There is one thing to break inflation via more supply and there is another to have it happen because demand falters because of that inflation. Yesterday in the March CPI report we saw used car prices fall by 3.8% m/o/m (while still up 35% y/o/y) and after hearing the CarMax conference call yesterday, it is the demand side that is faltering. CarMax CEO Bill Nash said “we began to see pressure after the holidays that continued through the end of the quarter…We believe several macro factors weighed on marketwide used car sales including consumer confidence, vehicle affordability, the omicron surge and lapping stimulus benefits paid in the prior year period.”
Of these factors, “If I had to rank in order of magnitude…I would probably say that the high prices are at the top of the list, followed by the covid surge.” Also, this gets to a growing credit problem too. A senior VP of their credit operations laid it out like this. Last year, a buyer came in to buy a $20,000 car and put down $1,000 for it. Now that same car is about 40% more expensive and the buyer still wants to put down the same $1,000. So for a now $28,000 car, they want to borrow $27,000. And this is not even taking into account the new rise in interest rate.
For the week ended April 8th, the MBA said the average 30 yr mortgage rate rose to 5.13% from 4.90% in the week prior and vs 4.27% one month ago. Refi’s fell another 5% after last week’s 10% drop and the 14%+ declines in the two weeks before that. They are lower by 62% y/o/y. Purchases rose 1.4% w/o/w after last week’s 3.4% drop as buyers are likely trying to lock in before rates go even higher but at some point an affordability wall will get hit face first here too. Right now people are just stubbing their toes and banging their elbows. That said, it’s easy to argue that the 1st time buyer has already face planted. Purchases were lower by 6.4% y/o/y.
While the consensus was for the Reserve Bank of New Zealand to hike rates by 25 bps, they did so by 50 bps instead to 1.50%. They said in their statement, “The Committee agreed that their policy ‘path of least regret’ is to increase the OCR by more now, rather than later, to head off rising inflation expectations. It is appropriate to continue to tighten monetary conditions at pace.” Now while what the RBNZ doesn’t have global macro implications, they are the first developed central bank that is going down the 50 bps lane and will be followed by possibly the BoC today and the Fed next month. Interestingly, and something to take note on what MIGHT happen with rates elsewhere, particularly in the US, the 2 yr New Zealand yield is down 14 bps to 3.10% in response on the belief that more hikes now will lead to less later. That said, this yield was 2.90% two weeks ago so we are really only giving back some of the jump since to 3.25% as of yesterday.
As stated above, the Bank of Canada is expected to hike rates today to 1% from .50% and thus taking that 50 bps at a time baton.
CPI in the UK in March hit 7% y/o/y, 3 tenths more than expected and up from 6.2% in February. The core rate accelerated to 5.7% from 5.2% and that was 4 tenths above the estimate. The retail price index, which is what the inflation linkers trade off, was up 9% y/o/y. This wasn’t just an energy thing as both durable goods and services were up sharply.
Prices in the pipeline picked up further with input prices spiking by 19.2% y/o/y, well more than the forecast of up 15.1%. Output charges were up 11.9% y/o/y, also above the consensus of up 11.1%. In response, the 10 yr inflation breakeven is up by 2.4 bps to 4.38%. The BoE should be hiking rates by 50 bps at their meeting in May but the odds are just above 50/50 that they do. The 2 yr yield is up by 4 bps today and higher by 6 this week to 1.55%, a hair off an 11 yr high. I’m still bullish on UK stocks, particularly the energy ones along with the reits. The FTSE 100 is up 2.8% year to date.
Yesterday I mentioned that the yen was just above a 20 yr low vs the US dollar. Today, it is at a 20 yr low vs the US dollar. What is noteworthy is that this time frame captures Abenomics and the aggressive pivot the BoJ took in late 2012 into 2013 that should have taken the yen to something close to 140. Japanese exporters enjoy this and the Nikkei rallied 2% overnight (we’re still bullish) but this will create a problem for Japanese citizens and possibly soon the JGB market and which would have global bond implications.
Reflecting likely a rush of demand for Chinese imports right after the invasion in order to avoid delays, China said its exports grew by 14.7% y/o/y, above the estimate of up 12.8%. But, in a likely sign of the slowdown to come, imports were flat instead of rising by 8.4% as forecasted. Throw in too all the port issues related to the shutdowns and likely rerouting of routes after the invasion started. Not only do the Chinese people need their lives back from the strict top down covid approach, the world needs the Chinese consumer again. The Shanghai comp fell .8% but the H share index in Hong Kong was higher by .7%.