The University of Michigan Consumer Survey showed a decline in May to 58.4 (100 is baseline). Soaring inflation is a likely culprit.
But the truly horrible survey result is the UMich Buying Conditions for Houses, plunging to 45. The reason? Crazy, expensive house prices courtesy of The Federal Reserve and rising mortgages (also, courtesy of The Federal Reserve).
The buying conditions for houses is now the lowest in the history of the University of Michigan consumer survey. In fact, consumer sentiment for housing is far lower than during the awful housing bubble burst of 2008 and the subsequent financial crisis.
And the US economic surprise index has turned negative.
Here is Fed Chair Jerome Powell wielding his monetary bat called “Lucille.”
I have never seen two Federal entities make such a mess in my life. The Federal Reserve and The Federal government.
The good news? The 10-year Treasury yield is down -12.9 BPS this morning generally resulting in lower 30-year mortgage rates. Of course, the reason why the 10-yield is falling is generally bad news.
The bad news? US New Home Sales fell -16.6% MoM in April as mortgage rates skyrocketed.
Since the installation of Joe Biden as President, new home sales have plunged -31.2%, mortgage rates are up 88.9%, and framing lumber prices are up 29.2%.
Biden is out there bragging about rising energy prices which he views as a necessity to force the conversion of America to electric cars and trucks. Biden is the first President in history to gloat over the suffering of American households.
Under Biden, regular gasoline prices are up 92%, diesel prices are up 111%, and CRB Foodstuffs are up 61%.
Say, framing lumber for housing is cheaper than food. Maybe Biden will suggest Americans transform to being beavers and gnaw on wood.
As The Federal Reserve tries to fight inflation (it can’t thanks to Federal energy policies and bottlenecks), it is causing a disconnect between mortgage current coupon rate and the MBS index coupon. The disconnect is so bad that it is back to 1985 levels.
The Fed can certainly try to cool inflation, but Biden is intent on raising energy prices (leading to food price increases, and everything else) to shift us to electric cars. So, Biden is unlikely to back off.
So, The Fed is left trying to fight a war against inflation that only Biden can fight.
Meanwhile, the US mortgage market is getting pulverized
We have a double whammy facing investors, The Federal Reserve wanting to take away the monetary punch bowl and Federal energy policies that are crushing middle-class households and lower-wages workers.
But how do you hedge against The Federal Reserve tightening and Biden’s reckless energy policies?
Take a look at investing in commodities (S&P GSCI Commodity-Indexed Trust and the Bloomberg Commodity Index) versus the S&P 500 Total Return index since The Fed began signaling that they would take away the monetary punch bowl.
Yes, commodities like food and gasoline/diesel prices are up dramatically under Biden’s energy policies (not to mention the USA’s proxy war with Russia).
The Fed seems determined to remove the Fed “Snake juice” from the economy.
The inflation that is crushing Americans is due to energy and food price increases. That is, the non-core inflation. Under Biden, food is up 63%, gasoline is up 92% and diesel prices are up 112%. But The Fed doesn’t consider food and energy prices, per se.
If we look at the Taylor Rule considering fighting inflation including food and energy, The Fed would have to raise their target rate to … 21.38%.
Now, The Fed can clearly cool-off the housing market by raising rates. In fact, my fear is that they go too far and crash the housing market. The Fed will NEVER get to 20% again like we last saw under Volcker in 1981. 20% rates certainly cooled home prices back then and Fed rate hikes helped crash the housing market in 2008.
So, when The Fed says they want to be the inflation-fightin’ Fed, we must be aware what The Fed can and cannot do. They can’t tame the inflation beast in the form of food and energy prices (unless they crash the economy), but they can crush home prices.
Nothing has been the same since Covid and The Federal Reserve’s massive overreaction to the government shutdowns of the economy.
Notice how the University of Michigan Consumer Sentiment Index (white line) has plunged since Covid and the ensuing rise in inflation. University of Michigan’s Buying Conditions for Houses has also plunged to new depths.
Rising inflation (highest in 40 years) and hottest home price bubble (even hotter than the infamous housing bubble of 2005-2007) AND rising mortgage rates have placed a damper on home buying sentiment.
The US Senate yesterday confirmed the reappointment of Jerome “Slowhand” Powell as Federal Reserve Chairman.
The good news? Atlanta Fed’s Flexible CPI YoY cooled to 20% in April. The bad news? Flexible prices are still growing at 20% while wages are growing at 5.5% YoY.
On the export front, export prices are cooling and were at 18% YoY in April, down slightly from March. Import prices cooled to 12% YoY as The Federal Reserve has slowed asset purchases.
I would have preferred President Biden appoint a serious Federal Reserve Chairman liked Stanford University’s John Taylor (of Taylor Rule fame). In his honor, here is the Mankin version of the Taylor Rule which calls for a Fed Funds Target Rate of 13.89% while the current Fed Funds Target Rate under Powell and the Gang is … 1%.