Wednesday was a wild trading session where we saw the largest intraday selloff in the E-mini S&P 500 futures that we have seen in some time. Intraday price action was driven largely by statements made by Chairman Bernanke and the release of the Federal Reserve Meeting Minutes, which saw some monster intraday moves and a large spike in the Volatility Index (VIX).
While the world is focused on when the Federal Reserve is going to taper their Quantitative Easing program and the impact those actions will have on financial markets, I wanted to look at another divergence in the economic data which is supported by market action.
Instead of trying to determine how or when the Federal Reserve will taper or end their monetary experiment, I wanted to juxtapose statements that were made today with the actual facts. Readers can draw their own conclusions.
Recently, we have been told that the housing market is in the early stages of recovery. Unfortunately due to low interest rates housing has turned back into a speculative market. Consequently, a lot of so-called fast money is flowing into housing, which in many cases is either being purchased for rentals or by foreign investors as a speculative investment.
At present the housing market is not being driven by capital formation at the household level and data indicates that construction jobs are under pressure and affordability is reversing. The chart below illustrates what has recently transpired in the 10-year Treasury yield:
As can be seen above, the 10-year Treasury yield has risen considerably since the beginning of the month of May. Normally when interest rates are rising and Federal Reserve policy is indicating that a form of tightening seems likely we typically see a rush of mortgage applications and home starts as borrowers try to lock in lower interest rates. Furthermore, the spring and early summer months are generally considered a very favorable time to sell existing homes in the United States.