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.

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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.

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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.

Continue reading Yield Curve Apologists

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.

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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

Why It’s Different This Time

By Steve Saville

One of the financial world’s most dangerous expressions is “this time is different”, because the expression is often used during investment bubbles as part of a rationalisation for extremely high market valuations. Such rationalisations involve citing a special set of present-day conditions that supposedly transforms a very high valuation by historical standards into a reasonable one. However, sometimes it actually is different in the sense that all long-term trends eventually end. Sometimes, what initially looks like another in a long line of price moves that run counter to an old secular trend turns out to be the start of a new secular trend in the opposite direction. We continue to believe that the current upward move in interest rates is different, in that it is part of a new secular advance as opposed to a reaction within an on-going secular decline. Here are two of the reasons:

The first and lesser important of the reasons is the price action, one aspect of which is the performance of the US 10-year T-Note yield. With reference to the following chart, note that:

a) The 2016 low for the 10-year yield was almost the same as the 2012 low, creating what appears to be a long-term double bottom or base.

b) The 10-year yield has broken above the top of a well-defined 30-year channel.

c) By moving decisively above 3.0% last week the 10-year yield did something it had not done since the start of its secular decline in the early-1980s: make a higher-high on a long-term basis.

Continue reading Why It’s Different This Time

S&P 500 Dividend Yield Is Now Less Than 3-mo Treasury Bill Yield

By Anthony B. Sanders

Last Time Was Before Lehman Bros, Bear Stearns, Fannie Mae and Freddie Mac Collapsed

The last time that the S&P 500 dividend yield was below the 3-month Treasury bill yield was back in February 2008, before both Lehman Bros and Bear Stearns collapsed.  And before Fannie Mae and Freddie Mac were placed into conservatorship on September 6, 2008.

But yes, for the last several trading days the S&P 500 dividend yield has been BELOW the 3-month Treasury bill yield once again.

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Oddly, Fannie Mae and Freddie Mac are STILL in conservatorship with their regulator, FHFA while Lehman Brothers and Bear Stearns are but a grim reminder of the financial crisis.

On a side note, the actor to the left of Ryan Gosling in the film “The Big Short” is a former student of mine.

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My Ridiculously Specific Expectation for 10-year Interest Rates

By Michael Ashton

I try to stay away from making predictions. I don’t see the upside. If I am right, then yay! But after the fact, predictions often look obvious (hindsight bias) and it is hard to get much credit for them. By the same token, if I am wrong then the ex post facto viewer shakes his head sadly at my obtuseness. Sure, I can make a prediction with a very high likelihood of being true – I predict that the team name of the 2019 Super Bowl winner will end in ‘s’ – but there’s no point in that. This is one of the reasons I think analysts should in general shy away from making correct predictions and instead focus on asking the correct questions.

But on occasion, I feel chippy and want to make predictions. So now I am going to make a ridiculously specific prediction. This prediction is certain to be incorrect; therefore, I just want to observe that it would be churlish of you to criticize me for its inaccuracy either before or after the fact.

Ten-year Treasury rates will break through 3% for good on May 10, and proceed over the next six weeks to 3.53%. As of this Thursday, year/year core CPI inflation is going to be 2.2% or 2.3%, and median CPI over 2.5% and nearing 9-year highs. At that level of current inflation, 3% nominal yields simply make no sense, especially with the economy – for now – growing above trend. Two percent growth with 2.5% inflation is 4.5%, isn’t it? There is also no reason for 10-year real yields to be below 1%, so when we get to that 3.53% target it will be 1.08% real and 2.45% expected inflation (breakevens).

Continue reading My Ridiculously Specific Expectation for 10-year Interest Rates

Wealth-Destroying Zombies, Report 6 May 2018

By Keith Weiner

The hot topic in monetary economics today (hah, if it’s not an oxymoron to say these terms together!) is whither interest rates. The Fed in its recent statement said the risk is balanced (the debunked notion of a tradeoff between unemployment and rising consumer prices should have been tossed on the ash heap of history in the 1970’s). The gold community certainly expects rapidly rising prices, and hence gold to go up, of course.

Will interest rates rise? We don’t think it’s so obvious. Before we discuss this, we want to make a few observations. Rates have been falling for well over three decades. During that time, there have been many corrections (i.e. countertrend moves, where rates rose a bit before falling even further). Each of those corrections was viewed by many at the time as a trend change.

They had good reason to think so (if the mainstream theory can be called good reasoning). Armed with the Quantity Theory of Money, they thought that rising quantity of dollars causes rising prices. And as all know, rising prices cause rising inflation expectations. And if people expect inflation to rise, they will demand higher interest rates to compensate them for it.

The quantity of dollars certainly rose during all those years (with some little dips along the way). Yet the rate of increase of prices slowed. Nowadays, the Fed is struggling to get a 2% increase and that’s with all the “help” they get from tax and regulatory policies, which drive up costs to consumers but has nothing to do with monetary policy. Nevertheless interest rates fell. And fell and fell.

Continue reading Wealth-Destroying Zombies, Report 6 May 2018