One of my friends on Wall Street wrote my yesterday claiming “The 10-year Treasury yield is set to crash. Brace for impact!” Then I logged into Bloomberg this AM and saw the 10-year Treasury yield up almost 10 basis points (although it is down -2 BPS at 10:20am). Did markets not read his comments?? Maybe they did!
Well, The Fed is doing the Tighten Up. That is, The Fed is FINALLY removing their excessive monetary stimulus left over from the Bernanke Blowout (2008 adopting Japan’s print ’till you drop model).
But as The Fed removes their monetary stimulus (rate increases), we are seeing negative effects in the housing market. I call this chart “The X Factor.”
The US Treasury 10-year yield is up to 4.3% this morning, a far cry from 1.804% when Biden was crowned as President on January 20, 2021. The 30-year mortgage rate is up from 3.67% on Coronation Day to 7.32% yesterday, an increase of … 100% (that is, the 30-year mortgage rate has doubled under Biden). At the same time, Existing Home Sales YoY have gone from -2.41% in January 2021 to -23.79% in September 2022. THAT is a HUGE decline!
University of Michigan’s consumer sentiment for housing for 77 in January 2021 to 39 in November 2022. That is a -49% decline in consumer confidence. Also a big decline.
But going back to my pal’s email, he also said that The Fed is unwinding its balance sheet at a dangerously rapid rate (orange line). Relative to just increasing it, I would agree with him. But The Fed’s balance sheet is barely declining to my eyes. The troubling thing for housing is that inflation is so hot that REAL average hourly earnings YoY (yellow line) has fallen from +0.24% growth YoY on January 25, 2021 to a horrific -2.80% YoY rate in September 2022.
While I will not reveal my friend’s name (who works at a famous hedge fund), I will recommend Bill Carson, my former colleague at Deutsche Bank. While we might agree on everything, his site is worthy of a good read.
Bill’s point to me is that lending is still hot (at least commercial and industrial lending or C&I) while The Fed’s balance sheet remains in force (green line).
The Fed has a lot more work to do if they want to cool the commercial lending market. They have successfully slowed down the residential mortgage market.