Winter Is Coming 2! Mortgage Rates Hit 6%, Gasoline Prices Hit $5, Inflation Continues To Rage (Taylor Rule Implies 22.10% Target Rate, Only At 1.75%)

Where is Stanford’s John Taylor when we need him?

Even since the housing bubble burst and ensuing financial crisis on 2007-2008, The Federal Reserve under Ben “The Savior!” Bernanke, Janet Yellen and Jerome Powell let their zero/low interest rate policies be too low for too long that anyone with common sense knew would lead to serious problems when The Fed was forced (this time by inflation) to end the massive OVER monetary stimulus. We are now living through The Great Reset of the US economy.

Since Biden was sworn-in as President (or El Presidente) in January 2021, 30-year mortgage rates are up 108% to 6%, regular gasoline prices are up 108% to $5 a gallon nationally. Inflation is up to 8.6% YoY.

Bernanke, Yellen and Powell did not follow any rule per se, just a “seat of the pants” panic button approach. Using the Mankiw specification of the Taylor Rule model, the Fed Funds target rate should be 13.25% based on CORE PCE. Notice starting in 2014, The TR suggested target rate started to be higher than the actual Fed target rate. And since the Covid monetary blast of 2020, the gap between the Taylor Rule and Fed target rate (red area) has grown to near the highest level in history. Even now Mohamed A. El-Erian, Chief Economic Advisor at Allianz, is starting to admit that The Fed’s ZIRP policies are beginning to hurt.

But if we use total inflation rather than core inflation, the measure that picks up the actual pain that Americans are feeling from rising gasoline prices and mortgage rate, we get a Fed Target rate of 22.10%. Since The Fed’s current target rate is only 1.75%, The Fed has “Room To Move.”

And in a painful. bad way.

Bernanke, Yellen and Powell must think that The Taylor Rule is the New Jersey ham pork roll.

Winter Is Coming … For Mortgage Markets! Monthly Mortgage Payments SOAR As Fed Tightens Noose On Economy

We’ve got a line on The Federal Reserve. They don’t seem to care about housing and the mortgage market.

Monthly mortgage payments are soaring as home prices soar AND mortgage rates soar.

Mortgage rates have soared with Fed noose tightening.

Something has to give. Otherwise, winter is coming.

The theme song of The Federal Reserve thinking that rising prices can be tamed by raising rates is “Dear Mr Fantasy.”

Alarm! US Industrial Production Slows To 0.2% In May, Lower Than Expected As Fed Tightens The Monetary Noose (It’s NOT Always Sunny In Philadelphia)

Alarm!

As The Federal Reserve tightens the monetary noose (Fed Chair Powell said Fed ‘acutely focused’ on returning inflation to 2%), the US economy is slowing. In fact, May’s Industrial Production report is half of what was expected. Industrial production declined to 0.20% MoM versus the expected 0.4%. At the same time, capacity utilization rose slightly to 79%., but still below expectations.

Mortgage rates are rising rapidly, but the growth has cooled slightly as the economy cools.

Bitcoin is getting demolished by The Fed’s reaction to inflation.

And “It’s Not Always Sunny In Philadelphia.” Since the Philadelphia Fed’s Business General Conditions has dropped into negative territory with, among other things, The Fed’s monetary tightening. And they’ve only just begun (no Carpenters’ songs!).

Here is Phil Hall’s article on housing and The Federal Reserve’s noose tightening. US housing starts dove -14.4% MoM as mortgage rates soared.

If the Biden Administration and Federal Reserve jointly produced a dating site …

But its most central banks too. Look at German home prices against the ECB’s balance sheet

Opening Hell! The Morning After The Fed’s 75 BPS Rate Increase, 10Y Treasury Yield Spikes +11.5 bps, S&P 500 E-mini Down -1.8% (US Housing Starts Plunge -14.4% MoM In May)

Like in the movie The Poseidon Adventure, we can all sing “The Morning After.”

On the heels of The Fed’s 75 basis point surge in the target rate, the US Treasury yield jumped +11.5 BPS as of 8:30 AM EST. The S&P 500 E-mini futures contract is down -1.8%.

As investors brace for a recession, mortgage rates dropped to 6.03%.

Gasoline prices remain near $5 per gallon, diesel prices are near $6 per gallon and The Fed’s massive balance sheet is still in force.

On the housing front, US housing starts plunged -14.4% MoM in May, the biggest decline under Biden.

While housing starts were down -14.4% MoM in May, single-family detached home were down only -9.16%. It was 5+ unit (multifamily) starts that were down -26.83% MoM.

Good morning peeps! Reality is dawning after the market surge yesterday after investors celebrated that The Fed could have raised rates even more.

US Real GDP Sinks To -0.002% As Fed Meets To Discuss Monetary Tightening (Declining Purchasing Power Of US Dollar)

While expected, it is still unwelcome news.

The Atlanta Fed’s GDPNow real-time GDP forecast for Q2 just sank into negative territory at -0.002%.

Let’s see how Real GDP does if The Fed actually withdraws its stimulus needle.

And consumer purchasing power keeps diving as The Fed keeps printing money.

We’re Goin’ Down! Treasury Curves Goes Negative As Mortgage Rates Hit 5.87% As Fed Tightens Its Choke Hold

We’ve goin’ down!

The US Treasury 10Y-5Y yield curve has gone into negative territory (which usually occurs before a recession). At the same time, US mortgage rates are climbing like Tom Cruise in “Top Gun: Maverick” to 5.87% as The Fed tightens its choke hold on markets.

The 10Y-5Y Treasury curve typically goes negative before a recession.

And then we have today’s PPI report (Producer Price Index), rising 10.8% YoY as M2 Money stock starts to decline a bit.

Here is a better view of mortgage rates under Biden/Powell.

I hate this chart from John Burns.

Biden/Powell/Pelosi/Schumer are collectively “Mr Freeze.”

Closing Hell! NASDAQ Tanks -4.58%, 10Y Treasury Yield Spikes +22 Basis Points, 10Y-2Y Yield Curve Flattens To Near Zero (MBS Prices Pull A Titanic)

Not nibbling on baby formula, watching the sun bake, all those people paying $5 per gallon for gas. Wasting away again in Biden/Powellville.

It was closing hell for a terrible day in markets as investors struggle to process the dreadful and seemingly endless inflation report on Friday.

What happened today? The NASDAQ tanked -4.58% and the 10-year Treasury yield jumped 22.2 basis points. Gulp.

The 22.2 bps jump in the 10-year Treasury yield has led to Agency MBS prices pulling a Titanic and sank.

Somehow, I don’t think that Biden and Congress are going to help the middle class and low-wage workers.

Fear The Talking Fed! US Treasury And MBS Returns Get Hammered As Fed Signals Monetary Tightening (Mortgage Rate Rises And 10Y-2Y Yield Curve Flattens To 8.8 Basis Points)

The Federal Reserve is making up for Bernanke and Yellen’s “too slow to remove” Fed stimulus policies (QE1 – QE3) and Powell’s Covid-related QE4. Now The Fed is trying to remove the stimulus in a (misguided) attempt to cool inflation. Remember, the dramatic rise in prices was caused by more than Fed stimulypto, it was also caused by Biden’s executive orders driving up oil, gasoline and natural gas prices and the massive Federal spending bills signed by Biden.

The result of The Fed’s jawboning about undoing Fed stimulypto is take away the punch bowl. But the results are troubling. Both the total return indices for US Treasuries and Agency Mortgage-backed Securities (MBS) have declined dramatically since inflation has been rising (highest in 40 years) and The Fed is expected to crank their target rate by February 2023 to 3.448% (The Fed Funds Target Rate currently stands at 1%). That is almost a 250 basis point rise in the target rate in 8 months.

While the 10-year rate is rising rapidly, the 2-year Treasury yield is REALLY rising fast.

And the yield curve (10Y-2Y) is down to +8.819 basis points as The Fed signals tightening.

And with rising 10 and 2Y Treasury yields, we are seeing the fastest rise in mortgage rates since 1981.

Alarm! Nasty Inflation Report Leads To No-bid For MBS (Duration Risk Has Extended To 7 From <1 On August 2, 2021 With Rising Inflation)

Alarm!

The CPI news on Friday was so awful that it changed the bond market’s view of Fed trajectory, and the weakest sector broke. In bond jargon, MBS went “no-bid.” No buyers for MBS. Then a few posted prices beyond borrower demand, not wanting to buy except at penalty prices. (Courtesy of Cherry Creek Mortgage)

Despite what Treasury Secretary Janet Yellen has said, Friday’s inflation report demonstrated that inflation is no longer transitory. And with that realization, there was a dearth of bidders for Agency Mortgage-backed Securities (Agency MBS) on Friday.

As a result, agency MBS 2.5% dropped to under $90 as markets expect The Fed to keep raising rates to combat inflation.

Duration of the FNCL 2.5% agency MBS has been extending with growing inflation. Duration was under 1 on August 2, 2021 but is now 7 times greater at almost 7.

Note to Yellen: inflation seems be permanent, not transitory. Or at least inflation will remain high for the foreseeable future, crushing the life out of Agency MBS.

Weekend Update! US Gasoline Tops $5 (Highest In History), 2Y Treasury Yields Soaring, Mortgage Rates Highest Since 2008 (Inflation Tax Costing Households $5,200 More YoY)

Up, up and away in our inflationary balloon!

Regular gasoline prices have breached the $5 a gallon barrier, the highest in recorded history. And it is even worse in states like California where regular gas prices have been above $7 per gallon.

Bankrate’s 30-year mortgage rate is now 5.78%, the highest since 2008. And rising really fast as The Fed tightens the monetary noose.

Speaking of noose tightening, the 2-year US Treasury Note yield is rising awfully fast.

The US Treasury 10Y-2Y curve slope just flattened to 8.819 bps and challenging the 0% grade awfully fast.

The US Dollar is soaring as US inflation soars, consumer purchasing power (green line) collapses along with M2 Money Velocity.

There is little doubt that soaring inflation, gasoline and food prices have hurt Biden’s popularity as well as the Democrats popularity ahead of the upcoming mid-year elections. People for the most part vote with their wallets.

According to estimates by Bloomberg Economics, US households will spend $5,200 more this year than they did last year on the same consumption basket.

That breaks down to $433 extra in expenditures every single month. That is what is called “the inflation tax.” And it hurts.

Call this The Inflation Tax Blues.