Really the only question with the FOMC today is will Jay Powell talk about a slowdown in December from the four meeting pace of 75 bps rate increases. He should, as other central banks like the RBA and BoC are now doing, but because there are still two more CPI and payroll reports before that December meeting he certainly doesn’t have to commit just yet. Also, maybe he’ll get a question on what he thinks the needed level of bank reserves will be at the end of the day in order to avoid a repeat of 2019 and in the context of the bank regulatory world we’re in that dictates what the banks can and can’t do with their balance sheet. Bank reserves are already down about $1.2 Trillion from last December when the Fed was finally tapering QE.
Bank Reserves held at the Fed
You’ve heard me talk many times about my concerns with the leveraged loan world and the floating rate debt held that is now a major pain point for those companies that either didn’t hedge or don’t have the cash flows to service it. CNBC’s Leslie Picker reported on this important story yesterday with regards to a Kroll Bond Rating Agency report on private credit. KBRA stress tested the private credit space (totaling $1.2 Trillion) and at a terminal fed funds rate of 5.25%, 60% of companies would see an increase in interest expense (thus 40% likely are hedged) and 16% of companies wouldn’t generate enough needed cash flow to service its debt and that doesn’t include a recession.
Auto sales in October totaled 14.9mm which was above the estimate of 14.5mm, up from 13.5mm in September and vs 12.99mm in October 2021. Wards said “October’s surge was sparked by greater availability, moderation to price increases and delayed shipments from Q3. Boding well for the rest of the fourth quarter is that inventory will continue rising through November, which, if coupled with restraint on pricing, creates upside to deliveries. Challenges to the rest of the year include potentially tougher economy-related headwinds, as well as less impact from the temporary lifts that helped October.” As I said yesterday, the auto sector was one of the few industrial sectors that had a decent Q3. Affordability, just as it is in housing, for both new and used cars, is the big picture challenge as supply continues to improve which in turn can hopefully help the affordability on the price side as there will be no relief on the interest rate side.
The October Logistics Managers Index fell to 57.5 from 61.4 in September, is the 2nd month in the past 3 below 60 and is the weakest since May 2020, though still above the breakeven of 50. LMI said “In a continuation of what we have seen for the last six months, the engine of this growth are the warehousing and inventory metrics. While we do see some evidence that firms are finally winding down their inventories, the costs associated with holding them remains high, and we continue to see a lack of available warehousing capacity…Similar to what we noted last month, inventory seems to be sitting idly clogging warehouses where retailers hope for a busy Q4. The flipside of that is that the normal peak season for carriers has not materialized, as there has been less to move than we would usually see during this time of year.” We know many companies that see a major sales bump around the December holidays stocked their shelves earlier this year than usual so as not to get caught short with a lack of inventory like they did last year.
Speaking of transportation, Maersk reported earnings today and they are a clear bellwether for the global shipping of goods. In its press release they said “it is clear that freight rates have peaked and started to normalize during the quarter, driven by both decreasing demand and easing of supply chain congestion…With the war in Ukraine, an energy crisis in Europe, high inflation, and a looming global recession there are plenty of dark clouds on the horizon. This weighs on consumer purchasing power which in turn impacts global transportation and logistics demand.” Here is a fresh chart of the World Container Index Shanghai to LA cost of shipping a 40 ft container. It is almost back to the $1600ish level seen before Covid.
WCI Shanghai to LA
Here is intraday chart on Wheat after Russia said they will allow the resumption of grain shipments.
While the average 30 yr mortgage rate backed off by 10 bps, it still is above 7% at 7.06% according to the MBA today. Mortgage applications after the run of weakness was little changed for the week ended October 28th. Purchases fell .8% w/o/w but are still down 41% y/o/y. Refi’s were up by .2% w/o/w and lower by 85% y/o/y. As we are clear on what’s going on in housing, except for how far home prices fall, no need to add anything here.
Unemployment in Germany in October rose by 8k people but that wasn’t as bad as the 12.5k estimate. The unemployment rate held at 5.5%. Because of the uniqueness of the Germany labor market in that they have emergency schemes to keep people employed via subsidies, “the consequences of economic uncertainty show that more companies than before are preparing for short time work and reducing their demand for new staff” according to the Federal Labor Agency chief. The euro is a bit higher while bond yields are slightly up too with the DAX down a touch.