If we remember back to September 21st, the last FOMC meeting, Wednesday might end up being a non-event in that the Fed will deliver what they laid out then. That after getting another 75 bps hike, the 4th straight one to that finally achieved 4 handle, they’ll go in smaller increments thereafter with likely 50 bps more in December. In order to avoid seeming more dovish as to dilute what they are trying to do, Powell will likely say that the destination might end up being the same, regardless of the pace of hikes from here and that anything between 4-5% is possible and thus leaving open the door of more rate increases in 2023 even if smaller in size. Either way, QT is still running at the pretty robust size of $95b per month with the only question being what level of bank reserves is needed in order to not have a repeat of 2019. We’ll unfortunately only know it when we see it.
A big piece of the analysis will be rents as it dominates CPI as we know, even though less so in PCE. Over the weekend Apartment List.com released its November National Rent Report (covering leases for new tenants as opposed to extending expiring ones) and said “Our national index fell by .7% over the course of October, marking the 2nd straight m/o/m decline, and the largest single monthly dip in the history of our index, going back to 2017. These past two months have marked a rapid cooldown in the market, but the timing of that cooldown is consistent with a seasonal trend that was typical in pre-pandemic years. Going forward it is likely that rents will continue falling in the coming months as we enter the winter slow season for the rental market.”
This said, new rents are still up 5.9% y/o/y and “continues to outpace the pre-pandemic trend, even as it has slowed significantly from last year’s peaks” but that is a sharp slowdown from the 18% y/o/y increase at this point in 2021. So, 2022 will still be the 2nd quickest pace of rent gains in the Apartment List short history. While demand is cooling, more supply is helping too as “Our vacancy index now stands at 5.5%, after a full year of gradual increases from a low of 4.1% last fall.” Though that is still below the pre-pandemic trends. The breadth of rent slowdown is wide as “Rents decreased this month in 89 of the nation’s 100 largest cities in October.”
I wonder if a Fed member/staffer has this survey on their data radar screen.
A few days after the ECB hiked rates by another 75 bps to just 1.5% and already some of their members are getting weak knees in continuing that pace and that Lagarde said they have made substantial progress in taking away accommodation (even though QT hasn’t even started and rates are still barely positive), the Eurozone CPI for October just printed up 10.7% y/o/y, 4 tenths more than expected. The core rate up by 5% was as expected but up from 4.8% in September, 4.3% in August, 4% in July and 3.7% in June. Non-energy industrial goods prices accelerated as they did for services.
As the core rate was in line, the 5 yr 5 yr euro inflation swap is up only 2 bps to 2.38% but that is just slightly below the highest since May. Bond yields in Europe are higher and the euro is back below $1.00. Stocks are flattish.
Speaking of ‘weak knees’ on rates, today it was the Italian central bank head Ignazio Visco who said “The danger that the deterioration of the economic outlook will turn out to be worse than expected, making an excessively rapid step in the normalization of interest rates disproportionate, shouldn’t be underestimated.”
Complicating the ECB’s job is the desire of European workers for higher wages in order to cushion the ever rising cost of living. IG Metall, Germany’s largest union, on Friday told its members in the metal and electronics industries to strike. They want an 8% rise in wages and instead they’ve been offered only a one time bonus to cover a 30 month time frame.
The Eurozone also saw Q3 GDP rise .2% q/o/q and 2.1% y/o/y, a hair above the estimate but follows an .8% q/o/q and 4.1% y/o/y increase in Q2.
Eurozone CPI y/o/y
5 yr 5 yr Euro Inflation Swap
Highlighting the lunacy and cross purposes of fiscal and monetary policy in Japan, the 29 Trillion yen (about $200b) fiscal stimulus that the Japanese government approved on Friday is in large part to offset the higher inflation that the Bank of Japan has been trying to stoke for the last 10 years and now that they’ve become successful in doing so, won’t back down with a change in monetary policy. PM Kishida said “The economic measures are designed to overcome rising prices and to achieve an economic recovery. We will protect the people’s lives, jobs and businesses, and strengthen the economy for the future.” Kuroda on the other hand is trying to pick and choose which inflation he thinks is good and which he thinks is bad (will respond to the former and not the latter) when either way, a higher cost of living is the result. And with the yen, the Finance Ministry said they spent 6.3 Trillion of yen (about $42b) in FX interventions in October.
China said its October state sector composite PMI fell below 50 at 49 from 50.9 in September with both services and manufacturing also less than 50. We shouldn’t be surprised as China keeps shooting at its own economy. Chinese stocks fell and the yuan is weaker in response.
The price of wheat is jumping by almost 6% on the Kremlin move over the weekend to back out of the grain shipments deal even though some ships did leave ports over the weekend. We’ll see how long that lasts but wheat prices are still well below the initial post invasion spike.
Wheat
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.