Good for employees, not good for profit margins/Other stuff

On the debate over wage growth, in case you didn’t see the news this week, a few days ago Delta’s pilots secured a 34% pay increase over a 4 yr time frame. There will be an 18% immediate pay raise retroactive to the beginning of the year which will be followed by a 5% increase next year and then 4% raises in the two years after. In the last deal struck in December 2016 totaled 30% over a 4 yr period. Delta has about 15,000 pilots and for any other airline labor deal coming due soon, American does, this will of course set the bar. Good for employees, not good for corporate profit margins. 

I forgot to mention the results of February vehicle sales on Wednesday as they totaled 14.89mm at a SAAR. That was above the estimate of 14.68mm and compares with 14.07mm in February 2022 but down from 15.74mm in January and vs 16.83mm in February 2020. 

I cannot emphasize enough that while used car prices have cooled a bunch after the historic rise, the supply of new cars over the past 3 years has been so muted that used car prices are going to stay very elevated for a few more years to come. In the 3 years leading into covid, the SAAR averaged 16mm new vehicles (both retail and fleet). In the 3 years since, the average has been 14.3mm. So, we’re talking about 5mm less cars sold than otherwise. And now we have record high new car prices at the same time the affordability challenge is only growing with stress now being seen at the subprime level. This said on new cars, if inventory levels continue to improve, more cars won’t be selling above MSRP but we also know car companies aren’t intent on going back to pre covid levels of days of inventory. 

This is a stagflationary set up as it is in housing, still elevated pricing that slows the number of purchases. With housing, little inventory of existing homes could result in only modest declines in pricing in many markets that are not dealing with excessive new builds. This leads to a sharp drop in the pace of transactions with little movement on price. Now some markets where new construction has been more vibrant, the price adjustment will be more pronounced but only in those markets. 

Quietly yesterday the 5 yr TIPS inflation breakeven rose another 6 bps to 2.73%, the highest since last August. The 2 yr breakeven rose to the most since last June at 3.31%. I’ll repeat my belief again that after the downside of the inflation spike settles out, the sustainable 1-2% inflation dream won’t be realized for a while and the reality of 3-4% will be most likely. Sticky inflation is ALWAYS evident with services but now will be more so with goods. 

China’s reopening helped to lift the February Caixin services PMI which rose to 55 from 52.9. Caixin said “Companies frequently mentioned that the easing of pandemic related restrictions, and reduced disruption to operations, had helped to lift activity and demand in the latest survey period.” 

Just imagine how brutal of a period it was to run a local restaurant for example where at any point over the past 3 years you had to shut down for a month here, a month there and not have any warning too beforehand. Caixin also said, “The improvement in market conditions and rising new order intakes prompted firms to take on additional workers for the first time in four months.” 

Hong Kong’s PMI was up 2.7 pts m/o/m to 53.9, the highest since May 2022. Singapore’s though dipped below 50 at 49.6 from 51.2. 

India’s services services PMI was up to 59.4 from 57.2. India remains the most exciting EM story out there I still believe and we own Indian stocks. 

With respect to the global bond markets, it very well could be the the CPI figures out of Japan is now more important than that seen in the US and Europe because we already know what the Fed and ECB are going to do but much less so with the BoJ and its new governor. The February Tokyo CPI figure rose 3.4% y/o/y headline, down from 4.4% in the month before but helped by energy subsidies. So the BoJ wants higher prices but when they come the government hands out subsidies to offset it, nonsensical. Prices rose 3.2% ex food and energy. That core/core number was up from 3% in January and one tenth more than expected. 

The Japanese labor market remains tight too as their unemployment rate fell to 2.4% from 2.5% and the jobs to applicant ratio at 1.35 is just off the highest since covid started. This number though was 1.60 in early 2019. 

While the 10 yr JGB remains stuck at .50% (but is a damn that wants to break again and it will) and the 9 yr yield was little changed, the 40 yr yield rose 2.7 bps and the yen is stronger vs the dollar. The 10 yr inflation breakeven was up 2.4 bps to .72%, the highest since late January. The Nikkei rallied by 1.6% and is now up 7% year to date. We remain owners and bullish of Japanese stocks, particularly their banks. 

Shifting to Europe, the Eurozone February services PMI was revised slightly lower to 52.7 from 53 initially but that is up from 50.8 in January and the best since last June. The UK services PMI was revised a touch higher to 53.5 from 53.3 initially and up notably from the 48.7 print in January and also the highest since last June. Both the euro and pound are rallying while yields are falling after the recent run up. We know Europe caught a HUGE break this winter with the mild weather and sharp drop in energy prices off their peak. 

Helping the euro was more tough ECB talk where the Belgium central bank head in particular, Pierre Wunsch, said they can’t rule out eventually taking rates to 4% to deal with inflation.