Peter Boockvar

Yesterday was actually the most confusing day of the two Powell stage events with respect to the markets interpretations of what he said. Last Wednesday both stocks and bonds were on board honing in on the dovish commentary and ignoring the talk of more hikes, obviously disrupted by Friday’s payroll report. If you closed your eyes and ears right before he spoke yesterday and opened up again at 4pm, the action in Treasury yields would imply he was hawkish. If you looked at the stock market, you’d obviously think he was the opposite. 

Powell has complicated also the definition of ‘financial conditions’ as it’s not clear what it means anymore. In Q4 2018 it was direction of credit spreads and the S&P 500 that he responded to in the famous pivot. Now, I’m not so sure as his second chance of tying the recent easing of the markets just as he’s further raising rates and doing QT wasn’t really touched upon. Instead again he talked about the tightening of conditions which is not clear to what he’s citing considering many parts of the market are partying like it’s 2021.

To the wage debate, it again seems that those employees that need to be on the job in person continue to have all the leverage. I mentioned Monday the Disney World employees that are being offered almost a 10% raise but want 20% instead. Yesterday Delta said they are raising base pay with some additional merit based compensation by a total of 5% for non union ground and flight attendant workers. 

The January Logistics Managers Index rose 3 pts from December to 57.6 and is the 2nd month in a row of m/o/m gains. LMI is calling this a trend after a string of 7 out of 8 months of declines. They said “Unlike September, supply chains are not so flush with inventory that they are merely shifting goods around. Inventories are much lower now than they were in Q3 of last year, and it seems the supply chains are coming back to life with the goal of replenishment.” Warehouse capacity continues to drop partly due to an increase in inventory levels relative to a year ago. Also, “Transportation prices have continued to decline, but at a slower rate than over the last few months. There is still excess transportation capacity in the market, but respondent future predictions and anecdotal evidence from carriers suggest that increased demand may begin soaking up some of this excess soon.” 

Just as a big lift in inventories helped the Q4 GDP print, it will reverse in Q1 with the end result a likely negative print.

With the drop in mortgage rates, the January Fannie Mae Home Purchase Sentiment Index did rise for a 3rd month but only 17% of those surveyed think it’s a good time to buy a home, down from 21% in December. The chief economist Doug Duncan said “For consumers, the same affordability issues are persisting, as they continue to indicate that high home prices and high mortgage rates make it a ‘bad time to buy’ a home. The latest survey data also indicated that the majority of consumers expect home prices to decrease or remain flat over the next year, which may incentivize some potential homebuyers to delay their purchase decision.” 

Higher for longer rates means that the only way to improve affordability is to see a more notable decline in prices. Until then, the pace of housing transactions will remain muted and all the ancillary activities that surround a home closing will be happening much less as a result. And gets to my point again that the end of rate hikes doesn’t end the tightening. 

As the average 30 yr mortgage rate for the week ended February 3rd was at 6.18%, the lowest since mid September, it helped to lift mortgage apps. We know though that mortgage rates have ticked up since. Purchases rose 3.1% w/o/w, though still down 37% y/o/y. Refi’s were higher by almost 18% w/o/w but still down 75% y/o/y. 

After a pretty decent decline recently, wholesale used car prices (those that dealers buy in the market) rose 2.5% m/o/m seasonally adjusted and by 1.5% non SA. They are still down y/o/y by 11-12.8% depending on that adjustment but Manheim did say “In January, Manheim Market Report values saw price increases that were not typical, culminating in a 1.2% total increase in the Three Year Old Index over the last four weeks.” 

While there was no question that used car prices were going to come down in price after the tremendous multi year price increases, we have to understand that three years now of below normal NEW car sales results in a much more limited supply of used cars. There is just no way that used car prices are going to trend like they did pre Covid for a while. 

Here are some notable comments from the Chipotle call last night:

“we’ve seen transaction trends turn positive as we remain focused on delivering a great customer experience.” 

“While it’s difficult to forecast comps for the rest of the year, considering economic uncertainty including the possibility of recession we expect comps to moderate as we let menu price increases in early Q2 and the middle of Q3.”

“I’m also happy to see an improvement in turnover with December being one of our best months in the past two years both hourly and salary turnover rates. And our staffing levels continued to improve with 90% of our restaurants fully staffed.” 

“The benefit of menu price increases and lower avocado prices, offset elevated costs across the board, most notably and dairy, tortillas, beans, rice and salsa.”

“Labor costs for the quarter were 25.6%, a decrease of about 80 bps from last year. The benefit of sales leverage was somewhat offset by wage inflation, in addition to higher than expected sick pay and medical claims. For Q1, we expect our labor costs to improve slightly, but remain in the mid 25% range due to seasonally higher employee taxes, as employee taxes start the year in a elevated level due to resetting of wage caps.”