Boockvar on Rates, the Other Important Central Bank Meeting
The following is from Peter Boockvar:
The day after & the other VERY important meeting/Shipping/Interesting comments
A few things post Fed meeting.
1)Pre FOMC, did the bond market price in the rate increase in response to Kevin Warsh’s more hawkish Jackson Hole speech or did it do it on its own because it felt that was the right thing to do? If the latter, which I think is a big part of it, then it means the Fed is now a follower of the market, not a leader of it.
2)I want to emphasize how meaningless the dots should be viewed as. I believe so because they are only as good as the data that is in hand on the day the dots are filled out. The very next day events can change.
3)While the rate hike was not successful in taming the long end of the yield curve yesterday (though rates are down today), it did lower inflation expectations as priced in the TIPS market. The 2 yr inflation breakeven fell 8 bps, the 5 yr was down 6 bps and the 10 yr was lower by 5 bps.
4)On my ‘lunch is not free theme’ on Wall Street (previously stated, upper income savers will now enjoy even higher interest income but a continued rise in the cost of capital could threaten the stock market and whose high level is driving much of the demand side inflation in the economy), a further deterioration in the affordability of buying a home will just result in more renters that could lead to higher rental gains from here and which is a key component of CPI and PCE.
5)With about $7 trillion in US t-bills outstanding, the 25 bps rate increase just raised the upcoming financing costs over a 12 month time frame of the US government by another $18 billion with the US Treasury leaning to more short-term issuance over the past year and going forward.
The Bank of England kept its bank rate unchanged at 3.75% as expected. The vote was 6-3 with the 3 dissents wanting to hike by 25 bps. And why did the 6 vote to maintain rates? “There has been little evidence so far of material second-round effects in price and wage-setting.” But, “the risk of such effects, against which policy needs to lean, is greater the longer higher energy prices persist or are more volatile.”
They also maintained their plan to continue to shrink their balance sheet via sales and maturing gilts.
No surprise from them and the pound is little changed. The 2 yr gilt yield is lower by 3 bps with the 6-3 vote and the 10 yr is lower by 5.5 bps.
Now on to the other VERY important central bank meeting this week, that of the BoJ where they will hike rates and we’ll see how hawkish Governor Ueda is after the announcement. Maybe that will be more effective in calming global long term interest rates.
Global container shipping costs continue to get more expensive with the Shanghai to NY route now back above $10,000 at $10,394, higher by another 7% w/o/w and the highest since June 2022. Shanghai to LA prices rose 4.9% w/o/w to $7,712. On the other hand, Europe is paying cheaper prices because of the different route with the Shanghai to Rotterdam container price down for the 10th straight week.
So, in the US we have the rising cost of shipping goods to us by sea and then when the goods eventually get a truck in route to its ultimate destination, those costs are skyrocketing too.
Shanghai to NY Container Shipping Price
With respect to trucking, this is exactly what JB Hunt said on Tuesday that resulted in its 13% price drop yesterday:
“And so as we progressed through the 2nd quarter, we saw one of the most acute changes in the cost of purchased transportation. I believe intra-quarter spot rates moved up 30%. And so we had to make adjustments. You saw our JBT business actually lost a little bit of money. ICS (integrated capacity solutions) broker margins got squeezed.”
“And so here we sit today, and I would tell you all the plays that we would normally call at this part of the cycle, which is we need to dramatically ramp up our driver hiring department. We need to institute driver sign-on bonuses, we need to raise driver pay, we need to prepare for peak season. We’re sort of facing all that right now. And so I do believe there is a little bit of a mismatch based upon the delayed part of pricing that we see in Intermodal relative to the cost we’re feeling now that we just want to be transparent with investors and given an update that in light of these costs that are sort of hitting us, we are expecting our Q2 and Q3 earnings to actually drop 5% to 10%.”
The positive is that demand trends have improved, along with pricing, but the higher costs are running ahead right now.
This is what United Airlines said of note with regards to what is going on in the air, speaking at the MS conference:
“demand is incredibly resilient…And the consumer has disposable income and wants to spend on experiences. And so the industry, to maintain profitability, has had to push through some price to offset rising fuel prices. And I wouldn’t say to our surprise, it was our expectation, but it’s proven out that demand is incredibly resilient.”
“We have not captured price as an industry for the last five, 10, 20 years relative to other categories in the travel spend bucket. And I think we have finally put together a product and a service that is demanding some recapture of that.”
“But there is some marginal routes that don’t make sense in a higher fuel environment. So we cut them. You will see us continue to behave that way.”
Overall, “as we look into the 4th quarter, bookings are tremendously strong…And so that piece of the equation is resilient, very little evidence of demand destruction. I mean, if you squint at some of the lower price tickets, you might be able to find something there, but very small for United Airlines. And in the premium cabins just kind of humming along very nicely. Corporate business has been ticking up a little bit.”
Speaking of the upper income consumer, and that ‘premium cabin’, this is what American Express said yesterday at the Barclays conference:
“And so despite the headlines, despite all the noise about inflation, the wars, we see a lot of strength in the spend of our card members. So feel very strong about that. Card fees up 16% year-to-date. NII was in double digits.”
“And the thing that I found the most remarkable and to some extent, unexpected, is actually the strength of the T&E spend, travel and entertainment. And we see the same thing in the numbers quarter-to-date.”
“So billing stable, strong, a lot of discretionary spend, a lot of signals about confidence, and about credit quality, which gives me confidence about the balance of the year and how to think about it.”
Eaton is a big beneficiary of the data center buildout as they provide a lot of the electrical equipment going into these facilities. From them at the MS conference on this:
“So, the market is really strong…we grew 65% revenues, 85% orders, but you look at the pipeline, the negotiation pipeline was over 130% in data centers…And then you look at what our customers announced that most of those projects we are not even yet quoting for, and every time you look at that, the number is higher.”
“So, when we released our Q2 numbers the total announced projects for data centers was 307 gigawatts to be built, just think about that. And now today, we checked this week, it’s already 342 gigawatts. So, a month later, it’s already more. And then you contrast to what this industry has ever built. We have installed 50 gigawatts. So, today operating, there are 50 gigawatts. So, we are talking about between 6x and 7x what exists today is what’s going to be built in the next years. Most of this is not going to turn into ‘27 or ‘28 revenues. So, it’s going to be a longer cycle, that’s the way to think about it.” I bolded.
“So, everywhere we look, we see strength in this market. I’m also aware of the discussions around models. I think large language models can adapt much quicker than the physical infrastructure. I don’t see a slowdown. I don’t expect a large slowdown anytime soon.”
But not all is roses, particularly for those most tied to the level of interest rates, and this was from the Lennarearnings release and whose stock is down pre-market:
“While our earnings of $1.19 per share were below expectations, they reflect the nature of the environment in which we are operating, which has deteriorated since our last earnings call.”
“Mortgage rates increased through the quarter, with the 30 year rate at approximately 6.8% at quarter end and even higher since. Rates are responding as inflation remains above the Fed’s target, driven by geopolitical tension and higher oil prices. Additionally, consumer confidence has declined as rates and affordability have driven more consumers to slow their purchase decision.”
“Nevertheless, even while market conditions have weakened, the overall housing environment remains constructive as housing shortages continue to drive demand from both primary buyers as well as ‘single-family for rent’ and ‘build-to-rent’ buyers.”
“Our average sales prices was $372,000, reflecting approximately 12% in incentives, along with base price adjustments necessary to sustain volume in a market where affordability remains the defining constraint.”
