I thought the last inflation report of 7.5% inflation was bad. But then the Atlanta Fed updated their inflation measure for flexible prices. Flexible inflation, less food and energy, is roaring at 19% YoY!
Flexible prices are those prices that adjust rapidly. Along with commodity prices.
Speaking of rapid rises, take a look at the 2-year US Treasury yield since COVID struck in early 2020.
We did see 2-year Treasury yields generally correlated with The Fed Funds Target Rate … at least until COVID struck. Since mid-2020, The Fed Funds Target Rate remains at 0.25% while the 2-year Treasury yield is roaring back with fuzzy expectations from The Fed’s leadership.
The 10-year Treasury yield is not rising as rapidly as the 2-year Treasury yield, but it is hovering around 2%.
But Bankrate’s 30-year mortgage rate is rising like a comet, similar to the 2-year Treasury yield.
The University of Michigan consumer survey is out for February. And an ugly survey is it! Buying conditions for housing fell to 71 as The Federal Reserve continues it monetary stimulypto!
Despite 7.5% inflation, The Fed continues its “Stimulytpo” monetary policy.
US consumer confidence is the lowest in 10 years as the yield curve crashes.
Here is the POMO schedule just released by The Fed.
I am reminded of my roommate at University of Wyoming who played James Brown over and over and over again. Much like The Fed doing nothing to curb inflation. Until they finally do something with a crashing yield curve.
Well, it has been a cringe-worthy year+ under President Biden. West Texas Intermediate Crude futures price is up 91% and the Commodity Research Bureau Foodstuffs index is up 47%. Talk about Biden’s energy folicies being passed through to American households in the form of higher food costs and energy prices!
And then we have mortgage rates. Bankrate’s 30Y mortgage rate is up to almost 4%, up 39% since the beginning of 2021.
Other central banks are raising rates like banshees on the moor, while The Federal Reserve continues to send conflicting signals about possible March rate hikes.
Goldman Sachs sees 7 rate hikes in 2022, culminating in an eventual 2% rate in December.
Fed Funds Futures are signalling 7 rates increases by the February 1, 2023 meeting.
(Bloomberg) What a difference 25 years makes. Worried that inflation was about to turn higher, the Federal Reserve in February 1994 began raising interest rates, taking the federal funds rate from 3% to 6% a year later. As it turned out, those worries were unfounded: The U.S. consumer price index barely budged, finishing the year at 2.7%, right where it had started.
Although inflation in many developed-world countries is now well above those levels — 7% in the U.S. alone — of the major central banks only the Bank of England has started to raise short-term rates. They are now, um, 0.25%. Across the developed world, short rates are still either barely above zero or negative. What’s more astonishing is that even though they have cut their purchases, the Federal Reserve and European Central Bank continue to buy about $140 billion of longer-maturity bonds every month, suppressing long-term yields even as inflation rages.
Some central banks say that rate hikes are coming, but their extraordinary reluctance to deal with actual inflation means it will become entrenched. Not only will policy makers have to raise rates more than they envision, but they will have to cut the size of their massive balance-sheet assets, too. Don’t expect that the process will be anything other than awful for risky assets of all stripes.
Over the last year and a half, inflation has not only accelerated but also broadened. It started with goods prices and has now expanded to services, even in the moribund euro zone. Central bankers and markets still believe inflation rates will come down a lot. The part of the swaps market that in essence predicts inflation in the future is pricing in a drop in the U.S. CPI to 3.6% by the spring of 2023 and to 3.25% the year after. Alas, like central bankers, the inflation swap market’s record is dreadful. In late spring of 2020, markets predicted a CPI of minus 1.35% a year later and staying below zero by the spring of 2022.
The US DollarInflation Swap is a poor predictor of inflation, at least under President Biden.
I’m not suggesting inflation will remain at current nosebleed levels. More likely is that having had a couple of decades of headline inflation that was on the low side — for central bankers, but not for anyone else — we are in for a few years when it remains above their targets.
Short rates will of course need to rise. That is problem enough for markets, but the bigger problem comes from the trillions of dollars of assets that central banks have accumulated on their balance sheets. Taken together, the Fed, ECB, Bank of Japan, Bank of England and Swiss National Bank have some $27 trillion of assets. In 2007, before the global financial crisis, the combined total was a little more than $4 trillion. Central bank assets will stop growing this year, undermining a major source of support for all types of bonds. But if inflation remains persistently high, central banks won’t simply be able to let their assets roll off as they mature, as most assume. They will have to start selling them. That is the big problem.
Central banks resorted to buying bonds and other financial assets (so-called quantitative easing) for a few reasons. The main one was to drive up inflation and inflation expectations from uncomfortably low levels by injecting more liquidity into the financial system and driving down longer-dated yields. Now that central banks have got much more inflation than they wanted, they will, by the equal and opposite token, need to sell the assets they bought. The longer inflation remains at current levels, the greater the pressure to sell. And they will probably need to do so sooner and faster than most expect and at prices a lot lower than they fetch today. The Fed alone owns about 30% of all the notes and bonds issued by the U.S. Treasury Department.
To say that central bank purchases have had a large effect on yields would be an understatement. One way of seeing this is to split the yield of a longer-dated bond into the part that reflects the expected path of interest rates over the life of the security from everything else. That “everything else” is the term premium. This should compensate investors for, say, sudden surges in inflation. Clearly, this is no longer true. Depending on what model you use, the term premium on 10-year Treasury reached a high of 450 basis points to 500 basis points in the early 1980s. At the nadir of the pandemic, it was minus 100 points and is now about minus 10 points. To be clear, this means that you get less buying a 10-year Treasury than would be suggested by the expected path of rates over the life of the bond — expectations that are almost certainly too low.
Term premiums below zero suggest bond investors are no longer compensated for things like inflation.
The driving down of government bond yields also compressed yields and spreads on investment-grade and junk bonds. That was the intent. Junk spreads reached their narrowest level ever in June of last year. With so little yield available in fixed income and central banks seemingly always on hand to bail them out, investors flooded into equities. As a result, many developed-world equity indexes are either very expensive or, in the case of the U.S., not far off their most expensive levels ever based on valuation measures that are a decent guide to future returns. That is what a decade and a half of market manipulation by central banks has done.
The policies of zero or negative rates and seemingly infinite QE looked idiotic (and were) when they were adopted, and time has not been kind. Paradoxically, they could only be sustained if central banks were wrong, and their policies failed to spark inflation. Now that inflation has taken hold, rates will go up substantially and balances sheets will need to shrink.
What would you pay for fixed-income assets now if you knew that central banks will become, in effect, forced sellers later? I can’t see how any financial asset will escape the damage from the likely lurch higher yields. The way out of these policies will be as nasty as the way in was nice.
Particularly since Fed Funds Futures are pointing toward 6 rate increases over the next year.
At least Treasury Secretary Janet Yellen is wearing her Mao jacket.
Inflation is literally burning a hole though the pockets of Americans. The Flexible Price CPI is raging at 18% YoY. The Dallas Fed has their preferred measure of inflation, the trimmed mean CPI, is growing at only 3.05% YoY. The classic measure of inflation, CPI YoY, is growing at 7.12%.
That is of course if you can find things to buy at the grocery store.
I remember when Fleetwood Mac played at Bill Clinton’s first inauguration party. Perhaps Fleetwood Mac can play at the midterm election party commemorating the rampant inflation under Biden’s “leadership”: Bare Shelves.
Well, the COVID hysteria from the Biden Administration and the media preparing us for a horrible jobs report was … incorrect. In fact, the January jobs report was “exceptional”. 467,000 jobs were added and average hourly earnings growth ROSE to 5.7% YoY.
The bad news? Thanks to surging inflation, REAL average hourly earnings growth YoY FELL to -2.36%.
Unemployment ROSE to 4.0% from 3.9% as more people dropped out of the labor force in January. On the bright side, labor force participation rate rose to 62.2% from 61.9%.
Leisure and hospitality employment (one of the most vulnerable to inflation) expanded by 151,000 in January, reflecting job gains in food services and drinking places (+108,000) and in the accommodation industry (+23,000).
The reaction in the bond market? US 10-year yields are up 6.9 basis points as Eurozone is up across the board.
Energy prices are up (except natural gas futures).
Yes, its a cold one out there. But the Biden Administration is engaging in reducing fossil fuel supply and pushing towards “green” energy such as inefficient solar panels, eagle-killing wind turbines, and ocean turbines.
As a consequence, natural gas futures are up 93% from January 1, 2021 while coal futures are up 133% and WTI Crude spot price is up 82%.
Any wonder why food prices are up 40%?
Stay warm. It’s a cold one out there today. And The Federal government doesn’t care.
Raphael Bostic and Goldman Sachs are both calling for dramatic rate increases to fight inflation … that they helped cause with their monetary stimulypto. I call this The Fed’s March of the Toreadors as The Fed now attempts to kill the bull market.
(Bloomberg) — The Treasury yield curve flattened to the lowest level in over a year on Monday as the prospect of a super-sized Federal Reserve rate increase in March gained traction, weighing disproportionately on shorter-dated tenors.
Two-year U.S. yields climbed as much as 4 basis points after Raphael Bostic, the president of the Fed’s Atlanta branch, said the U.S. central bank could raise its benchmark rate by 50 basis points if a more aggressive approach to taming inflation is needed.
That narrowed the gap with ten-year counterparts — which rose about half as much — to the least since October 2020. The last time the Fed delivered a half-point increase to borrowing costs was at the height of the dot-com bubble in 2000.
The repricing extended a move spurred last week, after Fed Chair Jerome Powell underscored the policy maker’s determination to put a lid on inflation. The market positioning may have been exacerbated by hedge funds that had been leaning the wrong way before Powell’s address.
Traders are currently betting the Fed will deliver 32 basis points of tightening in March, more than fully pricing an increase of a quarter-point. That puts the implied probability of a 50-basis-point increase at almost 30%. The odds of such a move in December were zero.
Consumer prices rose an annual 7% in December, the fastest pace in almost four decades. Powell left the door open to increasing rates at every meeting, and didn’t rule out the possibility of a 50-basis-point hike.
In an interview with the Financial Times, Bostic stuck to his call for three quarter-point interest rate increases in 2022, while saying that a more aggressive approach was possible if warranted by the economic data. Bostic is a non-voting member of the FOMC this year.
Since the rapid growth in inflation was caused by a combination of too much Fed stimulus, too much fiscal stimulus and “green” energy policies, it is unclear whether an increase of 50 basis points will do much, particularly if Bostic’s own Atlanta Fed GDPNow forecast of 0.051% is accurate. Raising ratesif the economy is slowing??
To be clear, Bostic and others are trying to signal The Fed’s intent well in advance to avoid a surprise knock-down of the stock market. Or a killing of the bull market.
The misery index is traditionally inflation rate plus U-3 unemployment rate. The RENTER misery index is the Zillow Rent Index YoY + U-3 unemployment rate to demonstrate the hardship of renters because of soaring home prices.
Notice that because of rising home prices, the Renter misery index has overwhelmed the improvement in unemployment.
As I typically do, I will now include The Fed’s balance sheet (as a proxy for Fed stimulus and supporting Federal government expenditures). Yes, you can see that The Fed and Federal government are responsible for our modern day “Grapes of Wrath.”
If we look at the TRADITIONAL misery index, we see that misery remains above 10 (it was below 6 prior to the COVID outbreak in early 2020).
Remember that the REAL average hourly earning growth of Americans is NEGATIVE. Gains in wage growth more than offset by inflation.
I won’t even mention how inflation is crushing retirees since Social Security and pension plans rarely adequately compensate retirees for inflation.
Now for the really bad news. 81-year old senior, House Speaker Nancy Pelosi, has announced that she is running for Congress yet again from leftist-stronghold San Francisco. Although she has an expensive home in Georgetown and a beautiful vineyard in Napa Valley. Pelosi’s vineyard only sells grapes to other wine makers. Not bad for a career civil servant!
I really wanted Pelosi to produce a wine called “The Grapes of Wrath” in honor of her insider trading and massive wasteful spending of taxpayer money that has helped generate inflation, rampant government debt growth and hurting retirees and hourly workers.
Confounded Interest - Anthony B. Sanders 
You must be logged in to post a comment.