Wednesday night the September Treasury capital flow data came out and there was another month of huge buying of US notes and bonds but again a lot of it came from the Caribbean and thru the UK banks (which means it could be anyone) while central banks were net sellers again. A net $60.4b of notes and bonds were purchased bringing the year to date amount to $614.6b. This is the most I’ve seen and compares with the around $400b that was bought in 2011 and 2012 which at the time were big numbers. As part of their attempt to defend the yen, the Japanese, the largest foreign owner of US Treasuries, were big sellers, unloading a net $35.5b and letting another $45b of bonds mature without being reinvested. China, the 2nd biggest, added $2.2b of notes and bonds but let $36b of bonds mature and also not reinvested. Buying out of the UK came to $43b after a whopping $100.4b in August. If only we knew who these buyers were but could also be money managers in Europe rather than official foreign buyers.
Bottom line, foreign governments continue to reduce their holdings of US Treasuries but private buying has more than offset this at the same time the Fed is basically selling via QT and banks are shrinking their holdings. A respite for now in the aggregate but there is a lot of supply coming at the same time tax receipts are slowing.
Here were some notable quotes from retail conference calls yesterday:
WSM: “We are proud of our third quarter results, but we are also aware that economic uncertainty is on the minds of consumers and investors alike. During the third quarter, we experienced deceleration and choppiness in our demand, and it is hard to know where the economy is going or how long the uncertainty will last.”
“As it relates to pricing, we continue to be committed to not running site wide promotions as we did before the pandemic, but we will continue to mark down and clear overstocks.”
In terms of the trend of the quarter, “it was incredibly inconsistent and choppy…and that’s both across our portfolio of brands in the quarter. We started the quarter off relatively strong, mid-single digit comps…And then we saw it really trail off after Labor Day once the Fed announced the rate hike.”
“In summary, we are conscious that the home furnishings market may contract due to macro factors.”
ROST: “We continue to expect a very promotional holiday selling season and ongoing inflationary headwinds to pressure our low to moderate income customers.” Traffic trends by the way in the quarter were negative but as seen with Home Depot and others, there was “a higher average basket.”
On the cost side, “Domestic freight we see as slightly neutral, seeing some benefit in rate, but offset by still elevated fuel prices. Ocean freight will probably be the most tangible tailwinds for us.”
M: Similar to what Target said on how their quarter ended softly, “In the middle of October, there was an unexpected slowdown in sales, which continued into November. Markets that were unseasonably warm were the most affected. Over the past week, our sales performance has improved. We are evaluating the sustainability of recent trends and the drivers that we believe will impact holiday consumption.”
“When we think about last year, the consumer was flushed with cash and there was a pull-forward of demand on well documented inventory constraints. This year, the consumer is hearing about a glut of inventory. They are under a tighter budget, feeling the impact of inflation on non-discretionary items and beginning to deplete their savings. With that in mind, we believe they are waiting until closer to holiday to make purchases, especially as there’s an extra day, which is a Saturday between Thanksgiving and Christmas. We now expect holiday shopping patters to be similar to 2019 and are taking the appropriate actions to support anticipated higher peaks around Black Friday, Cyber Week and the two weeks before Christmas.”
As the Bank of Japan continues to sit on its hands and YCC remains their commitment, CPI in October in Japan rose 3.7% y/o/y headline and 2.5% ex food and energy with both one tenth more than expected. If you take out the influence of value added tax hikes, that is a 30 yr high. The 10 yr inflation breakeven rose 3 bps in response but just to .84%. It got over 1% in June. The 10 yr JGB yield closed at just under .25% at .249%. The 40 yr yield was little changed at 1.64%. The yen is actually a bit higher.
This data point is not moving Kuroda as he spoke today and said that wages must now rise by around 3% for inflation to consistently hit their 2% target. So consumers will suffer until then with a lower standard of living I guess. He said “Raising interest rates now could delay Japan’s economic recovery. I’m not saying the BoJ cannot raise rates indefinitely. I’m saying that it’s inappropriate to raise rates now, in light of current economic and price developments.” Thankfully his term ends in April as he joins Mario Draghi and some Fed Chair’s, both current and past, in the central bank Hall of Shame that felt playing god over the cost of money and printing a lot of it was a good strategy.
Core/Core CPI in Japan y/o/y
The UK consumer stressed by double digit inflation and wage growth about half that resulted in October retail sales in fuel that rose .3% m/o/m, half the estimate of a drop of 1.5% in September (partly due to the ceremonies for QE2). they were down by 6.7% y/o/y. That’s the 7th straight month of y/o/y declines. So Liz Truss, who wanted to ease the economic burden on households and businesses by cutting taxes for the former and stopping rate hikes for the latter, that freaked everyone and she was thrown to the gutter, we have Rishi Sunak that is going to further damage economic growth by hiking taxes. “The sky was yellow and the sun was blue” the Grateful Dead once sang. The pound though continues to rally vs the dollar and is now approaching $1.20 with gilt yields higher. For perspective, the pound stood at around $1.46 the day before the 2016 Brexit vote. We still think the pound rallies further from here.