With the yield curve doing its typical thing when the Fed is in tightening mode, we stay on the lookout for both real and anecdotal signs of the impact of higher rates and the coincident very high inflation. As for the most interest rate sensitive part of the economy, housing, Redfin released a report yesterday titled “Surging Mortgage Rates and Home Prices Sideline More Buyers.” Here were the two bullet points right under, “The market still feels hot, but a slowdown in online searches, home tours and mortgage applications suggests more buyers are getting priced out.” The 2nd, “Redfin economists predict home price growth will start to slow in the coming months.” The Chief Economist of Redfin said “there are early indicators that the market is turning, and we expect the softening to become more apparent in the coming weeks, eventually causing home price growth to slow.”
Here are more details: “As of this month, Redfin has started receiving fewer requests than a year ago for agents’ service in pricey coastal markets including Seattle, San Diego, Boston and Washington, DC. These markets are experiencing y/o/y declines in pending sales, though they’re still seeing homes sell relatively quickly and are not yet seeing outsized growth in the share of sellers cutting their list prices. Declines in searches, touring, and mortgage applications are larger in California than elsewhere.”
Here is one anecdote from a Redfin real estate agent in the Bay Area, “Bidding wars are still common, but homes that would have brought in 10 or more offers earlier this year are now getting half that many. Homes also aren’t selling as astronomically over the asking price as before. A house that might’ve gone for $700,000 over the list price two months ago may no go for $300,000 or $400,000 over. That’s not the case every time, but I’m finding more opportunities for my clients where the competition is a bit more manageable.”
Here’s another important anecdote I believe as it’s an indirect call ultimately on consumer spending. The CEO of FreightWaves, Craig Fuller, whose firm has their finger on the pulse of transportation like no other published a piece on their website titled “Why I believe a freight recession is imminent.” This comes after a week he published an article titled “Just 3 years after 2019’s trucking bloodbath, another is on the way.” The 2019 ‘bloodbath’ by the way was in response to the tariff battle with China with put US manufacturing into a recession.
He believes this because of what the FreightWaves SONAR tender data is telling them. “Tender rejections are the best indicator into real time supply/demand in the truckload sector. The data comes from actual electronic load requests – ‘tenders’ in the truckload contract market. A high rejection rate means that trucking companies have more options to choose from. A low rejection rate means carriers have fewer options in freight to pick from. Since this measures actual load activity and not load board posts or searches, it tells us what the market is actually doing. And since it measures the willingness of carriers that are contracted to accept or to reject a load they have a contracted rate for, if the rejection rate declines, it suggest capacity is loosening.”
With that backdrop, “At the start of March, the rejection rate was 18.7%, today it sits at 13.9%. Even though it has only been a week since I wrote the ‘bloodbath’ article, the rejection rate has fallen another 1.3%. The last week of March is normally one of the best weeks of the year for carriers, but this year it has been one of the worst. Just wait for April…” he said.
As FreightWaves claims to speak to “a broader swath of the transportation industry than anyone else”, here is what some said:
From a large industry supplier (from early March)
“In an internal memo that I sent to the team last week about weakening demand and what that means for the industry, my closing line was ‘The Elmer Fudd steroid induced demand juicer is over.”
From a top ten 3pL/Truck brokerage (Last Friday, March 25th)
“Our linehaul purchasing rate is down almost 20% in 3 weeks. Rates are not down so much due to fuel offset.”
Large enterprise fleet – 1000+ trucks (Wednesday, March 28th)
“We were turning down 4 loads for every truck a year ago. Today, we are barely keeping our trucks running. In some markets, things are so bad that we have resorted to signing up for a load board account to keep them moving.”
Large LTL carrier with sizeable truckload brokerage (Tuesday, March 30th)
“Rapid deterioration in truckload brokerage. April is going to be rough for the truckload carriers.”
My bottom line, take note from all of the above, the slowdown is here.
Ahead of the US ISM manufacturing report at 10am est, we saw a bunch of PMI’s from overseas and here’s a quick capture:
China’s Caixin mfr’g 48.1 vs 50.4
South Korea 51.2 vs 53.8
Japan 54.1 vs 52.7
Australia 57.7 vs 57
Taiwan 54.1 vs 54.3
Vietnam 51.7 vs 54.3
Thailand 51.8 vs 52.5
Malaysia 49.6 vs 50.9
Philippines 53.2 vs 52.8.
Bottom line, China weakens further and moderation seen in the key export ones from South Korea, Taiwan and Vietnam. Japan’s rose but only after the February drop. We know all about the supply challenges but if the anecdotes above are right, we’re about to start seeing it from the demand side.
We also saw revisions to the initial manufacturing PMI’s from the Eurozone and the UK and they were revised slightly lower. For the Eurozone, the March final print was 56.5 vs 58.2 in February. The UK manufacturing final index for March was 55.2 vs 58 in February.
The war of course is disrupting a lot of things and Markit captured it with their European report: “While the boost to demand from the further relaxation of Covid containment measures helped ensure a sustained expansion of manufacturing order books and output in March, rates of growth have cooled markedly amid sanctions, soaring energy costs and new supply constraints linked to the war. Heightened risk aversion among both manufacturers and their customers due to the uncertainty caused by the invasion, combined with an intensifying cost of living crisis, meanwhile threatens to pull growth even lower in the coming months, as reflected in the slumping of manufacturers’ growth expectations for the coming year.”
Also out of the Eurozone was an accelerating CPI that for March rose 7.5% y/o/y, well above the estimate of up 6.7% and up from 5.9% in February. The core rate was higher by 3% vs 2.7% last month but one tenth less than expected. Inflation is a problem in itself but it gets majorly compounded when central banks have interest rates well below it. The ECB would be in a much better situation to deal with inflation if they didn’t go so far with QE and negative rates. In response, the 5 yr 5 yr euro inflation swap is higher by 5 bps to 2.27%. Sovereign bond yields are higher across the board and why US yields are rising too.
5 yr 5 yr Euro Inflation swap