Powell and rates, overseas dissent/Some data points/Mexico

While Jay Powell continues to feed the rates market more gummies, not appreciating the time delay feature, nor the shock of a vertical rise in rates in just one year and that positive real rates for a while will itself be a continued form of monetary tightening, the Bank of Canada is expected to sit on its hands today, keeping its overnight rate at 4.5%. Swait Dhingra is a new member of the Bank of England and she today is expressing her interest in going slow from here. “Overtightening poses a more material risk at this point, through potential negative impacts from increased borrowing costs and reduced supply capacity going forward. It risks unnecessarily denting output at a time when the economy is weak and deepening the pain for households when budgets are already squeezed through energy and housing costs.” Now this opinion is in stark contrast to fellow colleague Catherine Mann who wants to keep on hiking but there is at least some dissent at the BoE.

There is also growing dissent within the ECB. It was Governing Council member Robert Holzmann a few days ago that said he wants to hike 50 bps in the next four meetings. He was slapped today by Ignazio Visco from Italy who said “Uncertainty is so high that the Governing Council of the ECB has agreed to decide meeting by meeting, without forward guidance. I therefore don’t appreciate statements by my colleagues about future and prolonged interest rate hikes.” 

By days end yesterday, the fed funds futures pushed the March meeting rate hike odds of 50 bps to 64% vs 48% after he was done talking. I still think they go 25 bps as he’s already made the downshift calibration that I don’t think he will reverse. I appreciate Powell’s fight and the need to further temper inflationary pressures but this process takes time and now that we are on the cusp of no longer having negative real rates, has to be treated more delicately in balancing the impact on the economy. 

You’ve heard me talk many times before about how the below trend sales of new cars over the past 3 years will limit used car supply for the coming 3 years. So we saw the February Manheim wholesale used car index yesterday that showed a 4.3% m/o/m price increase seasonally adjusted. This is the biggest one month increase in February since 2009 and thus is not ‘typical’ according to Manheim. The explanation is pretty easy I believe understanding that leasing since 2019 has made up between 20-35% of annual car sales. In February 2020, the auto sales figure in SAAR terms was 16.8mm. In March 2020 it plunged to 11.4mm and to just 8.6mm in April 2020 and got back to 12.2mm in May 2020. Thus, a dramatic decline in cars coming off lease right now and leading to the lift in used car prices. I also heard from an executive at Sonic Automotive last night on CNBC who told Mike Santoli that he saw many more fleet buyers entering the used car market in February which was also a factor in the firming of prices.

Fannie Mae released its February Home Purchase Sentiment Index yesterday and it fell 3.6 pts m/o/m and is back near the survey low seen in October 2022. Doug Duncan, their chief economist, said “The decline was partly driven by a substantial decrease in consumers’ sense of home selling conditions, with most respondents who indicated it’s a ‘bad time to sell’ citing unfavorable economic conditions and mortgage rates as the primary reasons for that belief.” Nothing surprising here, especially with the reversal higher in rates since the January payroll report. 

What was worth noticing in the Fannie Mae survey ahead of this week’s jobs data were the answers to the labor market questions. “The percentage of respondents who say they are not concerned about losing their jobs in the next 12 months decreased from 82% to 73%, while the percentage who say they are concerned increased from 18% to 24%.” 

While the average 30 yr mortgage rate lifted another 8 bps to 6.79%, mortgage apps rebounded by 7.4% w/o/w. Purchases after 4 weeks of declines rose 6.6% w/o/w as the spring buying/selling season is upon us, though still down 42% y/o/y. Refi’s were up by 9.4% but down 76% y/o/y. Assume at this level of mortgage rates that most are refinancing to take cash out of their home as opposed to trying to lower their mortgage rate. By the way, about 90% of outstanding mortgages are under 5% and 70% are below 4%. 

Also out yesterday was the February Logistics Managers’ Index which fell 2.9 pts to 54.7 from January. While still above 50 it follows two months of gains. Of note, the ‘transportation costs’ component is “now contracting at the fastest rate we have measured in the 6.5 yr history of the index.” Part of this though is seasonal as February is sort of a hangover month after the holidays and the January gift card usage and returns influence. LMI said “There is some optimism from some corners that traffic will pick back up sometime in Q2 as retailers begin to rebuild inventories ahead of back to school and holiday shopping, but as of this moment that has yet to materialize.” LMI said there has been some loosening of warehouse capacity but storage prices are still accelerating, though should start to moderate. 

If there is a beneficiary of the diversifying supply chains from China, it is Mexico. And while much of the focus of the direction of the US dollar is against the euro and the yen, have you seen what the Mexican peso has done? It’s just off the best level vs the dollar since 2017. The Mexican stock market is up 9.5% year to date too. 

Mexican Peso (the lower it is, the higher value vs the US dollar)