I mentioned on Monday my hope that the SVB/SBNY hearings this week would point the finger too at the monetary policy of the Federal Reserve, not just over the past few years but for the last few decades, particularly in the 2000’s and at least in front of the Senate yesterday, that was not the case. We’ll see today with the House. Today’s opinion piece of the WSJ agreed with me.
It wrote, “One certainty in politics is that the Federal Reserve will never accept responsibility for any financial problem. Fed Vice Chair for Supervision Michael Barr played that self-exoneration game on Tuesday before the Senate as he blamed bankers and Congress for Silicon Valley Bank’s failure. This act is simply unbelievable. No one disputes that bankers failed to hedge the risk posed by rising interest rates to asset prices and deposits. What Mr. Barr didn’t say is that the Fed’s historic monetary mistake created the incentives for the bank blunders. The Fed fueled the fantastic deposit growth at SVB and other banks with its prolonged quantitative easing and zero interest rate policy that caused banks to pile into longer-term, higher yielding assets.”
I’m not meaning to point this out just to rant again on the Fed but to importantly have a full conversation of what went wrong and not let another crisis go to waste in terms of never learning lessons. Unfortunately, monetary policy lessons, and the boom bust cycles it creates, are at risk AGAIN of not being absorbed.
Important too for monetary policy from here will be the direction of rents because of their outsized impact on the inflation stats, as we know, and the lagged nature of the government’s calculations. Yesterday the April Apartment List National Rent Report came out, measuring rental price changes for new leases, not including ones that are rolling over. The March increase was .5% from February, “the second straight monthly increase and and slight acceleration over last month’s pace. This month’s increase is of a similar magnitude to the typical March price change that we saw in the pre-pandemic years.” The y/o/y increase has slowed to just 2.6% and that compares with the 2018 and 2019 pace of 2.8% and “is likely to decline even further in the months ahead” thinks Apartment List. Keep in mind that the BLS is still saying rents are rising by 8-9%. Boston saw the biggest rental gain of the 100 largest cities and the college town that it is certainly helps, which I am currently contributing to.
Their measure of the vacancy rate is at 6.6% “which now puts it back in line with the average pre-pandemic rate.” And, we have a “record number of multi family apartment units currently under construction” and could result in “property owners competing for renters, rather than the other way around.” I’ll add, once this construction is done though, we’ll go back to a dearth of new projects because I hear almost every week of another new construction deal getting shelved because the numbers no longer pencil out and if they are getting off the ground, a lot more equity is needed.
We saw with the other highly interest rate sensitive part of the economy, that being autos, a Cox Automotive forecast yesterday for Q1 sales. They expect the Q1 SAAR to total 15mm units vs 14.1mm in Q1 2022 and helped by higher inventory levels “despite elevated prices and high auto loan rates.” They see inventory levels up 70% y/o/y which also is helping fleet sales which they forecast to be up between 50-60% y/o/y.
Their bottom line, “The stronger start to 2023 has led us to make positive revisions to our vehicle sales forecasts, but we continue to believe supply constraints and affordability issues will put a ceiling on what’s possible in the year ahead. With the job market still strong, the largest demand problem for automotive in 2023 will be rising interest rates that push many would-be buyers out of the market.” They don’t see the Q1 strength to last as Q1 sales volume will be down 3% from Q4 2022, “suggesting that market headwinds are growing.”
Here were some notable quotes from the earnings calls from LULU and MU:
LULU
“I am pleased that as we progressed out of the holidays and began to transition to new spring merchandise, regular price sales return to our normal levels…And as you can see from our guidance, business remains good in quarter one and we are looking forward to another strong year in 2023. Our business continues to be well balance across product category, channel and region.” Helping too seems to be their gain in market share in the ‘adult active apparel industry.’
On inventory, “We do have a higher proportion of our inventory in quarter, 45% vs 40% historically (in terms of growth)…And I would say, at the end of Q1, we’re going to see inventory moderate to 30% to 35% growth, and we expect it to come in line towards the 2nd of the year.”
On pricing, “We’re not planning any drastic significant moves in pricing and continue to focus on full price with markdowns as a means to exiting seasonal products only.”
MU
“we’re not comfortable with where our inventory levels are…we do have elevated inventory levels. We expect pre write down, the DIOs have peaked in the 2nd quarter, and we would expect over time for the supply/demand balance to improve on customer inventories and volumes increasing sequentially and eventually working inventory levels down. But it’s going to take some time.”
With a slight dip in the average 30 yr mortgage rate to 6.45% vs 6.79% 3 weeks ago, mortgage apps rose for a 4th week. Purchases were up 2% w/o/w, though still down 35% y/o/y. Refi’s grew by 4.8% (assume mostly cash outs) w/o/w but lower by 61% y/o/y. Week to week it seems that mortgage apps are following in kind with mortgage rates.
Reflecting the global slowdown in trade, Vietnam said its March exports fell 14.8% y/o/y, well worse than the forecast of down 6.5%. Economic stats out of Vietnam, Taiwan and South Korea are just as important as from China will trying to glean the state of manufacturing and trade.
Shifting to Europe, German consumer confidence rose 1 pt while confidence in France fell 1 pt and pretty much as expected for both. With respect to Germany specifically, GFK said “Income expectations are currently benefiting from the recent noticeable drop in energy pries, especially for gas and heating oil. Nevertheless, inflation will remain high this year, even if it will be somewhat lower than the 6.9% measured in 2022 according to the forecasts available so far. The expected loss of purchasing power is preventing a sustained recovery in domestic demand. Accordingly, private consumption is unlikely to make a positive contribution to economic growth in Germany this year. This is also signaled by the still very low level of consumer sentiment.”