Mortgage Rates Explain Housing Weakness

By Tom McClellan

30-year Mortgage Rate versus 30-year T-Bond yield

Housing sector stocks have been among the worst performers in 2018, and analysts are pointing to lots of different reasons including the newly imposed U.S. tariffs on Canadian softwood lumber.  But an easier explanation arises when we look at interest rates.

Mortgage rates are not yet empirically “high”.  I bought my first house with a 13% mortgage, so rates that start with the number 4 still seem pretty low, at least to me and my ge-ge-generation.  The key insight contained in this week’s chart is that mortgage rates are high compared to 30-year T-Bond rates.  Both rates have been rising in 2018, and the 30-year mortgage rate has been more than a full percentage point above the 30-year T-Bond yield for most of 2018.

Continue reading Mortgage Rates Explain Housing Weakness

“Harbinger of Doom”: Amigo 3 in Play, But Real Doom Awaits

By NFTRH

“The Harbinger of Doom”? Of course we (well, the media) are talking about the yield curve AKA Amigo #3 of our 3 happy-go-lucky riders of the macro. I have annoyed you repeatedly with this imagery in order to show that three important macro factors needed to finish riding before situation turns decidedly negative.

Amigo 1: SPX (or stocks in general)/Gold Ratio

Amigo 2: 30 Year Treasury Yield

Amigo 3: Yield Curve

In honor of Amigo 3’s arrival to prime time let’s have a good old fashioned Amigos update (going in reverse order) and see if we can annoy a few more people along the way. :-)

Yield Curve

Clicking the headline yields a Bloomberg article all about various yield curves and all the doomed news  you can use, including a hyperactive interview with an expert bringing us all up to speed on the situation.

Continue reading “Harbinger of Doom”: Amigo 3 in Play, But Real Doom Awaits

A History of First Cuts

By Kevin Muir

The market is definitely torn about whether last week the Federal Reserve signaled a pause in their rate-tightening campaign. You know where I stand (they did), so there is little to be gained by my shouting into the wind trying to convince anyone.

Yet one of my more astute readers sent a note to be careful what I wish for. Now, he knows we are a long way from the Fed actually cutting rates. In fact, I suspect we both think the Federal Reserve will raise rates this December. But let’s imagine that I am correct and the next meeting brings about a one-and-done rate rise. What if the Fed’s next move after December is a rate cut? I know that seems preposterous right now, yet there are many signs the American economy is slowing faster than the Federal Reserve forecasts.

Continue reading A History of First Cuts

Revisiting the Age-Old Relationship Between Interest Rates and Prices

By Steve Saville

There is an age-old relationship between prices and interest rates that Keynesian economists have called a paradox (“Gibson’s Paradox”). The relationship was clearer during the Gold Standard era, but as I explained in a previous post it is still apparent if prices are measured in gold.

To understand “Gibson’s Paradox” and why it actually isn’t a paradox, refer to the earlier post linked above. Suffice to say that when money is sound or at least a lot sounder than it is today, interest rates don’t drive prices and prices don’t drive interest rates; instead, on an economy-wide basis both prices (in general) and risk-free interest rates are driven by changes in societal time preference. Moreover, as mentioned above and explained in my earlier post, even with today’s massive, continuous manipulation of interest rates by central banks the relationship is still evident, but only when interest rates are compared to a wholesale price index denominated in gold.

Continue reading Revisiting the Age-Old Relationship Between Interest Rates and Prices

The Mist! US Housing Starts Plunge Under Rising Interest Rates

By Anthony B. Sanders

Hurricanes Florence and Jerome

There is little doubt that Federal Reserve policies have resulted in mispriced risk and massive distortions in the economy. Fed Chairs Bernanke and Yellen were masters of distortion (keeping rates too low for too long) while Fed Chair Powell (Hurricane Jerome) is raising rates rapidly in the face of little-to-no inflation. Throw in Hurricane Florence and we have “The Mist” where fear changes everything.

Housing starts for September were released yesterday and, as expected, the numbers were down across the board (except for the West where it is seemingly always sunny).

rezcon

1-unit starts (aka, single family detached) are still below 2000 levels thanks, in part, to The Federal Reserve dropping their target rate like a hammer to 1%. We got a massive construction response. That blew up, so The Fed dropped their target rate like a hammer … again from which Hurricane Jerome is only recently begun raising.

Continue reading The Mist! US Housing Starts Plunge Under Rising Interest Rates

Stronger U.S. Economy May Warrant ‘Restrictive’ Rates: Boston Fed’s Rosengren

By Anthony B. Sanders

Consumer Credit Growth Slowing With Fed Fund Rate Increases

Now that the US economy is stronger, Boston Fed’s Eric Rosengren wants to  raise rates. Again.

BOSTON (Reuters) – When Boston Federal Reserve Bank President Eric Rosengren switched from advocating low interest rates to tighter monetary policy, he argued it was time to start crawling back toward “normal” rates even with 5 percent unemployment and weak growth and inflation.

Two years later, Rosengren has joined colleagues in beginning to lay the groundwork for those rate hikes to potentially continue longer and to a higher level than currently expected as the outlook for the economy strengthens.

Rates may not only need to become “restrictive,” but the definition of that may be moving up as well, Rosengren said in an interview with Reuters on Saturday following an economic conference here.

“This is not hair on fire. There is upward pressure on inflation, and given that we are already at 2 percent, labor markets are already tight … that is going to be a situation where we start persistently having inflation above what our target is,” Rosengren said. “There is an argument to normalize policy and probably be mildly restrictive.”

The Fed maintains a 2 percent inflation target, which it is only now reaching after a decade struggling to consistently hit and maintain it.

Yes, it has been a long, hard road to get to 2% core inflation … again.

earninf

But here is the problem. Consumer credit YoY is slowing quite rapidly with increases in The Fed Funds Target rate.

Continue reading Stronger U.S. Economy May Warrant ‘Restrictive’ Rates: Boston Fed’s Rosengren

Mortgage Refinancing Applications Lowest Since December 2000

By Anthony B. Sanders

Rising interest rates have led to the lowest level of mortgage refinancing applications since December 2000.

mbarefi30.png

And compared to the “Go Go” days of the housing bubble, mortgage purchase applications are back to 1997 levels and growing at a tepid rate (by comparison).

Continue reading Mortgage Refinancing Applications Lowest Since December 2000

Tbac-o Road: 10-Y Treasury Yield Tops 3%…

By Anthony B. Sanders

…As Treasury Announces MORE Auctions AND A 2-Month T-Bill (Dollar Continues To Decline In Purchasing Power)

Tbac-o road.

According to the Treasury Advisory Committee (TBAC),

  • Over the next three months, Treasury anticipates increasing the sizes of the 2-, 3-, and 5-year note auctions by $1 billion per month.  As a result, the size of 2-, 3-, and 5-year note auctions will increase by $3 billion, respectively, by the end of October.
  • In addition, Treasury will increase the auction size of the next 2-year FRN auction by $1 billion in August.
  • Finally, Treasury will increase auction sizes by $1 billion to each of the next 7- and 10-year notes and the 30-year bond auctions in August, and hold the auction sizes steady at that level through October.

Not surprising given Washington DC endless appetite for spending.

Continue reading Tbac-o Road: 10-Y Treasury Yield Tops 3%…

Yield Curve Apologists

By Kevin Muir

I am sure many of you are sick of my yield curve talk. I have been babbling about the curve for far too long. I guess it’s a little understandable as I believe a steepener position will be “the” trade during the next crisis.

Yet there can be no denying that so far, I am wrong and the yield curve keeps going down faster than the plate of drinks at the end of David Hasselhoff’s table after a taping of Britain’s Got Talent.

It’s not an expensive position to carry, so it’s not like I am bleeding profusely from the position, but there can no denying the call has been a dud.

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The Return of the PIGS: 10Y Italy, Greece Yields Spike Over 40 BPS

By Anthony B. Sanders

2Y Italian Yield Spikes 153 BPS

A general rule of thumb is that whenever sovereign yields spike by over 10 basis points, it is a big deal.

So Italy and Greece 10-year sovereign yields spiking over 40 basis points this morning is a big deal! The third PIG (Portugal) is up 11.3 BPS.

sov10

For the 2-year sovereign debt, Italy is up over 153 BPS.

Continue reading The Return of the PIGS: 10Y Italy, Greece Yields Spike Over 40 BPS