Inflation Inroads

Y-o-Y CPI is now 4.9%, down from 9.1% in 6/22, and core CPI is 5.5%, down from the 9/22 peak of 6.6%. Similarly, producer price inflation is just 2.3%, well off its high. Further, shelter inflation is now finally starting to officially decline, and it’s 42% of the CPI. The issue consuming the Fed is how much further inflation falls and how fast. But no matter how measured, it’s falling!

Rate Reduction

The median length of time from the Fed’s last rate hike to the first cut, dating back to the 1957 rate rising cycle, is four months. The shortest gap was one month in 4/80 and 1/81, and the longest was 20 months in 11/70. As for the three worst recessions since the depression, namely 1974/75, 1981/82 and 2008/09, the cuts came after two months, one month, and 15 months respectively.

Presumable Pause

Hooray, rate hikes are over! With yet another bank (PacWest) disintegrating before our eyes, a debt ceiling debacle that looks suspiciously grave, and a 3-month 10-year yield curve that is profoundly inverted, the Fed finally hauled out language suspiciously similar to what’s been previously used to signal the end of a tightening cycle, while still (theoretically) retaining a tightening bias. The pause has finally arrived. The pivot remains MIA.

Excellent Eggspectations

Wholesale egg prices started 2022 at about $1.60/dozen, essentially rose steadily over the course of the year and ended up at an eye-watering $5.20/dozen. That said, 2023 has been the reverse on steroids. After starting the year at $5.20/dozen, wholesale eggs are now selling at just $0.80/dozen, a staggering 85% decline from the peak and are at their lowest level in years!

Rent Reversal

As recently as 5/1/22, U.S. office building values, as measured by the share prices of office building REITS, were stable as tenants paid and occupancy rates steadily improved. However, since then values have plummeted by 50% as tenants renew for less space, occupancy rates have stalled at 50%, and interest rates are way up. For purposes of comparison, since 5/1/22 all U.S. REITS, including office properties, have declined about 12%.

Homebuilder Hopes

Historically, new houses constituted about 15% of all homes sold. While that percentage dropped to a low of 5.8% in 7/11, the worst of the Housing Bust, it’s almost steadily risen since. In 12/22 it hit an amazing 34.9% and in 3/23 was 32.8%, the highest March outside of 3/22’s 33.4%. While single-family starts are painfully anemic, completions are stellar due to resolved supply-chain delays that held up previous deliveries.

Lovely Labor

April payrolls grew a surprisingly strong 253,000, the unemployment rate fell to a 55-year low of 3.4%, the rate for Black Americans hit an all-time low, and M-o-M wage growth was reasonably hot at 0.5%. But February and March job growth was reduced by 149,000 jobs, and three-month average employment growth was 222,000 jobs, the weakest since 1/21. Very slow slowing gives the Fed cover to hold, but not cut.

Credit Control

In the five years before Covid, revolving credit card debt/GDP was flat at 6.5%, well down from the staggering Housing Boom level of 9%. The level sank to 5.5% in 5/20 and remained there through late 2021. Since, it’s been steadily rising, but at 6.2% remains below its pre-Covid level. This partly explains why households have been able to continue spending impressively but suggests it may soon get harder.

Golden Growth

At just over $2,000/oz, gold is within striking distance of its high of $2,069.40 set in 8/20. With the Fed raising rates, gold seems unattractive. However, because it’s priced in dollars, the decline in the dollar has made gold cheaper for foreign investors. Moreover, markets must think the Fed will stop raising rates soon and will quickly lower them, and inflation will remain elevated. Falling Treasury yields also help.

Recession Ratings

Leading economic indicators and manufacturing activity are signaling recession, labor markets and consumer spending aren’t. However, the unemployment rate is a coincident/lagging indicator. Moreover, the Bloomberg recession indicator and the NY Fed curve-based recession model are at 55% and 60%, respectively. Every time either model rises above 40% a recession has followed since 1985, and for the NY Fed model it’s been accurate seven out of eight times since 1960.

Lost Lending

Banks are currently experiencing rising deposit costs. If those costs can’t be fully passed to borrowers, profits will fall, reducing lending. It’s estimated that a 10% reduction in profits reduces lending by regional and smaller banks by 2%, and based on prior rate hiking cycles, a 4% lending reduction is possible. That’s likely to lead to a painful reduction in GDP growth of as much as 0.4%!

NFL Numbers

Until the late-1970s there were never more than two 300 lb. players in the NFL. By 1990, there were 72, in 2000 there were 286, by 2010 there were 379, and in 2020 there were 468. Accounting for expansion, as a percentage of all players, heavyweights hit 10% in 1994, 20% of players in 2001, peaked at 21.6% in 2017, and were 20.7% in 2022.