Great news from Pfizer that a booster will work in adding solid protection against Omicron and stocks are celebrating but I want to emphasize that what the Fed does from here should be the market’s predominant focus. At least with QE, the Fed is ending a $1.44 Trillion annualized asset purchase program possibly within the next 3 months. That is a lot of liquidity flow that is going to zero, quickly. With the possibility of rate hikes thereafter, the 2 yr note yield is now up 11 bps this week and 20 bps over the past 3 weeks. This said, I do like all the travel and leisure stocks.
Ahead of Friday’s CPI report, I’m late in mentioning the Apartment List National Report for December which came out last week. The rent increase was just .1% m/o/m in November which is the slowest rate of change m/o/m this year. However, the year to date gain is now 17.8%. For reference, in the October CPI report from the BLS, Owners’ Equivalent Rent was up 3.1%. I do expect the BLS figure to play a lot of catch up in the coming quarters but it will never get to what Apartment List said. Apartment List said “rent growth from January to November averaged just 2.6% in the pre pandemic years from 2017-2019.”
Here you can visualize the pre pandemic trend versus what actually happened with rents:
The massive inflation we’ve seen in housing over the past year and a half is mostly due to the demand side incentives from the Fed with historically low interest rates. There is no way home prices would be up 20% y/o/y if mortgage rates had a 4 handle instead of a 3 I’d argue. I do though don’t want to minimize the large supply side challenges for new homes but most of the market is for existing ones. Some should stop blaming only the supply side and Covid for all of our inflation challenges.
Also on the inflation debate, the front page of today’s WSJ has an article titled “Companies Plan Big Raises for Workers in 2022.” They are highlighting a Conference Board survey “that companies are setting aside an average 3.9% of total payroll for wage increases next year, the most since 2008. The survey also shows that companies are planning on raising salary ranges, which would result in higher minimum, median and maximum salaries. That suggests pay raises could be broad based and affect workers across a company’s pay scale.” The chief economist of the Conference Board said “The impacts of wages on inflation and of inflation on wages are now stronger than they have been in recent decades.” The only thing keeping companies from trying to recapture this lost profit margin via higher prices and/or lower costs elsewhere is faster productivity and at least for Q3 we saw yesterday, the labor shortages are slowing productivity and raising unit labor costs. The rate of change will likely peak in February on inflation but I still believe that the pace will slow to only about 3-4% in 2022 rather than go back to the pre Covid trend of 1-2%.
With respect to transportation costs, yesterday the Logistics Managers’ Index for November was released. This was their bottom line for volumes, costs and capacity:”Growth is increasing at a decreasing rate for: Inventory levels, and warehousing utilization.””Growth is increasing at an increasing rate for: Inventory costs, warehousing prices, transportation utilization, and transportation prices.””Warehousing capacity and transportation capacity are contracting.”
Adding this all up for prices we have “the highest Aggregate Logistics Price level in the history of the index.” These costs include inventory costs, warehousing prices and transportation prices.” This price index at 271.1 was i[ 880 bps in October and for perspective, the historical average is 192.2.
With mortgage rates little changed w/o/w, the MBA said purchases fell 5% after rising by a like amount last week. Versus last year they are down 8.1%. Refi’s rebounded 9% w/o/w after falling by 15% last week. They remain down 37% y/o/y on tough comps.