Thoughts From The Divide: The Little Things

While we’re often reminded “don’t sweat the small stuff”, there are also a number of sayings reminding us of the importance of the little things, i.e. “a journey of a thousand miles begins with a single step” or “it’s the little things in life”. This week, a few small things are catching our eyes… a sign of things to come, or alternatively, “one swallow does not make spring”?

“Strain on the consumer wallet”

Following the warnings from Walmart’s earnings last week, Target announced earnings this week and saw its stock walloped. As the CEO noted, “The ‘biggest challenges’ Target is hearing from its shoppers are ‘inflation in food and household essentials’”, further adding that “inflation is putting a ‘strain on the consumer wallet.’” This was, of course, grist for some of X’s most prominent economic trolls: Prof. Krugman (“The Internet will have the economic impact of the fax machine”), for example. As has been standard for a while, concern about the state of the US consumer is greeted with another round of “who are you going to believe, me or your own eyes?”. This time, it was a reporter from Axios assuring the 56% of Americans surveyed in a Guardian poll who “mistakenly believe the U.S. is currently in a recession”. Luckily, this is economics, and we never have to believe households about their situation because we have economists who are far better qualified to opine. Axios’ finest was not unaware that “the NBER called the 2008 recession months after most people believed we were in one”, so we were surprised by her confidence. After all, absence of evidence is not the same thing as evidence of absence, ma’am. As an aside, we follow shipping as a proxy read on consumers, so we noticed DHL is also winding down some cargo operations in an apparent echo of FedEx’s “falling volumes”. That said, global freight rates have been perky the last few weeks.

“Reality is coming your way”

Another neck of the woods that is seeing some small shifts that may be ominous is CRE. Admittedly, it’s hard to shock in this sector, with the likes of CBS’s 60 Minutes covering the subject in depth back in January. However, we were struck by the owners of the AAA tranche of “a $308 million note” backed by the mortgage of 1740 Broadway in Manhattan getting “less than 75 cents on the dollar back earlier this month after the loan was sold at a steep discount”. That there are losses in commercial real estate will likely come as no surprise, but it’s worth noting both that a loss was realized, and that it even hurt the AAA holders. As one of our research team noted, default is a last resort, unless you want it. Did someone want this? Perhaps, but no one seemed very interested in the opinions of the five groups of lower-ranked creditors. Related, the specter of gating redemptions is once again back in the news, with Starwood’s SREIT having chosen to go that route when selecting from the perceived “three choices” as it bled cash. What’s the saying, “there’s never one cockroach”?

P.S. While headlines on UK inflation trumpeted that CPI was the “lowest in three years”, others noted that the slowing was “less than forecast”, and under the hood measures other than energy prices “, such as services inflation, picked up more than expected, complicating the chances that the BoE could cut rates as soon as June”.

P.P.S. Another small thing worth noting this week was, following the removal of the statement about peak rates from Powell’s opening comment, the minutes this week noted that “various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate”.