General Mills, a stock we own, said this in today’s earnings press release with regards to their fiscal 2023 outlook, “The company anticipates double-digit inflation on its cost of goods sold in fiscal 2023 and is addressing inflation headwinds with HMM (Holistic Margin Management) cost savings and net price realization generated through its SRM (Strategic Revenue Management) capability. The company is planning for volume elasticities to increase but remain below historical levels and supply chain disruptions to slowly moderate in fiscal 2023 compared to fiscal 2022 levels.” You are going to hear a lot from consumer product companies in the upcoming earnings season about their exposure and sensitivities to elasticities of their products. In other words, who has pricing power and who doesn’t.
Apartment List’s National Rent Report came out and its June index rose 1.3% m/o/m, the same pace seen in May. While growing at a slower pace than 2021, rents are still up 14.1% y/o/y as comps get more difficult and are higher by 5.4% ytd vs 8.8% in the same time frame last year. On the supply side, “our national vacancy index ticked up slightly again this month, continuing a streak of gradual easing dating back to last fall. Our vacancy index now stands at 5%, up from a low of 4.1%, but remains well below the pre-pandemic norm. And with spiking mortgage rates sidelining potential homebuyers, we could see additional tightness in the rental market in the months ahead. Rents increased this month in 97 of the nation’s 100 largest cities.” They said NYC has seen the quickest rent growth over the past year while the very hot sun belt states are beginning to plateau. Only SF is still below its pre-pandemic rent levels but “barely.”
The Apartment List bottom line and why services inflation will remain robust, offsetting the expected fall in goods prices, “Despite a recent cool-down, many American renters are likely to remain burdened throughout 2022 by historically high housing costs.” The BLS CPI figure still has rents rising at about 5% which is not reality.
With the average 30 yr mortgage rate pulling back by 14 bps w/o/w to a still relative high of 5.84%, mortgage apps rose slightly. Purchase apps were flat w/o/w but down by 24% y/o/y. Refi’s rose by 1.9% w/o/w but are down a whopping 80% y/o/y. We know what’s going on in housing so no need to opine again here.
As ECB members throw out their thoughts on whether to hike interest rates 25 or 50 bps in July (just as they finish up QE tomorrow) to either -.25% or zero, Spain today said its June CPI rose 10% y/o/y. That is above the estimate of up 8.8% and an acceleration from the 8.7% rise in May. The core rate was higher by 5.5% y/o/y. After seeing a bunch of regional CPI prints today, German is expected to announce an aggregate figure at 8am est an 8.8% y/o/y CPI gain in June. It’s truly amazing how the Germans ever left it happen that they ceded their Bundesbank in managing monetary policy to the banana republic type monetary regime under the ECB.
We also saw today the Eurozone Economic Confidence Index for June which fell 1 pt m/o/m to 104 but that was 1 pt above the estimate. The consumer confidence component in particular is just above its April 2020 low. Manufacturing confidence did lift by .9 pts but after falling by 1.3 last month. Services confidence did rise too benefiting from the end of covid restrictions with leisure and hospitality but retail and construction confidence softened.
The end result of the above is Spanish and German 10 yr inflation breakevens are falling by 4 bps and European bonds generally are rallying and that is because it is possible that the 8am German print might come in less than expected based off the regional figures seen. The main reason is that the German government has handed out a fuel tax rebate, have discounted public transportation tickets to entice people to use less energy and the end of a renewable energy surcharge. The euro is little changed and European stocks are following our weakness from yesterday on growth concerns.
With respect to US Treasuries, we’ve seen 3 really crappy auctions this week with the 2s, 5s and 7s and while that was not really market moving, it highlights how important now the monthly TIC data is so we can gauge the level of interest from foreigners in buying US Treasuries. This as the Fed is essentially selling now and banks are already loaded up.
As Vietnam is an ever growing manufacturing stand out, they reported exports that grew by 20% in June y/o/y, above the estimate of up 18%. Imports were up by 16.3% y/o/y, also higher than forecasted. The Vietnam economy is expected to grow by 7% this year according to their statistics office. While inflation of course is a challenge, along with logistics and the slowdown in China, they are certainly benefiting from the supply diversification away from China.