It appears central bank gold buying is continuing at a “breakneck pace.” Plus a look at what else is happening across the globe.
February 5 (King World News) – Peter Boockvar: JGB yields are moving higher after an FT article today titled “BoJ signals readiness to exit negative rates.” The first sentence of the piece, “Officials at the Bank of Japan have become increasingly confident that the economy is robust enough to attempt an imminent exit from the world’s remaining negative interest rates.” It seems like we’re getting real close here and March could be the month, though at the last BoJ meeting the hints were there and it’s maybe why the yen is not really moving. Yields are up notably across Asia, that spilled over into Europe and why US yields are up too again (as well as reasons below). The US 2 yr by the way is up 23 bps in two days to the highest since January 19th.
Upside Risks To Inflation
While just about all Fed members were citing higher long term interest rates last summer as further tightening policy for them, only Governor Michelle Bowman is talking about the easing of financial conditions and also geopolitics and how it could impact their policy. Back on January 9th, Bowman said “There is also the risk that the recent easing in financial conditions encourages a reaccelerating of growth, stalling the progress in lowering inflation, or even causing inflation to reaccelerate.”
Late Friday, she talked about the upside risks to inflation, including similar wording as above. “These include risks from geopolitical conditions, including the prominent risk of spillovers from geopolitical conflicts and the extent to which food and energy markets and supply chains remain exposed to these influences. There is also the risk that continued easing in financial conditions could add momentum to demand, stalling any further progress in lowering inflation, or even causing inflation to reaccelerate.” She also mentioned the “continued labor market tightness.”
Her conclusion, “I will remain cautious in my approach to considering future changes in the stance of policy. Reducing our policy rate too soon could result in requiring further future policy rate increases to return inflation to 2% in the longer run.” And she also threatened another rate hike if needed to restore price stability.
Now Jay Powell said nothing new last night on 60 Minutes that he didn’t say last Wednesday but I had to laugh when interviewer Scott Pelley was introducing the interview by saying “inflation has plummeted” as if people are experiencing a drop in the price of things and then went on to ask Powell, “Is inflation dead?” Anyway, Powell repeated that March is basically off the table and maybe by mid year they will cut rates which he seemed intent on doing this year at some point. Similar to the press conference, Powell again said nothing specific about easing financial conditions and the Red Sea situation and how it could influence policy but waiting to be more confident of the sustainability of the disinflation being seen could be his implicit acknowledgement of the risks to the upside in inflation, though its obviously moderated.
Gold
I haven’t mentioned gold in a bit but don’t you worry, my bullishness is fully intact. Last week the World Gold Council released its 2023 report and central banks were again huge buyers of gold. “Central bank buying maintained a breakneck pace. Annual net purchases of 1,037 tons almost matched the 2022 record, falling just 45 tons short.” It is because of this bid for gold that gold has been able to trade near record highs in the face of high real rates and a strong dollar vs the yen, euro and pound. I specify these currencies because its action against others is more mixed…
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Let’s get to some earnings calls and the Camden Property Trust, a stock we own, one was pretty interesting on the multi family business, rents and the migration out of California and New York.
Rent growth clearly continues to slow and for 2024 they see just a 1.2% blended rate increase across their mostly sunbelt portfolio. We should enjoy this while it lasts because as CPT said in their call, “2025 starts are projected to plummet.”
And here is the secular story for multi family. “Beginning in 2011 and through 2019, apartments had an average market share of 20% of household formations. Apartments are projected to double that market share to 40% between 2024 and 2026. This is because first, home affordability is at 20 year lows with rising home prices and current interest rates and no signs of the pressure easing anytime soon even with rates continuing to fall; immigration to Camden’s markets continues to grow; more young adults are in the workforce with solid job growth and wage growth; 30% of households choose to live alone, which is at an all-time high.”
They then talked about the in-migration to their Sunbelt apartments, “one of the other things that we track is that we track Google searches from people in New York or people in California looking for apartments to rent in our markets. This is interesting to me, New York searches for Texas apartments were up 72% in the fourth quarter ’23 as compared to the 4th quarter ’22. California searches for Texas apartments were up 52% in the fourth quarter ’23 as compared to the fourth quarter ’22.”
My bottom line, rent relief that we’ll see this year and into early 2025 will then reverse to notable jumps in rental inflation thereafter.
One would think that a company that sells at home cleaning supplies, garbage bags and charcoal would be insensitive to consumer behavior but not the case with Clorox. They said, “we expect the operating environment to remain challenging as consumers remain under pressure and their value seeking behaviors to continue.”
Also, “This assumption on a modest slowdown in categories is one consistent with what we provided as an original outlook to fiscal year ’24, as we saw the consumer come under more pressure. And we originally had the assumption of a mild recession, which we are no longer assuming, but still assuming the consumer is going to be under more pressure given all the factors in the macro economy.”
Drop In Mortgage Rates Brings In Buyers
Beazer Homes on Friday talked about how the drop in mortgage rates off its peak helped to bring people off the fence. “With the quarter now in the rear view mirror, I’m pleased to report that we experienced a meaningful improvement in demand, particularly in December, leaving us optimistic for the upcoming spring selling season.”
This said it’s not all clear sailing. “The macro environment for new home sales remains constructive but challenging. Most parts of the economy are in reasonably good shape, with job and wage growth providing support for homebuyer demand. And the supply of both new and used homes remains at historically low levels. Those are the constructive parts. Affordability, or more precisely, the lack of it, is the challenging part.”
Ahead of the US services data where the employment component will be a big focus in light of the big payroll report that flies in the face of others, here were some PMI’s seen today.
China’s Caixin January services PMI fell to 52.7 from 52.9. As seen in the Lunar New Year travel numbers which are above 2019 levels, spend on services/experiences is way outperforming spend on goods.
Hong Kong’s PMI fell below 50 again to 49.9 from 51.3 while Singapore continues to be an economic standout to the upside, though its PMI fell 1 pt to 54.7, still well above 50. India is another standout, we remain bullish and long, as its services PMI rose to 61.8 from 61.2.
The January Eurozone services PMI was left unrevised at 48.4, thus still contracting while the services sector in the UK is doing better at 54.3, up .5 pt from the initial print and up almost 1 pt from December. Both are still seeing price pressures. In the UK specifically, the benefit of lower fuel and raw material costs were offset by higher wage pressures.
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