German Inflation Rises To 5.3% As 10Y Sovereign Yield ALMOST Rises To 0% (France Inflation 2.7% With 10Y Sov Yield At +0.25%)

The world has become a wild and wacky place since COVID was unleashed on an unsuspecting population. Since the massive spending spree by The Federal government in the USA coupled with extraordinary monetary stimulus from The Federal Reserve, US inflation has shot up to 6.8% YoY.

German is also having an inflation moment. With their CPI YoY running at 5.3%, faster than the anticipated 5.1%.

At least the German 10-year sovereign yield is ALMOST back to 0%.

France, on the other hand, is seeing inflation rising to 2.70% YoY.

While the French 10Y sovereign yield rose to 0.2531%.

France’s Macron certainly likes to have his photo taken as if he wants to go 10 rounds with UK’s Tyson Fury.

Fed Minutes Flag Chance of Earlier Hikes, Balance-Sheet Rundown (When Jay Powell Speaks, People Listen [Dow Drops, 10Y T-yield Increases])

Federal Reserve officials said a strengthening economy and higher inflation could lead to earlier and faster interest-rate increases than previously expected, with some policy makers also favoring starting to shrink the balance sheet soon after.

“Participants generally noted that, given their individual outlooks for the economy, the labor market, and inflation, it may become warranted to increase the federal funds rate sooner or at a faster pace than participants had earlier anticipated,” according to minutes published Wednesday of the Dec. 14-15 meeting of the U.S. central bank’s policy-setting Federal Open Market Committee, when it pivoted to a more aggressive inflation-fighting stance.

“Some participants also noted that it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate,” the minutes said.

The S&P 500 stock index extended declines following the release and was on track for its biggest loss in more than a month. Treasuries also extended losses and the dollar pared its decline.

At the conclusion of the December meeting, the FOMC announced it would wind down the Fed’s bond-buying program at a faster pace than first outlined at the previous meeting in early November, citing rising risks from inflation. The new schedule puts the central bank on track to conclude purchases in March.

And with the minutes released, the Down dumped.

And the 10-year Treasury yield jumped 5.3 bps on the release.

When Jerome Powell speaks, people listen.

Tiny Or BIG Bubbles? Buffett Indicator, Shiller CAPE At Dangerous Levels Thanks To Fed And Their Champagne Policies

The Federal Reserve Open Market Committee meeting should have a Lawrence Welk bubble machine operating, particularly for their announcements.

When we look at the Buffett Indicator, we can see how The Federal Reserve’s loose monetary policies (or follycies) are driving up stocks to unsustainable levels that may not survive without The Fed’s “Do Ho Big Bubble Policies.”

How about the Shiller CAPE (Cyclically-adjusted Price/Earnings) ratio? While not up to dot.com levels yet, the Shiller CAPE ratio is climbing with the assistance of The Fed and their insane money printing.

How about house prices? The Case-Shiller National home price index is far above the level last scene during the housing bubble of 2005-2007. Again, with a little help from The Federal Reserve.

I can’t wait to see how the equity market and housing market reacts IF The Fed actually follows through with reducing monetary stimulus. Probably not just adding more stimulus, just reinvesting the Treasury and MBS proceeds (aka, not shrinking the balance sheet).

Speaking of Lawrence Welk and his Champagne Music Makers, watch the blazing-hot electric guitar work worthy of Steve Morse or Jimmy Page in this video.

Here is the new logo for The Federal Reserve.

Mortgage Purchase Applications Plunge 10% WoW At End Of 2021 (But It Happens Every Year!)

The last mortgage purchase applications index from the Mortgage Bankers Association was released this morning. The headline is “Mortgage Purchase Applications Plunge 10% WoW (since the previous week). But this is called “Seasonality.” And it happens EVERY YEAR.

Here is a chart of mortgage purchase application (NON-seasonally adjusted). What will happen when the new year starts and purchase applications began rising?

Whether seasonally-adjusted or not, all number are down for the final week of 2021, except for the 30-year mortgage rate that rose 60 basis points.

On a seasonally-adjusted basis (aka, smoothed-out), we can see the impact of super-low mortgage rates on home prices.

Here is the data summary for the last week of December 2021. All indices are down … except for the 30 year mortgage rate which was up 60 basis points.

So let’s see what 2022 brings with The Fed threatening to shrink the balance sheet and raise their target rate 3 times. As Parks and Recreation’s Joan Calamezzo said, “We’ll see.”

The Mystery Of The Missing Housing Inventory For Sale (Elderly Americans Selling Less)

The inventory of existing homes for sale in the US is extremely low. The lack of available inventory to buy is helping drive home prices through the roof.

Available inventory for purchase peaked back in the 2007-2008 period during the dreaded housing bubble in the US. But inventory for sale has declined ever since. Why?

I think it has something to do with the aging of the US population. Look at this chart of Existing Home Sales Inventory against the growth 65+ years old.

Perhaps households 65+ are resisting moving to states like Florida and Arizona as they had in the past, leaving them stationary in their dwelling.

Another reason for the bewildering lack of inventory is the growth of the HECM (Home Equity Conversion Mortgage) that allows elderly households to drain the equity in their home rather than have to sell to utilize it. But HECMs have not taken-off sufficiently to explain the mystery of the missing inventory.

So we know that housing inventory is very low and we know that the number of Americans 65 and over is increasing. But we do not know the reason for the decline in inventory.

Jack Guttentag has an excellent write-up in Forbes on the HECM. Particularly with rapidly growing home prices and equity.

CoreLogic: Home Prices Rise Record 18.1% In November (When Will Fed Take Its Foot Off The Pedal??)

Home price growth especially strong in Mountain West and Southeastern states
By November 2022, annual home price growth is predicted to slow to 2.8%

Yes, US home prices continue to rage with CoreLogic’s home price index rising 18.1% YoY.

Their forecast for 2022 is only 2.8% YoY likely due to forecast mortgage rate increases and fiscal stimulus wearing out.

Arizona, of course, is leading at 28.6% YoY. Florida is in second place followed by Idaho.

Slowdown? Let’s hope the slowdown doesn’t turn into a Matchbox and lead to declining home prices.

5-Year Treasury Yield Highest Since Fed COVID Intervention As Canada 10Y Rises 18.7 BPS (Gold, Bitcoin, Ethereum Rise)

Treasury yields rose a second day, with five-year rates hitting the highest since before the pandemic took hold in the U.S., amid increasing conviction that the Federal Reserve will raise rates at least three times beginning in May.

The five-year Treasury note’s yield climbed as much as 3.8 basis points to 1.392%, the highest since Feb. 20, 2020, while 30-year yields bumped up toward their 200-day moving average.

Yields across the curve are rising for a second straight day, after Monday’s selloff lifted the 10-year note’s yield by nearly 12 basis points in its worst start to a year since 2009. The two-year yield topped 0.80% for the first time since March 2020.

At the 10-year mark, we see Canada’s sovereign notes rising 18.7 basis points.

Also at the 10 year mark, we see the US 1-year breakeven inflation rate (red line) surging.

The US Treasury actives curve and Dollar Swaps curve remain steeply upward sloping.

And on the crypto and gold front, gold surged this morning after tanking in the evening, while Ethereum (blue) is doing quite well along with Bitcoin.

My favorite non-bond, non-alt investment chart. The S&P 500 index charted against The Fed’s M2 Money Stock.

Following my friend Jesse’s habit of posting great French food dishes, here is one from my favorite Parisian eatery, Le Duc de Richelieu. Mmmmmmm.

RIP, Hap Jacobs.

Pfizer’s Covid Booster Shot for Younger Teens Wins FDA Clearance, Stock Drops (But Pfizer Underperformed S&P 500 Index Since Fed COVID Stimulus)

You would think that an FDA approval to give booster shots to millions of new patients would send their stock soaring. It didn’t Pfizer dropped along with the S&P 500 index.

Despite the growth of COVID cases in the US (blue dashed line), Pfizer stock has only gone up by “only” 88% since March 2020. The S&P 500 index rose by 100%.

I under what Pfizer’s performance would be if The Fed wasn’t blowing a hurricane wind at the back of the market.

Bad Santa! 10Y Treasury Yields Jump Above 1.60% as Expectation Of Fed Hikes Grows (Mortgage Rates Expected To Rise)

Happy New Year! And Treasuries are off to fast start with investors bailing on Treasuries and buying stocks. AND the expectation that The Fed will raise rates 3 times this year.

The 10-year Treasury Note yield rose above 1.60% this morning.

And the US Treasury 10Y-2Y curve rose to 80.601 basis points.

Fed Funds Futures data is showing 3 rates hikes in 2022. May, September and December.

The Fed Dots project is definitely showing an upward trend in the Fed Funds Target rate with FOMC member forecasting the median target rate to be above 2% by 2024.

Of course, Fed reverse repo activity grew to an all-time high (but it is expected to pare-back).

How about mortgage rates? I expect mortgages rates to rise over 2022 as the 10-year Treasury Note rises.

While The Fed has been acting like Santa Claus with monetary easing since 2008, they are predicted to act like Bad Santas in 2022.

6 months of telling inflation in transitory stories. Now you know why.

What do you say to the Fed Open Market Committee that has resisted raising rates while inflation is the highest in 40 years?

Cautionary note: The Fed is likely to protect economic growth and ignore inflation. So I expect FOMC will continue to reinvest prepayments into Treasury and MBS, pro-rata to the current portfolio.

Just Hedge Funds And The Blues: Why Can’t Hedge Funds Beat The S&P 500 (Or The Federal Reserve)?

Just hedge funds and the blues. Or hedge funds got the blues in 2021.

2021 saw the S&P 500 index generate a return of 28.7%. Much of it thanks to The Federal Reserve “stimulypto” or excessive monetary easing.

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But only three hedge funds beat the S&P 500 index: Senvest, Impala and SR. Thanks to fees (trading and management), the other hedge funds underperformed the S&P 500 index. And underperformed The Fed!