China’s Central Bank (PBOC) Cuts Reserve Requirements By 50 Basis Points To Stem Tide Of Economic Slowdown And Real Estate Development Problems (Big Trouble In Big China?)

Big Trouble In Big China?

China cut the amount of cash most banks must hold in reserve, acting to counter the economic slowdown in a move that puts the central bank on a different policy path than many of its peers.

The People’s Bank of China will reduce the reserve requirement ratio by 0.5 percentage point for most banks on Dec. 15, releasing 1.2 trillion yuan (US$188 billion) of liquidity, according to a statement published Monday.

The reduction was signaled by Premier Li Keqiang last week when he said that authorities would cut the RRR at an appropriate time to help smaller companies, and is the second reduction this year.

The decision comes after recent data showed the economy and industry stabilizing, although Beijing’s tightening curbs on the property market have led to a slump in construction and worsened a liquidity crisis at developer China Evergrande Group and other real estate firms.

Evergrande’s ADR is collapsing (now 5.975) along with Evergrande debt falling to 23.12 (versus 100 par).

China’s credit impulse has nosedived (see pink box) as the PBOC drops bank reserve ratios to lowest level since 2007 in an effort to float the boat. Will the PBOC drop in reserve ratios stem the tide? Or is it peasant magic?

Yes, its big trouble in big China. Let’s hope it isn’t the Three Storms (commercial real estate bubble, low Central Bank reserve ratios and … fear).

NOT In Labor Force Remains Near 100 Million As REAL Hourly Earnings Drop To -1.4% YoY (Biden Celebrates Unemployment Rate Dropping To 4.2%?)

President Joe Biden took to Twitter yesterday to celebrate how well his economic policies are working, particularly the American Rescue Plan. Between Congress and The Fed pumping trillions of dollars of stimulus in the economy, how is this surprising? Or a reason for celebration?

While declining unemployment is great, there is more to the story that President Biden failed to mention. Like … the number of people NOT in the labor force remains near 100 million (99,997,000 to be exact). Thanks to Covid-related policies (like job loss due to resisting vaccinations), increasing retirement, etc.), NOT in labor force remains elevated compared to pre-Covid levels. And, of course, Biden doesn’t want to mention that inflation is growing faster than hourly wage growth resulting in REAL hourly wage growth being -1.4% YoY.

And President Biden took credit (he is a politician, after all) for a small decline in gasoline prices. Of course, after helping send gasoline prices up over 50% since he took office.

So, is Biden going to take credit for increasing gasoline prices by 50%? And declining REAL average hourly earnings? Or over 100 million people NOT in the labor force? I doubt it. But he is focusing on the POSITIVES of his American Rescue Plan.

Its a bold strategy Cotton, let;s see if it pays of for him.

REAL Average Hourly Earnings Growth Falls To -1.378% YoY In November Jobs Report (Jobs Added Missed BIG At Only 210K, New Taylor Rule Estimate Is 15.50%)

Treasury Secretary Janet Yellen said yesterday that “It’s Fed’s Job to Avoid Any Wage-Price Spiral.” Well, The Fed is helping to avoid a wage increase in real terms, since the November jobs report revealed that REAL US Average Hourly Earnings growth YoY fell to -1.378%. In other words, inflation is greater than hourly earnings.

And in other jobs related news, nonfarm payrolls rose by only 210k versus expectations of 550k jobs to be added. Even NOMINAL hourly earnings growth (4.8% YoY) was less than expected (5.0%).

Labor force participation rose a bit to 61.8%, still well below the pre-COVID levels of 63.4% in January 2020.

The U-3 unemployment fell to 7.8%. Still higher than the pre-COVID rate of 7.0% in February 2020, but getting close! As for what this means for The Fed, the new target rate implied by the Taylor Rule is 15.50%.

After this lousy jobs report, 10-year Treasury yields dropped … like Biden’s approval ratings.

The dance number where The Fed keeps their target rate at 25 basis points while the Taylor Rule implies a target rate of 15.50% is the Yellen Boogie. By Powell and the Gang.

Powell, Yellen Say They Underestimated Inflation And Supply Snarls (M1 Money Grew At 369% With Rates Near Zero Since COVID And They Didn’t See Inflation Coming???)

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.

Here is a composite photo of Jay Powell and Janet Yellen (to save space). Here is a video of Powell/Yellen composite trying to control inflation.

US Mortgage Refinancing Applications Index PLUNGES 40.3% WoW (Purchase Apps Index Plunges 30.4%)

Its that time of year for mortgage purchases applications! Purchase applications usually decline during December and start to rise after the beginning of the year.

Mortgage purchase applications (white line) dropped -30.4% from the previous week, not usual for December. But what is surprising is the drop in REFINANCING applications: down -40.3% from the previous week.

30-year mortgage rates rose 2.16% from the previous week.

But between Omicron (or as the French say, “Oh! Macron!”) and The Federal Reserve, there is a good chance that mortgage rates will fall this week putting a quick end to refi application plunge.

Purchase applications? Nope, it is that time of the season when purchase applications drop like a rock.

Calamity Jay Powell Ditches Transitory Inflation Tag, Paves Way for Rate Hike (Compare To Volcker’s Record)

Calamity Jay Powell is no longer mentioning “transitory” when it comes to inflation, but does Powell and the FOMC have the moxie to ACTUALLY raise rates more than a smidge??

(Bloomberg) — Team Transitory is throwing in the towel.

In a clear sign that the Federal Reserve is shifting to tighter monetary policy, Jerome Powell — who’s spent months arguing that the pandemic surge in inflation was largely due to transitory forces — told Congress on Tuesday that it’s “probably a good time to retire that word.”

The Fed chair, tapped last week for another four-year term, still thinks inflation will ebb next year.

But in testimony before the Senate Banking Committee, he acknowledged that it’s proving more powerful and persistent than expected, and said the Fed will consider ending its asset purchases earlier than planned.

A number of economists are forecasting cooling inflation next year, which gives Powell an excuse to NOT raise rates, other than just a bit.

For a little history, inflation was rampant in the 1970s and early 1980s. Fed Chair Paul Volcker, all 6’7 of him, raised the Fed Funds target rate (white line) to 20% on several occasions. The result? Inflation cooled from over 14% in 1980 to 2.46% by 1983. But since 2008, Fed Chairs Bernanke, Yellen and Powell have been the ANTI-Volckers … keeping the Fed Funds Target rate near zero for the the most part and adopted their gut-wrenching quantitative easing programs that are still here today.

Of course, Powell could do what Volcker did (and the Taylor Rule suggests) and raise their target rate to 15% to cool inflation.

But does Powell and the other FOMC members have the moxie to really cool inflation? Frankly, no. Powell until yesterday played the TRANSITORY card and still believes that inflation will cool by 2022.

True, the Federal government has binged on borrowing (up 172% since January 2009). And with Biden and Congress trying to spend trillions more (much of which will be added to the public debt rolls, so increasing interest rates ala Volcker is very problematic.

And then there is always the good ‘ole excuse not to raise rates if needed. Other than admitting that The Fed is monetizing Federal government spending to which there is no end in sight.

Given Fauci’s alleged strong belief in “science” he could play Esqueleto in a remake of Nacho Libre.

Calamity Jay? Powell Weighs Faster Tapering of Bond Buys Amid High Inflation (Market Pukes, Dow Drops 500 Points, West Texas Crude Drops 6.56%)

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.

Calamity Jay Powell.

US Home Prices “Slow” To +19.51% YoY In September (Phoenix AZ Sizzles At +33.1%, Chicago Slowest At 11.8%)

When I told Benzinga’s Phil Hall in an interview a while back that I thought US home price growth would slow, I didn’t consider the never-ending COVID epidemic (now with the Omicron Variant taking the stage. But at least the CoreLogic Case-Shiller National home price index (HPI) “slowed” in September from +19.84% to +19.51%.

Once again, low available inventory of houses for sale coupled with outlandish Fed stimulus has resulted in a housing crisis where home price growth (+19.51%) exceeds hourly wage growth (+5.76%) by almost 4x.

Where are all the home prices above 10% YoY? Every one of the 20 metro areas covered by Case-Shiller. Phoenix AZ leads at +33.1%. Chicago IL is the “slowest” at 11.8%.

Although Columbus OH is the growth hub of the state, Case-Shiller only reports Cleveland. So here is Columbus’s all-transactions home price growth for Q3: +16.2% YoY placing Columbus at the top of the midwest metro areas of Detroit, Chicago, Minneapolis and Cleveland.

With the latest Omicron Variation (sounds like a Star Trek TV show episode), I will bet that The Fed will stay a little longer and keep rates low, leading to home price growth (with limited available inventory) to continue to grow at double digit speeds.

The Fed is printing SOOOO much money that the dollar should have a double eagle on it.

Fear? The Omicron Variant Isn’t Scaring Treasury Investors (Treasury And US Dollar Swaps Curves Calm After Friday’s Flattening)

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.

The VIX and VVIX are elevated showing fear in the equity markets. But much less than when COVID broke out in March 2020. Each spike in VVIX (or the volatility of VIX) is likely when Dr. Anthony Fauci opened his mouth.

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.

U.S. Pending Home Sales Rebound (+7.5% MoM) To Highest Level Of The Year, BUT 5th Straight Month Of Negative YoY)

A forward-looking gauge of U.S. home purchases rebounded in October to a 10-month high, signaling steady housing demand despite growing affordability concerns among many prospective buyers.

The National Association of Realtors’ index of pending home sales increased 7.5% from a month earlier to 125.2, according to data released Monday. The median estimate in a Bloomberg survey of economists called for a 1% advance.

But it is the fifth straight month of year-over-year declines.

Low mortgage rates and solid job growth have supported housing demand this year as pandemic-weary buyers seek more spacious accommodations. Existing home sales are on track to exceed 6 million in 2021, which would be the strongest in 15 years, Lawrence Yun, NAR’s chief economist, said.

Yes, humongous stimulus from The Federal Reserve will help push existing home sales to exceed 6 million in 2021.

Still, competition over a scant number of listings — particularly on the lower, more affordable end of the resale market — has pushed prices out of reach for many prospective buyers. Builders have struggled to fill the void as supply-chain delays and labor shortages upend construction schedules, exacerbating the inventory crunch.

Yes, inventory of homes available for sale is almost 1/3rd of the homes available in 2010.

Ten years after ... and we have progressively less inventory available.