Elmer Fed? US PCE Price Growth Hits 5.2%, Highest Since Mid-1983 (Taylor Rule Suggests Target Rate of 13.35%)

And this doesn’t include the inflation in prices caused by the Russian invasion of Ukraine. Yet.

US Personal Consumption Expenditures (PCE) price index rose by 5.2% in January, the fastest rate since mid-1983.

With CPI inflation at 7.5% YoY, the Taylor Rule suggests a Fed Funds target rate of 13.35%, higher than the current rate of 0.25%. Overstimulated much??

Let’s see if The Fed actually goes hunting inflation.

Let’s see if inflation makes The Fed dance!

Rocket And United Wholesale Mortgage Equity Drop To All-time Low On Fed Tightening (Despite Ukraine, Fed Looks To Keep Tightening)

As The Federal Reserve threatens to tighten monetary policy, 30-year mortgage rates have risen to 4.25% leading two major mortgage companies, Rocket Mortgage and United Wholesale Mortgage, to decline to all-time lows.

But wait, Federal Reserve officials signaled they remain on track to raise interest rates next month despite uncertainty posed to the global economy by Russia’s invasion of Ukraine.

While acknowledging the risks created by the conflict, which has triggered one of the worst security crises in Europe since World War II and caused oil prices to surge, U.S. central bankers stressed the need to confront the hottest U.S. inflation in 40 years.

So, The Fed plans to raise rates to fight inflation, even if it tanks the housing and mortgage markets? Fed Funds Futures are still signaling 6 rate hikes over the next year.

At least US Treasury 10Y yields are down just 7.6 bps. Look at 10Y Russian and Ukraine sovereign yields. Now THAT is a yield surge!

Putinesca! European Markets Tank, Energy Prices Explode, US 10Y Treasury Yields Plunge 13.3 BPS After Russia Invades Ukraine (Russian 5Y CDS Soars To 917)

I admit, I follow market data to get a signal of what is happening to mortgage rates and I got one. With Putin and Russia invading Ukraine, markets are in turmoil

WTI Crude is up 8.14% this morning, Brent Crude is up 8.45% and NBP (UK) Natural gas is up 40%.

Europe is having a bad day equity market-wise. Eurostoxx 50 was down 4.92%. The US Dow is braced for a 2.5% opening.

Now to bonds. The 10-year Treasury yield is down 13.3 bps this morning. Sweden and UK are down 10 bps as well.

How about the new Russian front? Ukraine’s 10y yield rose 691.0 bps while Russia’s 10Y yield rose 435 bps.

Russian 5Y Credit Default Swaps (CDS) leaped to a Greek-like 917.

Well, it looks like the sanctions imposed by Winken (US VP Harris), Blinken (US Secretary of State) and Nod (US President Biden because he always looks half-asleep) apparently didn’t work as intended.

Putin finally made up his mind.

My Kuroda! Japan’s Inflation “Miracle” (0.5% Inflation) Despite $5 Trillion BOJ Balance Sheet And -0.10 Policy Rate

My Kuroda!

Forbes has an interesting article on the Japanese “miracle” entitled “The $5 Trillion Inflation Time Bomb No One’s Talking About.”

It’s taken nine years and the Bank of Japan supersizing its balance sheet to the $5 trillion mark, but Asia’s second-biggest economy finally has some inflation.

Officials in Tokyo are realizing the hard way, though, that it’s best to be careful what you wish for as bond yields spike.

Granted, the gains in consumer prices Japan is reporting are negligible compared to those in the U.S. and China. And inflation is still a good distance from the BOJ’s 2% target. Still, the 0.5% rise in consumer prices in January year-on-year is already unnerving the bond market. It followed a 0.8% jump in December and marks the fifth straight month of increases.

The worry is that Japan’s inflation is the “bad” kind. Haruhiko Kuroda was hired as BOJ governor in March 2013 to end deflation. Kuroda unleashed tidal waves of liquidity. That drove the yen down 30%, generated record corporate profits and sent Nikkei 225 Average stocks to 31-year highs.

Despite a staggering balance sheet with a -0.10 bps policy rate, Japan has only 0.5% inflation.

And Japan’s yield curve is negative at 3 year tenor and less.

How is it that Japan has virtually no inflation with negative rates but the USA has 7.5% inflation with a 0.25% target rate? Could it be the USA undertook massive fiscal spending related to COVID and reduced energy sources in an effort to go “green” that led to 7.5% inflation??

My Kuroda!

Good governments don’t go on wild, wasteful spending sprees and shut off energy sources like the Biden Administration and Congress.

Case-Shiller National Home Price Index Still HOT In December +18.84% YoY As Active Inventories Die (Phoenix AZ Fastest Growing At 32.5% YoY While Washington DC Is Slowest Growing At 10.5% YoY)

The S&P CoreLogic Case-Shiller National home price index remained HOT in December, growing at a 18.84% pace. M2 Money YoY is still smoking at 13.11%.

All 20 metro areas in the Case-Shiller 20 index grew at 10% or higher YoY with my former home city Phoenix leading the way at 32.5% YoY house price growth. Washington DC, aka Mordor on The Potomac, was in last place at 10.5% YoY.

In terms of active inventory of housing, only Phoenix and Columbus Ohio are showing positive growth in active inventory YoY. But even Phoenix and Columbus saw a decline MoM (or month-over-month).

Including Existing Home Sales Active listings in the first chart, we see The Federal Reserve continuing to pump money at at 13.11% clip while active inventory is at an all-time low.

This is nuts.

Mortgage Rate Increases Subside As US Economy Slows, Yield Curve Flattens While Russian/Ukraine Tensions Grow

As US/Russian tensions grow over Ukraine, The Federal Reserve may be forced to postpone or reduce planned rate increases and balance sheet trimming.

But in addition, we see US GDP slowing to near zero (1.285%) as the US Treasury 10Y-2Y yield curve has flattened to 41.684 BPS. The good news? Bankrate’s 30Y mortgage rate increases have slowed to 4.19%.

On a different note, I noticed the Chicago Bulls logo when turned upside-down looks like a space alien violating a crab.

Another Volcker Moment? JPMorgan Expects String of Nine Straight Fed Rate Hikes (Shock And Awful??)

In August 1979, when Paul Volcker became chairman of the Federal Reserve Board, the annual average inflation rate in the United States was 11%. Inflation peaked in 1980 at 14.6%. Volcker raised the federal funds rate from 11.2% in 1979 to 20% in June of 1981.

Inflation (defined as CPI YoY) declined from over 14.6% in 1980 to 3.6% by 1985. But 30-year mortgage rates resumed their upward trajectory and peaking in October 1981 at 18.63 before beginning a gradual decline as inflation was tamed.

But will Powell enact another Volcker moment by raising the target rate abruptly?

JPMorgan Chase & Co. economists said the Federal Reserve is likely to raise interest rates by 25 basis points at nine consecutive meetings in a bid to tamp down inflation.

The bank is joining others on Wall Street in ramping up bets for faster policy tightening, after U.S. consumer prices posted the biggest jump since 1982 in January. Goldman Sachs Group Inc. is forecasting seven hikes this year, up from its earlier prediction of five.

“We now look for the Fed to hike 25bp at each of the next nine meetings, with the policy rate approaching a neutral stance by early next year,” the JPMorgan team, led by chief economist Bruce Kasman, said in a research note.

January U.S. inflation readings “surprised materially to the upside,” the economists wrote. “We now no longer see deceleration from last quarter’s near-record pace.”

On inflation, the economists said a “feedback loop” may be taking hold between strong growth, cost pressures, and private sector behavior that will continue even as the intensity of current price pressures in the energy sector eventually fade.

Strong growth? 1.3% is strong growth??

Be that as it may, the US economy is at a different place today than under President Jimmy Carter. When Volcker started raising The Fed Funds Target rate, US public debt was still under $1 trillion. It has ballooned to over $30 trillion today.

9 rate increases is above what is being priced in The Fed Funds FUTURES market which is 6 rate increases over the coming year.

With 7.5% inflation, the Taylor Rule suggests a target rate of 15.45%. Talk about “Shock and Awful!”

We are starting to see GOLD (gold) surging and Bitcoin (yellow) falling as The Fed prepares “shock and awful” rate hikes and Biden continues to beat the war drums over Russia invading Ukraine.

If The Fed actually raises rates 9 times and dramatically pares back its massive monetary stimulus, it will be “shock and awful.”

The Shadow Knows! Wu-Xia Shadow Fed Rate Is -0.1974% As Inflation (7.5%) Dwarfs Wage Growth (5.1%) And Q1 GDPNow Falls To 1.285%

The Shadow Knows!

Wu-Xia employs an approximation that makes a nonlinear term structure model extremely tractable for analysis of an economy operating near the zero lower bound for interest rates. It can be used to summarize the macroeconomic effects of unconventional monetary policy (ZIRP + QE). The Shadow Rate is now -0.1974%.

The good news? The Atlanta Fed Wage Growth tracker is showing a 5.1% wage growth. The bad news? Inflation is ruining that growth at a whopping 7.5% rate leaving REAL wage growth at -2.4%.

And the Atlanta Fed’s GDPNow Q1 forecast is a measly 1.285%. Apparently, the fiscal and monetary stimulypto has worn out.

And liquidity in the equity market has seemingly vanished.

The Biden Administration and Congress need a distraction from the awful inflation news caused by Biden’s energy policies, sheer wasteful spending and Federal Reserve policy errors (too much monetary stimulus for too long).

Zoltan! On Why the Fed Needs to Spark a Market Crash (As US Housing Starts Decline With Rising Mortgage Rates)

Zoltan!

Credit Suisse’s Zoltan Pozsar thinks The Federal Reserve needs to spark a market crash. Really Zoltan??

If The Fed does its expected “shock and awe” (or shock and awful), it will be more than the stock markets will crash. The housing market could crash too.

Take the current US housing situation with its limited inventory of listings combined with massive Fed stimulypto.

US 1-unit housing starts are down -4.1% in January. But heck, it is January! But on a year-over-year basis, 1-unit housing starts are down -2.4%. But what will happen if The Fed ACTUALLY withdraws its gargantuan monetary stimulus (green line)?

Existing home sales inventory continues to decline as Bankrate’s 30-year mortgage rate starts to climb with expectations of Fed “Shock and Awful.”

Say hello to The Federal Reserve Board of Governors!

Jay The Revelator! Minutes Show Fed Ready To Raise Rates, Shrink Balance Sheet “Soon” (Mortgage Rates SOAR To 4.23%)

Jay “The Revelator” Powell has told us in The Fed minutes that The Fed is ready to raise rates and shrink the balance “soon.” Sort of like saying “Shock and Awe” is coming.

The minutes of the recent Fed Open Market Committee (FOMC) have been released. Yet they only mention “soon.” Just like when my wife asks me to take out the trash and I reply “soon.” At which point she realizes that I have no intention of doing it.

The REAL 10-year Treasury yield is now -5.44%.