But that 6.9% YoY is very misleading because of the strange way the Bureau of Labor Statistics measures the largest asset in most households’ expenditures: housing.
The BLS measures inflation in housing using the Shelter measurement. Which was only 3.88% YoY. The problem is that the Case-Shiller National Home Price Index was 19.52% in its last reading. That is quite a discrepancy.
So, if we substitute the Case-Shiller National home price index for the CPI Shelter, we get an inflation rate of greater than 11%.
The U.S. is poised to enter Year Three of the pandemic with both a booming economy and a still-mutating virus. But for Washington and Wall Street, one Covid aftershock is starting to eclipse almost everything else.
Already-hot inflation is forecast to climb even further when November data comes out on Friday, to 6.8%. That would be the highest rate since Jimmy Carter was president in the early 1980s — and in the lifetimes of most Americans.
And the CPI change since last year, according to the Federal Reserve of St Louis FRED is a staggering 16.262%.
And with U.S. Jobless Claims plunge to 52-year low, its about time that The Fed begins removing the humongous monetary stimulus.
After all, largely thanks to Federal Reserve policies, we have seen the greatest wealth redistribution in US history … to the top 1%.
(Bloomberg) — The recent drop in primary-dealer holdings of front-end Treasuries is another warning of potential market dislocation heading into the year-end liquidity vacuum.
As of Nov. 24, primary dealers — which are mostly the large banks — were on the whole betting against two- to three-year Treasuries rather than buying. They had net short positions of just over $9 million, near the most bearish levels since 2017, signaling a pullback by buyers that provide crucial liquidity for older Treasury issues.
The positioning in the front-end of the curve “suggest less demand from the dealer community to fund off-the-run long positions,” Barclays strategists Anshul Pradhan and Andres Mok say in a Dec. 3 note. Off-the-run Treasuries are notes and bonds created in past years and traded less frequently than the newest issues; they’re the biggest part of the market and make up most of the Federal Reserve’s daily asset purchases, which are being scaled back.
Short positioning increased on a relative basis as a result, “which may also have crowded demand to borrow particular issues over others,” the analysts wrote.
Those forces together could contribute to an increase in market dislocations.
Jerome Powell’s hawkish pivot shocked financial markets. A week later, stocks are higher. The S&P 500 staged its biggest rally since March to wipe out losses from the past week. The speculative fringe that was a smoldering wreck Friday was soaring Tuesday. An index of meme stocks rallied more than 4%, while one composed of airlines added 1.6%. A gauge of newly public companies advanced more than 4%, SPACs jumped more than 2% and even cryptocurrencies rallied, with Bitcoin powering back above $51,000.
It’s a stunning about-face for risk assets that went into a tail spin after the Federal Reserve chair suggested he favored accelerating the removal of monetary support. What follows are takes from market-watchers on why the market is looking past the Fed’s potential change in policy.
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?
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 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.
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 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.
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.
Confounded Interest - Anthony B. Sanders 
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