Peter Boockvar

Yeah, rates matter. While he said this last month, and while I almost always disagree with him (except this time), the stock market is finally again heeding the message. Neel Kashkari said last month when the fed funds market was pricing in cuts in the back half of 2023 and to a reporter’s point that the markets were playing chicken with the Fed he said, “I’ve spent enough time around Wall Street to know that they are culturally, institutionally, optimistic. They are going to lose the game of chicken, I can tell you that.” I guess 16 yr highs in short term rates (2 yr touched it yesterday, 1 yr did last week) and a near 4% 10 yr is where the chicken line is now drawn. 

As for the minutes this afternoon, because we usually hear from so many Fed members in between the meeting and the release, it doesn’t really reveal much new. That said, they are not genuine minutes and have been laundered and used to send new messages if wanted. I don’t expect any though as they’ll hike another 25 bps at the next meeting, they’ll talk about inflation pressures moderating, but not wanting to waiver in their inflation battle. 

By the way on inflation, the 1 yr inflation breakeven closed yesterday at the highest level since August 2022 at 3.14%. After falling from the peak a year ago of around 6%, it’s doubled since last month’s low of 1.63%. The 5 yr breakeven closed at the highest since November at 2.63%.

5 yr Inflation Breakeven

Here are some notable quotes from Walmart and Home Depot’s earnings calls:

Walmart:

Their sales gains were pretty much all grocery. Sales growth “was led by strength in food sales, which increased high-teens, partially offset by mid single digit decline in general merchandise sales with softness in toys, electronics, home and apparel.” On grocery, “We continue to see strong share gains in grocery with nearly half coming from higher-income households and private brand penetration…as customers prioritize value.” 

“We’re gaining share across income cohorts, including at the higher end, which made up nearly half of the gains we saw in the US again this quarter.”

How else did Doug McMillon describe the consumer, “They’re making choices. We expect that to continue through the year.” 

“We ended the quarter with inventory about flat to last year, which is better than we anticipated and even better when you consider how inflation lifts that number, and they did it while improving in-stock levels.”

 “We will continue to invest in our associates through increased pay and benefits to reinforce the ladder of opportunities at Walmart.” 

Home Depot:

“The third quarter noted some deceleration in certain products and categories which is more pronounced in the fourth quarter.” 

“We are closely monitoring our elasticities and trends across the business and believe we have the tools, team and experience to manage in any environment.”

“Most important investment we can make is in our people, which is why we are announcing that we are increasing annualized compensation by approximately $1 billion for our frontline, hourly associates.” 

With respect to the rise in average ticket and decline in transactions, “The growth in our comp average ticket was driven primarily by inflation across our product categories, as well as demand for new and innovative products.” They did get hit though by lower lumber prices. 

“As we set targets for 2023…We’ve assumed, like many economists, that we will see flat real economic growth and consumer spending in 2023. Second, over the last 7 quarters, we have seen our transactions gradually normalized as consumer spending has shifted from goods to services. We believe that if this shift continues at its current pace, the home improvement market would be down low single digits.”

“We also still see a healthy customer. I mean we have good jobs, job growth, growing wages, still strong balance sheets. And most of our customers tend to own their home, which has seen a significant increase in value. But as we’ve said, we do see a unique environment with many cross currents right now. Obviously, there’s heightened inflation and rising interest rates, a tight labor market and moderating equity and housing markets. So given all that, we do expect moderation in home improvement demand.” 

I’ll add Toll Brothers here whose CEO said in their earnings release, “Since the start of the calendar year, we have seen a marked increase in demand beyond normal seasonality as buyer confidence appears to be improving. We believe the recent pick-up in demand is a sign that the long term fundamentals underpinning the housing market remain intact.”

I’d push back and say to him that buyers just took advantage of the drop in mortgage rates after the steady rise last year. And in fact today the MBA said purchase applications fell 18% just on the week (ended Feb 17th) as the average 30 yr mortgage rate is back at the highest level since mid November at 6.62%. Purchases are lower by 42% y/o/y. Refi’s fell 2.2% after last week’s 12.5% drop and are lower by 72% y/o/y.

Shifting overseas, the Reserve Bank of New Zealand hiked rates by 50 bps as expected to 4.75%. That pace is down from 75 and they will likely go to 25 bps at their next meeting. 

The February German IFO business confidence index rose 1 pt m/o/m to 91.1 which was about as expected. The Current Assessment was down slightly but offset by a 2.1 pt rise in Expectations. The IFO said simply, “The German economy is gradually working its way out of a period of weakness.” Lower energy prices and the China reopening give hope.

French business confidence was up 1 pt in February. The estimate was for no change. Manufacturing, services and retail each rose 1 pt while employment was down 1 pt and not surprisingly with the rise in interest rates, building construction confidence declined by 2 pts. 

In response to the European data, the euro is flat and yields are down slightly after the jump seen over the past week. Stocks are following the US weakness but their performance has been double the S&P 500 year to date.