An important earnings release was yesterday from Ally Financial who does big business in auto lending. If there was an area of excess over the past few years it was in this industry in terms of aggressive lending where many consumers were making in a year the same amount as they were spending on a car. But, thanks to a long maturity schedule and low rates, monthly payments were doable. However, the loan to value many times was well above 100% and some people are now handing back the keys just as they did with homes 15 years ago. Ally said in their call, “We expect continued increases in delinquencies as consumer trends normalize post-pandemic, and we are closely monitoring additional inflationary pressures…As pandemic tailwinds normalize, we expect delinquencies and net charge-offs to migrate above 2019 levels. We expect normalized delinquencies of 3.4% to 3.8% vs 3.1% in 2019, and we expect losses to migrate toward 1.6%, which is 30 bps higher than 2019. To compensate for that incremental loss content, we’ve added 125 bps of price since 2019.” Now these are not scary or alarming numbers yet and do imply declines in used car pricing to an extent but something we should all keep an eye on in the quarters to come and the stock fell 8% yesterday in response.
After hearing from JB Hunt a few days ago, Landstar, another large truckload carrier had similar comments. “There continues to be a lot of unease regarding US economic conditions as we head into the fourth quarter. On a macroeconomic level, continuing inflation concerns along with possible further action by the Federal Reserve to address these concerns at the risk of causing further recessionary pressure, as well as current geopolitical tensions and the corresponding volatility in the international energy markets, add significant uncertainty to the performance of the overall domestic freight environment. Moreover, high inventory levels being reported by large retailers corresponds with what we anticipate will be decreased seasonal demand for freight services in connection with the 2022 holiday shipping season.”
To the question I keep asking on housing out loud, ‘to what extent will home prices fall from here?,’ what will keep them elevated is still the lack of supply as so many don’t want to give up their 3% type mortgage rate. Redfin yesterday said in September “The number of homes sold dropped 25% y/o/y while new listings fell 22% – the largest declines since May 2020 and April 2020, respectively.” They went on to say, “The US housing market is at another standstill, but the driving forces are completely different from those that triggered the standstill at the start of the pandemic. This time, demand is slumping due to surging mortgage rates, but prices are being propped up by inflation and a drop in the number of people putting their homes up for sale. Many Americans are staying put because they already relocated and scored a rock bottom mortgage rate during the pandemic, so they have little incentive to move today.”
With regards to stock market sentiment, last week’s II data had more Bears than Bulls to the greatest extent since March 2009. Yesterday, Bulls rose to 31.3% from 25% while Bears slipped to 40.3% from 44.1%. This does not reflect the big rally on Monday and Tuesday. The AAII today does and Bulls rose 2.2 pts to 22.6 after falling by 3.5 last week. Bears were little changed at 56.2, just a few weeks off the multi yr high of 60+. The CNN Fear/Greed index at 37 is up from 24 one week ago. Bottom line, this bear market is doing what others have done, death by a thousand cuts that just grinds us investors into the ground. Sentiment as a result has been down for a while and thus trying to figure out what is extreme enough to trigger a rally is getting harder. At least last week’s extreme II figure was a catalyst for this Monday and Tuesday rally but what now?
Shifting overseas, Taiwan said its exports fell by 3.1% y/o/y in September, not as bad as the down 5% estimate but still negative after an up 2% print in August. Exports to China/Hong Kong dropped 28% y/o/y and a spokesperson at the statistics department said “Mainland China’s economic recovery is slower than originally estimated.” We know how important Taiwan’s tech sector is on the world economic stage.
Japan also reported its trade data and it was about as expected. Exports were goosed by the weak yen which touched 150 today, higher by 29% y/o/y. The weak yen also made imports really expensive and they were up 46% y/o/y. The BoJ also intervened again in the JGB market in order to keep that 10 yr beach ball yield under water at .25%. When that YCC goes at some point, that ball is going much higher (or at least to the next YCC upper range).
Also in Asia, the Bank of Indonesia hiked rates by 50 bps as expected to 4.75% and Australia reported a weaker than expected jobs number for September but bond yields there jumped anyway in response to the global bond market selloff yesterday.
French business confidence in October was unchanged m/o/m at 102 but that was 1 pt better than expected while still at the lowest level since April 2021.
French Business Confidence
Germany said its September PPI was up 45.8% y/o/y for a 2nd straight month and higher by 2.3% m/o/m, just shocking numbers.
German PPI
Finally, gilt yields are falling again after BoE member Ben Broadbent said he doesn’t necessarily seeing their bank rate getting as high as markets are pricing in. A 75 bps rate hike is expected for a few weeks which is what I think they do.
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.