Boockvar on Warsh, Oil, Dave & Buster’s
From Peter Boockvar:
Meet the new boss, different than the old boss/Oil/PLAY & LZB/Overseas
I really look forward to hearing from Kevin Warsh today. I think he’s going to be a refreshing rethink to what has been a standard, mostly Keynesian approach for years to how they model the economic data (mostly focusing on the demand side), how they use monetary policy (aggressively over the past 40 years and with forward guidance as a tool) and what will become of both the balance sheet and future use of QE (bloated and too big a footprint in markets).
I think for now with respect to rates and with an effective fed funds rate currently at 3.63%, around a zero real rate and if one uses headline inflation, its below zero, Warsh & Co should just sit tight and wait to see where prices settle out at, particularly oil prices, as supply chains normalize with the Strait reopening because until then they will have incomplete information.
When thinking about oil prices from here and where they eventually stabilize at, I want to highlight again something I talked about in January that is a big picture support, I believe, for crude oil prices. And that is a plateauing of US oil production. It’s not because drillers don’t want to drill, it’s instead the reality of geology in that many of the US shale basins are now seeing a flattening to lower production rate and the rate of growth out of the Permian in particular is slowing as well.
I include two charts, one over the past year of US oil production and one stretching 15 years that reflects both the dramatic increase in production that the technological wonder of shale drilling brought and took the US to the number one in the world spot but also relative to the slowdown in production seen over the past 8 months.
US Oil Production over past year at 13.8mm barrels per day
US Oil Production over past 15 years, from about 5.5mm per day to almost 14mm
Dave & Buster’s reported Monday after the close and its stock fell 5% Monday even with lower oil prices and another 6% Tuesday in response to the earnings. They said this of note:
“We started the quarter well in February. The spring calendar shift between March and April played out largely as expected. But the macro backdrop, elevated gas prices, geopolitical uncertainty, and meaningful softness in consumer sentiment, they all were a real headwind in April.”
They ended the quarter with comps down 5.4% y/o/y. In Q2 to date, they are trending a bit better, down 4% so far.
“Consistent with what we have seen here recently, certainly that lower end consumer is where we’ve seen most of that pressure. The higher end middle consumer is consistently trading but we’re seeing more of that pressure on the low end and that’s part of really what we’ve been trying to focus on with our value offers.”
La-Z-Boy is jumping pre market as while sales were about as expected, profits were much better than estimated. In their release they said this of note:
“Written same store sales decreased 2%, a sequential improvement, as lower traffic was partially offset by higher conversion rates, average ticket, and design sales. During the quarter, same store sales trends were strongest in April with positive comps.” They referred to “an industry that remains soft” and “While we continue to have a measured view of the external environment, we expect to continue to outperform the industry.”
With the average 30 yr mortgage rate holding at 6.60%, purchase applications fell 3.4% w/o/w after rising last week by 7.3% vs the previous 3 weeks of declines. Refi’s were down by 4.5% after last week’s pop that also followed declines in the previous few weeks.
Shifting gears overseas. The Swedish Riksbank decided to not follow the ECB with a rate hike and they held their policy rate at 1.75% as expected. That said, they are leaning to a hike and said “The Executive Board assesses that it is well balanced to leave the policy rate unchanged at 1.75% now, but the probability that the rate will be raised later this year has increased in relation to the assessment in March.” The Swedish krona is little changed in response.
Ahead of the BoE meeting tomorrow where no change with its base rate of 3.75% is expected, the UK May CPI rose 2.8% y/o/y, 2 tenths below expectations and the same pace seen in April. The ONS said lower food prices kept a lid on price gains but as energy bills reset in coming months, that will be a headline figure offset from here. The core rate was higher by 2.6% y/o/y vs 2.5% in April and one tenth below the estimate. Services inflation remains the problem, rising by 3.7% y/o/y vs 3.2% in the month before.
I think the BoE is in wait and see mode too. Gilt yields are lower by 5-6 bps in reaction to the below estimate print. The 10 yr inflation breakeven is down by 3.6 bps to 3.18%, the lowest since early March.
UK Core CPI y/o/y
Positions: None.
