I gave an analogy last year that one of the risks of a sharp rise in monetary policy in a very condensed period of time (one yr) without giving room for the shock interest rate therapy to work its way through the economy was similar to someone taking gummies, then taking more 15 minutes later because they didn’t feel anything yet. Then more in another 15 minutes, and so on because they didn’t kick in yet. Obviously they eventually do. Well, an uber dove (which I consider myself an inflation hawk) at the Bank of England who is soon to be departing gave her own version of my analogy today.
Silvana Tenreyro, a BoE policy member who dissented against hiking at the last meeting, said today “When the fool starts the water and it runs cold, he keeps turning the faucet and eventually, because he’s impatient, he gets burned.” Now this is someone who is more worried about undershooting inflation in two years. Yes, undershooting, which I disagree with. “The shape of the inflationary shock stemming mostly from the large increase in energy prices, coupled with the long lags with which monetary policy affects the economy, means that the most likely scenario now is that we undershoot the inflation target in the medium term, meaning 2025.” I’ll push back on her by saying the inflation challenge was much more than just energy prices. Either way, another colorful analogy on where policy stands today and a few days after the UK CPI was seen up 10.1% in March y/o/y headline and by 6.2% core and which compares with their benchmark rate of 4.25%.
On to the conference calls.
Knight-Swift Transportation:
“Freight demand in the first quarter was below expectations and were persistently softer than typical seasonal patterns. Weak demand pressured volumes and pricing, while ongoing inflation was a further headwind on operating income. Various public spot rate indicators had already fallen 30% to 40% y/o/y by the beginning of the quarter and the persistent softness drove spot rates even lower by the end of the quarter. This also serves to put more pressure on contract pricing throughout the bid season…Load volumes continue to be negatively impacted by lower import volumes, particularly out of the West Coast ports.”
On the shake-up to come for the industry: “We now estimate that the average spots rates have fallen below operating cost for a large portion of the industry’s carrier base. This soft environment and lower rate expectations, combined with ongoing inflation in equipment and lower rate expectations, combined with ongoing inflation in equipment, maintenance, and insurance will increase the pressure on carriers, especially smaller and less well-capitalized carriers. Higher interest rates and tightening credit standards are also taking a toll. These factors should serve to accelerate the ongoing capacity attrition. As the year progresses, demand should begin improving as shippers make further progress, reducing inventory levels and import volumes to return to more normal levels.”
American Express:
“Stronger spending growth outside the US and in T&E offset some softness in US small business spending.”
“We saw strong demand across all T&E categories and customer types. Spending at restaurants continues to be a bright spot, with growth accelerating to 28% on an FX adjusted basis y/o/y. In fact, March was a record month for reservations booked through our Resy platform.”
“Consumer travel also remains high, with Q1 bookings through our consumer travel business reaching their highest level since pre-pandemic.”
“As we’ve noted for some time, Millennial and Gen Z consumers are driving our growth in billings and acquisitions of premium fee-based products. More than 60% of consumer new accounts acquired globally came from Millennial and Gen Z. These customers also continue to contribute the highest growth in billed business among all age cohorts in the US, up 28% in the quarter.” This of course is just a natural progression of life as these generations graduate, get jobs, earn money, create households,etc… as Gen X and the boomers did before them.
“On credit, our metrics remain best-in-class, supported by the premium nature of our customer base, our strong risk management capabilities, and the thoughtful underwriting actions we’ve taken on an ongoing basis. Our customers have been resilient thus far in the face of slower growth and higher inflation economic environment.”
Auto Nation:
“Obviously, there’s a lot of mixed economic signals in the market and within auto retail, which do warn I think of a more cautionary approach than the past few years…Some of the concerns of late last year has not yet manifested themselves to the extent some thought they would. And the consumer in our opinion is in no way tapped out and the industry is benefiting from lower unit sales over the past few years and an aging vehicle park, which has historically supported demand within the industry.”
“Now for new vehicles, industry inventory remains well below historical levels and we have seen some recovery, but there is a wide variation amongst brands and models.” By the way, about 45% of new vehicles were still sold at MSRP which “continues to be far higher percentage than pre-pandemic levels.” It got as high as 60%.
“First quarter new sales increased from a year ago, driven by a large increase in fleet vehicles, the retail unit is up slightly. Even with the recent increase in sales, the industry still remains at or near recessionary levels.”
“So from an incentive point of view, we all know incentives are still significantly lower. I think there are some brands that will have to progressively increase their incentives to drive net price position down in the marketplace.”
SL Green Realty:
“Overly negative voices are overshadowing some of the positive signs that portend of a slow but steady recovery for a market that offers what employers want most, a highly educated, diverse, youthful and talented workforce. Midtown Manhattan also offers the most highly commutable office inventory with many buildings that are highly improved and amenitized and are at the forefront of innovation. It is clear that we are now in another moment of significant change as businesses rethink their office needs and cities around the world adapt to how the pandemic has changed central business districts in a way no one could have predicted. However, one thing we know is that New York is resilient. The city has reinvented its economy time and time again.”
“The future of this great city relies on rethinking the arc of the workday and how we experience our CBDs, transforming them into vibrant 24×7 destinations.”
They are hopeful that the stabilization in interest rates “will have a positive impact on the real estate debt and equity capital markets.” Also, SL Green has hedged most of its interest rate exposure through strategic debt repayment and the use of derivative instruments like interest rate swaps, caps, cash and collars.”
“There is recent evidence of higher office utilization within our portfolio as physical occupancy regularly exceeds 60^ on many workdays and the MTA announced that Metro North Railroad reached pandemic era ridership record two days ago with 195,000 riders or 74% of the pre-pandemic average.” With LIRR, they just saw the best 7 day average in over 3 years.
“So, there’s an increasing drumbeat of optimism about return to work and we hear it from more and more companies that are doing business here in the city with national and global companies that are mandating people come back anywhere between 3-5 days a week, all within the past 3 months or so.
Ahead of the US PMI at 9:45am est, services drove the improvements in overseas PMI’s as manufacturing remains in the doldrums. Japan’s service PMI for April was 54.9, holding steady m/o/m but manufacturing remains below 50 at 49.5. Same with Australia as its services PMI rose 4 pts to 52.6 but manufacturing fell 1 pt to 48.1.
Same also in Europe. The Eurozone services April PMI rose to 56.6 from 55 and 2 pts above the estimate but manufacturing fell almost 2 pts to just 45.5. The forecast was 48. In the UK, services were up 2 pts to 54.9 but manufacturing fell to 46.6 from 47.9.
Pressure is growing already on the new BoJ Governor Ueda after Japan said March CPI ex food and energy rose 3.8% y/o/y, up from 3.5% in February and two tenths more than expected. The BoJ will most likely widen YCC again I believe in the coming months. Their policy is just untenable but of course so are the finances of the Japanese government which needs low interest rates to finance itself.
In response, the Japanese 10 yr inflation breakeven rose 3 bps to .69%, obviously still very low but that is a 5 week high. The yen is rallying on the news but JGB yields were little changed. Don’t forget that what happens with BoJ policy from here is still a potentially big macro event for global bond markets and so on.
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