Peter Boockvar

With the stock market shrugging off the deteriorating earnings picture, it’s quite apparent that the only thing it’s focused on is the end of Fed hikes. Yeah, the Fed has a few more to go, but it’s clear that there is an assumption that we’re close to the end. Thus, Jay Powell day, as it is at each FOMC press conference and speech, will again be a binary event as markets will look for any hint of weakening hiking knees which they’ll celebrate but which Powell has to balance against the reality that while he’s already slowed the cadence of rate hikes to 25 bps, has talked about disinflation, he doesn’t want markets to have another party (although he can no longer properly define what ‘financial conditions’ mean) and he wants to keep his foot on the neck of inflation with tight money for a while. 

The Reserve Bank of Australia raised rates by 25 bps today to 3.6% as expected but Governor Philip Lowe revealed some weakening knees. Rather than firmly committing to more hikes, he played the ‘data dependent’ card in what to do next. “In assessing when and how much further interest rates need to increase, the Board will be paying close attention to developments in the global economy, trends in household spending and the outlook for inflation and the labor market.” Thus, there is no lock that April will see another hike and Lowe also said, “The monthly CPI indicator suggests that inflation has peaked. Recent data suggest a lower risk of a cycle in which prices and wages chase one another.” In response, the Aussie$ is selling off and the Aussie 2 yr yield fell 13 bps overnight. 

The Bank of Canada meets tomorrow and we know they signaled in January’s rate hike decision that a pause was coming. Canada and Australia have a lot of adjustable rate home mortgages and after inflating a housing bubble with zero rates, their central bankers are now feeling the heat of the other side. 

Make sure to watch KeyCorp and the banks today as they lowered their net interest income margin as they and all banks have to start paying higher savings/checking rates in order to stem the loss of deposits. This at the same time that higher allowances for credit losses is ahead. 

With respect to real estate, Starwood Property Trust’s (a stock we own and like) conference call last week gave some interesting commentary from its CEO Barry Sternlicht in an answer to the question about the CRE environment. He said the rising cap rates is creating some freeze on transaction activity as “there’s a lot of stuff that isn’t being sold because people expect, if they don’t have to sell, they won’t sell. It’s a little like, though it’s not the GFC, it mirrors that, in the sense that there is a big spread between buyers and sellers and everybody doesn’t want to have to sell today isn’t going to sell and if there is a sale, it’s pretty much a distress sale.” 

And the cost of loans are expensive and here is his jab at the Fed, again. “Loans are almost 10%. Today, probably SOFR plus 400 to 500 to 600 depends on what the building is. You have cash flow in a hotel, you can get a loan. Maybe it’s 400 over, which is 8.5% increasingly. But if you don’t have cash flow in totality, you’re going to see what you think your turnaround is going to be and it could be significantly wider than that. So, lenders are scarce. They’re not looking to put out capital. That makes the environment tricky. I mean big, bigger quality borrowers are able to borrow but many banks are shutting down credits of smaller players. The Fed has no idea it seems on what’s going on in the commercial real estate markets.”

Commercial real estate is going to be the perfect example of the ‘death by a thousand cuts’ economy that I believe we’re in with respect to the toll that higher for longer rates will have on those who have debt coming due this year and next and/or floating rate where it adjusts more quickly. 

China said its February exports fell 6.8% ytd (so takes into account the New Year holiday), a bit better than the forecast of down 9%. Imports though, many of which end up in exports, dropped 10.2% ytd, about double the estimate. Lower commodity prices however was an influence on lower imports. Bottom line, stating the obvious, because China is still the manufacturing powerhouse of the world, less exports implies slower global demand. We can see that too for sure in the plunge in shipping rates. 

Taiwan said February exports fell 17% y/o/y, worse than the estimate of down 12.5%. Semi’s led the way with a 17.3% drop in shipments y/o/y. We know outside of autos, the demand for them has faltered. Exports to China/Hong Kong fell 30% as Chinese consumers right now on their reopening are spending more on experiences rather than stuff. 

After a notable jump in December, base pay in January in Japan slowed to .8% y/o/y and that was below expectations. Just as we thought Japanese workers were on the cusp of sharper wage gains (Toyota just announced big wage gains), we get this. The market reaction was mixed though as the 40 yr yield rose another 3.6 bps to 1.64% but the 9 yr (because the BoJ has pinned the 10 yr) yield fell almost 2 bps to .58%. Inflation breakevens rose 1 bp to .78% which is a two month high while the yen is slightly weaker.