A key factor in the direction of the inflation stats of CPI and PCE in coming quarters will be rents where within CPI it is 32% of headline CPI and about 40% of core. Rents in PCE is about half that. We know home prices are rising double digits but the Fed ignores that because it’s not directly imbedded in those inflation reads. Well, here are some comments from the Apartment List National Rent Report for March out on Monday with respect to rents:
“This month’s data shows rent prices continuing to rebound in markets across the country. Out national rent index increased by 1.1% over the past month, the largest monthly increase ever in our estimates, going back to the beginning of 2017.” With respect to the city where rents have plummeted the most in 2020, “Although rents in San Francisco are still down 23.2% y/o/y, the city saw an increase of 3.4% this month, the biggest increase among the 100 largest cities in the country. 9 of the 10 cities with the sharpest y/o/y declines have now had two consecutive months of rising rents.” What about everywhere else? “At the other end of the spectrum, many of the mid sized markets that have seen rents grow rapidly through the pandemic are showing that there’s still steam left in the current boom – Boise rents also jumped by 3.4% this month, and are now up by 16.1% y/o/y.”
Bottom line, “This month’s increase wipes out the Covid dip in our national index – y/o/y rent growth is now flat nationally, compared to the .8% y/o/y decline that we reported last month…Our national rent index has started growing faster than the typical seasonal trend. This reflects that fact that in markets like San Francisco where rents had been falling fastest, prices have turned a corner and are now rebounding. At the same time, booming markets such as Boise are still continuing to see prices climb. More broadly, as vaccine distribution continues to gain momentum, we may be starting to experience the release of pent up demand from renters who had been delaying moves due to the pandemic.” In other words, rents in CPI and PCE will start contributing again to higher overall prices. In other words, I don’t believe the recent rise in inflation is transitory.
The average 30 yr mortgage rate fell back by 3 bps to 3.33% following the recent increase but mortgage apps still fell. Purchases were down by 1.5% w/o/w but with the help of easy comps are still up 39% y/o/y. Refi’s declined by 2.5% w/o/w and that is down for a 4th straight week and down by 32% y/o/y on tough comps as the collapse in rates a yr ago led to a flood of refi’s. With the rise in rates, refi’s are down 32% over the past two months.
With the global rise in interest rates, a valuation rethink is not just a US thing. Deliveroo went public today in the UK. It was priced at 390 pence before today’s opening, opened at 331p and as of this writing is trading at 295p. I saw a quote at the FT from a banker not involved in the deal who called this an “absolute car crash.”
China said its March manufacturing and services composite index rose to 55.3 from 51.6 with most of the contribution coming from services which came in at 56.3 from 51.4 vs the estimate of 52. Manufacturing was 51.9 vs 50.6 and .7 pts above the forecast. This figure comes after the New Year holiday where many did not travel and kept on working. With the US turning more reliant on government for growth, and Europe being Europe, Asia will be the growth story in the decade ahead with the Chinese consumer being a key part of that. Notwithstanding the upside relative to expectations Chinese stocks were in the red along with all of the region. The yuan though is higher as are most currencies against the dollar after its recent strength.
The March Eurozone CPI rose 1.3% y/o/y after a .9% increase in February but that was one tenth less than expected. The core rate moderated to a .9% y/o/y gain vs 1.1% in the month prior and 2 tenths less than expected. The reason for the core miss was a smaller rise in non-energy industrial goods prices while service prices were up by 1.3% vs 1.2% in February and 1.4% in January. Europe we know is still having trouble with rolling out the vaccine which is stunting growth but hopefully this improves dramatically in coming months/quarters and Europe again can help contribute to global growth.
Yesterday we saw German CPI up by 2% y/o/y from 1.6% and today the France CPI went to 1.4% from .8%. Also, with respect to Germany, the number of those in March that are unemployed fell by 8k, a bit more than the estimate of down 3k. The unemployment rate held at 6%, kept in check by the furlough payment programs. The euro is up slightly after declines in 10 of the last 13 days.
Christine Lagarde was interviewed today on Bloomberg and this is what she said about her recent battle with the market, “They can test us as much as they want. We have exceptional circumstances to deal with at the moment and we have exceptional tools to use at the moment, and a battery of those. We will use them as and when needed in order to deliver on our mandate and deliver on our pledge to the economy.” Lagarde and her colleagues at the ECB don’t have much market experience in their careers but they are in the midst of getting an education that will only intensify in coming years, especially when it comes time to getting out of negative rate policy.