yes, coronavirus fears are sweeping the globe.

But The Fed drives me crazy!

powellfearb

 

 

 

Vanilla (Swap) Sky! FRA-OIS Spread Highest Since Q1 2009 (Dow Up Almost 10%)

The spread between forward rate agreements (FRA) and overnight indexed swaps (OIS) just spiked to the highest level since Q1 2009.

vansky

A vanilla interest rate swap is an agreement between two counter-parties to exchange cashflows (fixed vs floating) in the same currency.  This agreement is often used by counterparties to change their fixed cashflows to floating or vice versa.

The payments are made during the life of the swap in the frequency that is pre-established by the counter-parties.

ycsc

Here is Tom Cruise wearing his Coronavirus mask from Vanilla Sky.

vanskyscruise

Good news! The stock market is up almost 10%, the exact opposite of yesterday.

mktup10

Big Bubbles? Fastest Bear Stock Market (Down 20% From Peak) May Happen! Dow Closes Down 1,467

The WHO (World Health Organization, not the 60s/70s rock band) announced that the coronavirus is a new PANDEMIC.

Or it is a bubble pop? Not tiny bubbles as Don Ho sang.  But a BIG bubble … burst.

Yes, The Federal Reserve and other Central Banks kept their target rate near zero for almost the entire Obama Presidency, then started to raise rates only to lower them again. But the S&P 500 and NAREIT – all equity indices have risen dramatically as well.

nareitbubb

A bear market in equities is when prices fall 20% from their peak. Over the past month, we are almost in a bear market.

blackhawkdow

Is this that fast 20% in history? Nearly.

Screen Shot 2020-03-11 at 3.51.47 PM

And there is lots of downward rotation in global equities.

Screen Shot 2020-03-11 at 4.42.36 PM

Yes, equity markets are fragile thank to the central banks. And now the bears have been awakened.

bearmkt

Boston Fed’s Rosengren Says Fed Should Consider a Wider Range of Assets (Whoomp, There It Is! Unusual and Exigent Circumstances)

Whoomp, there it is!

Boston Fed President Eric Rosengren is joining the “unconstrained rate manipulation squad” by calling for The Fed to purchase more than just Treasuries and Agency MBS.

(Bloomberg) — Federal Reserve Bank of Boston President Eric Rosengren said policy makers should be allowed to buy a broader range of assets if they lack sufficient ammunition to fight off a recession with interest-rate cuts and bond purchases.

With 10-year U.S. Treasury yields notes already at record lows, Rosengren said typical quantitative easing may not work as it did during the 2008 financial crisis. Therefore, the Fed may need the flexibility “enjoyed” by policy makers in Europe and Japan.

For the moment.
Remember, Maiden Lane LLC from 2008? The loan to Maiden Lane LLC loan was extended under the authority of Section 13(3) of the Federal Reserve Act, which permitted the Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations.
Will The Fed declare unusual and exigent circumstances, like they did with Bear Stearns, JP Morgan Chase and Maiden Lane?
maidenlane
Perhaps The Fed will add stocks, corporate bonds and real estate citing unusual and exigent circumstance.
somaholdings
Fear is driving markets … and Central Banks.
totalcb
To quote Coates (Common) from the Keanu Reeve’s flick The Street Kings about The Federal Reserve, “We straight nightmares. We the walking, talking exigent circumstances.”

powellfearb

Thanks to Jesse at Jesse’s Cafe Americain for that wonderful Fear photoshop of Fed Chair Powell.