The Friday File: The great Jim Brown has passed away. He played nine years in the NFL for the Cleveland Browns and was a Pro Bowler every year. He led the league in rushing eight times, was named MVP three times, won an NFL championship in 1964, and retired at the top of his career. He played his college career at Syracuse University and was named the greatest college player.
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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%.
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.
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!
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.
The Friday File: 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!
Prior to the Silicon Valley Bank failure, interest rates on bonds issued by money center banks like JP Morgan were about 15bps lower than for bonds issued by large regional banks like Huntington Bankshares and M&T Bank. That gap has since widened substantially and is now about 135bps. This gap exists because investors fear the government might let a regional fail and because of the possibility of added regulatory burden.
While CPI inflation continues to steadily fall and April is only up 4.9% Y-o-Y, down from 9.1% in 6/22, core-inflation remains troublingly high and stubbornly stable. It rose 0.4% M-o-M and 5.5% Y-o-Y, exactly where it was in 1/23. However, because the Fed Funds rate now finally exceeds the inflation rate, the Fed probably keeps rates where they are for a while and is very unlikely to hike much more.
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.
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.