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.
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.
Mortgage applications decreased 6.5 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending June 3, 2022. This week’s results include an adjustment for the Memorial Day holiday.
The seasonally adjusted Purchase Index decreased 7 percent from one week earlier. The unadjusted Purchase Index decreased 18 percent compared with the previous week and was 21 percent lower than the same week one year ago.
The Refinance Index decreased 6 percent from the previous week and was 75 percent lower than the same week one year ago.
In related news (debt), consumer debt is rising at 7.5% YoY while the personal savings rate plunged to 4.4% in May as consumers borrow more and save less to cope with inflation.
Here is my version of their chart since 2000 where you can seen the seismic shift in the balance sheet (toxic green slime line), particularly with The Fed’s response to Covid. The Fed is signaling a tightening in monetary policy to help reduce inflation (blue line).
But notice that M2 Money Velocity (GDP/M2) is now near the all-time low along with consumer purchasing power.
How BIG is The Fed’s balance sheet? Try more that a third of size of US GDP.
And as The Fed signals its inflation-fighting intentions, mortgage rates have shot up to 5.51%, the highest mortgage rate since June 2009.
Meaning that The Fed has kept monetary stimulus in play for too long since late 2008 helping to lower mortgage rates from over 6% in November 2008 to 2.98% in November 2021. Then came “The Missouri Boat Ride” as The Fed signaled monetary tightening, leading to mortgage rates skyrocketing to their highest level since 2010.
The result of rising home prices AND mortgage rates? Housing acquisition prices (home prices * 30 year mortgage rates) have skyrocketed.
Between rising home prices and rising mortgage rates, we see that number of prices reductions increasing at nearly 70% YoY (chart courtesy of WolfStreet.com).
Of course, Congress and the media will never ask Janet Yellen (former Fed Chair [2013-2018] and current Treasury Secretary) WHY she kept massive monetary stimulus around for so long. Or why current Fed chair Powell did the same with Covid-related monetary stimulus.
Instead of President Ronald Reagan saying ““Mr. Gorbachev, tear down this wall” we need someone to tell President Biden and Federal Reserve Jerome Powell to “Stop driving up prices and making housing unaffordable.” Unfortunately, The Fed thinks that raising interest rates will temper price increases — it won’t. But it could tamper home price growth.
So what we are left with is soaring home prices AND soaring mortgage rates, leaving this scary chart. The housing cost index has risen 114.5% under Biden.
Its only going to get worse from here.
Today’s jobs report for May showed that the U-3 unemployment rate remained the same as April, 3.60%. However, that is lower than the NATURAL rate of unemployment of 4.445% indicating that the labor market is overheated. Historically, The Fed has tightened monetary policy by raising rates when this has happened. So, look for The Fed to keep raising rates.
As I have mentioned before, REAL hourly wage growth is negative since March 2021, just after Biden signed his executive orders canceling drilling on Federal lands and cancelling the Keystone Pipeline. Later, he canceled off-shore drilling permits and Alaska drilling. Now we have REAL average hourly wages declining at -2.8% YoY as The Fed has been reducing M2 Money supply YoY.
Listings of homes is up 11% YoY, the highest in several years.
Let’s see how the housing market does with soaring mortgage rates.
First, ADP US jobs added flopped (only 128.2k jobs added, the lowest reading under Biden and the massive Federal Reserve stimulus). Much lower than the expected 300k. Second, nonfarrm labor productivity fell in Q1 -7.3%. Third, unit labor costs soared to +12.6%.
M2 Money stock YoY is falling, but remains at 8% YoY.
Here is the summary table for today.
And then we have the Atlanta Fed GDPNow, real-time GDP tracker for Q2 at 1.3%.
As M2 Money growth slows, US GDP is slowing as well. Is this a monetary hangover??
And, of course, rents are soaring for the American middle class and low wage workers.
President Biden met with Federal Reserve Chairman Powell to discuss how to control the inflation that is crushing the middle class and low-wage workers.
Here is a good example of why Biden is worried. There is a mid-term election on the horizon and people are angry and scared. Housing, generally the largest asset owned (or rented) by a household is simply unaffordable thanks, in part, to the over-stimulation of the economy by 1) The Federal Reserve in terms of money printing and 2) the Federal government in terms of fiscal stimulus in response to the Covid outbreak in March 2020.
In nominal terms, the gap between US home prices (Case-Shiller National Home Price Index YoY – US Average Hourly Earnings YoY) is near the all-time high.
Yes, home price growth exploded upwards when The Fed rapidly expanded their balance sheet in response to the Covid outbreak … and only now are considering shrinking the balance sheet.
In terms of house prices, CoreLogic has a nice chart depicted the odds of home prices dropping over the coming year. I circled Columbus Ohio because that is where I am moving (knock on wood).
And then we have the 30-year mortgage rate rising with The Fed’s expected tightening of monetary policy. That will certainly make housing even less affordable, unless house price growth cools dramatically.
The Federal Reserve has been signaling a tightening of its loose monetary policy (essentially loose since the housing bubble burst of 2008 and the ensuing financial crisis). It is still loose as The Fed hasn’t really trimmed its massive balance sheet yet and has just raised it target rate to 1%.
So, potential home owners have to pay 5.10% for a 30-year fixed-rate mortgage while the effective Fed Funds rate, the rate at which banks lend to each other, is a measly 0.83%. This puts consumers at a relative disadvantage to large Wall Street firms that are gobbling up houses at an accelerated rate.
With the US housing market slowing (thanks to The Fed’s signaling of monetary tightening), the question now is how far will The Fed go in its “War on Inflation!”?
You can see a major cause of inflation in the US since 2000: Federal spending and Federal (public) debt. During The Great Recession of 2008-2009, we saw inflation (CPI YoY) collapse into negative territory as Federal spending and debt soared. But the mini-recession of 2020 caused by the Covid governments shutdowns led to TWO surges in Federal spending and debt: Covid relief followed by the infrastructure spending bill. Combined with Biden’s anti-fossil fuel executive orders and massive splash of Federal spending in to the economy, we have inflation soaring.
If surges in Federal spending (requiring surges in Federal debt) have gone away (except for $40 billion in Ukrainian relief and Biden’s possible student loan cancellation of $10,000 that will cost an estimated $321 billion … and help drive up college tuitions even further), we may be over the “twin gorgings” of the Covid spending spree. This alone may result is a decline in the inflation rate.
Where do we sit today with the REAL neutral rate? The REAL Fed Funds Target Rate (upper bound) is -4.41%. It was in positive territory during the Trump years. But then Covid struck.
No wonder Wall Streeters like to go “Down To The Nightclub!” The Fed still has not taken the monetary stimulypto away, but have taken it away for consumers buying housing.
Americans’ Savings Rate Drops to Lowest Since 2008 as Inflation Bites.
Yes, inflation really bites. In fact, as US inflation is near the 40-year high, US personal savings declined -65% YoY as consumers try to cope with rising prices.
Its not only that personal savings is crashing in the face of inflation, revolving debt has soared as consumers try to cope with rising prices. I call this chart “The Biden Bowl.” Soaring consumer credit card debt with crashing personal savings.
Confounded Interest - Anthony B. Sanders 
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