The Boock Report

Ahead of the scrubbed FOMC minutes today at 2pm, the WSJ is running a story today titled “Apartment Rent Growth Set to Keep Slowing This Year… Tenants maxed out on rental spending combined with new apartment supply are expected to moderate increases.” On that supply, “The biggest wave of new rental buildings in nearly four decades is expected to cut the pace of rent growth across the country.”

If you didn’t see in the days right before Christmas, Apartment List published its 2022 Rental Market Recap Report and listed its three ‘Key National Trends’, along with its regional trends but I’ll focus on the former here.

1)”Rent growth comes back to earth…2022 marked the end of a prolonged period of astronomical rent growth” they said and they expect yr end rent growth for 2022 “will likely come in below 4%; this is close to the moderate level of growth we saw in 2018 and less than 1/4 of last year’s growth.” 

2)”More options for renters.” They also talk about the rising vacancy rates due to moderating demand and rising supply.

3)”Lack of household formation drives cooling demand…On the demand side of the rental market equation, 2022 saw a major slowdown in the number of new households looking for a place to live…It appears that renters are exhibiting much more caution in striking out on their own, as higher housing costs and general inflation have eroded their budgets, and as fears of a potential 2023 recession loom large in the public’s economic sentiment.” Household formation is below its 2021 peak.

The net result of this key category of CPI, 30% headline and 40% of core, is that the Fed is running out of reason to keep on hiking rates and why I think they don’t have many left (after likely being wrong that December would be the last). This said and what the Fed will emphasize when that day comes is the ‘higher for longer’ theme that will replace ‘how high’ with respect to rates. Again, they don’t want to see a decline in inflation, have them get soft, and then watch inflation inflect higher again. Also, we know they are focused on wage growth which is running at double the pre Covid pace, although no longer accelerating.

So with today’s minutes as we search for the end of rate hikes, I’m only going to write on it if there is something really new rather than just hearing about some think this, several want that, a few believe this. Lastly on this, we also know ‘higher for longer’ will be combined with continued balance sheet shrinkage and to emphasize again, QE was meant to lift asset prices and QT does the reverse and there is possibly a lot more QT to come.

The December Logistics Managers’ Index rose 1 pt m/o/m but has still fallen in 7 out of the past 8 months. While the rise in inventories is going to be a key factor in Q4 GDP, “Like November, inventory levels are increasing at a much slower rate than was observed throughout most of 2022.” Inventory levels were much higher at retail than at the manufacturing level as the former “dealt with more limited warehousing as they pushed to get goods to consumers for holiday shopping.” Transportation Utilization fell below 50 for the first time since April 2020 and Transportation Prices fell to 36.9, “which is the sharpest rate of contraction we have measured for this metric in the over six years of the LMI.”

Back to the inflation discussion to tie in here, the drop in goods prices after the sharp rise is a key factor in the falling inflation stats too. But, after clearing out a lot of inventory going into the holidays, retailers are going to hold less inventory thereafter relative to what they had prior to the holidays. For many other reasons too, like just in case inventory management and persistent wage growth higher than usual (particularly out of Asia), the zero price trend on average for core goods prices in the 20 years leading into Covid will not be seen again for a while I believe once inflation settles out on the downside. As for the deflationary aspect of technology on goods prices, yes that has been a factor since the history of time, but all good prices have to do is rise 1-2% per year and you’ll have overall inflation at 3-4% instead of 1-2% because of the persistence of service prices. 

Mortgage apps saw a sharp drop in purchase applications of 12% w/o/w and 4.4% with refi’s but around the holidays this data is worthless info as the MBA does a poor job of seasonally adjusting. That said, we of course know the challenges in housing. 

After Germany reported a less than expected December CPI figure yesterday (helped by government energy subsidies), France did today with the m/o/m print falling by one tenth instead of rising by 4 tenths as expected. The y/o/y pace slowed to 6.7% from 7.1%. As stated with Germany, these figures are distorted by energy price caps but France is going to see a 15% rise in January and February energy bills because of price cap readjustments and then inflation will fall back down again in March. Either way, hopes for a peak in inflation has the European bond market rallying again today with yields down double digits. That in turn is helping to drop US yields. The euro though is rallying as the DXY is giving back half of yesterday’s gains and gold is back above $1850.

The December Eurozone services PMI was revised up to 49.8 from the initial print of 49.1 and vs 48.5 in November. It’s the first m/o/m gain since April 2022. “Services inflation remains stickier for now, reflecting a sharp rise in labor costs, which continued to be pushed up by continued hiring efforts.” It’s in manufacturing that is seeing the price relief right now. With respect to the outlook, “business confidence edged up to a 4 month peak but remained historically subdued” and “Demand conditions remained fragile as clients have retrenched, while business confidence remains bogged down by recession concerns, energy cost uncertainty and persistently high inflation and a tightening of financial conditions.” 

India saw a rise in its services PMI to 58.5 in December and remains a very exciting global growth story. Thailand’s PMI was up m/o/m too at 52.5.