If this week’s title sends a small shiver down your spine, you may be in the Real Estate/lending business. Sadly, there doesn’t appear to be any quick or easy cures, which is perhaps unsurprising as the hits keep coming. Bank OZK is the latest example, getting slammed after a Citi analyst noted “substantial concerns” over the company’s “largest individual loan… and Life Science construction lending in general”. Some might think the residential side is also showing some cracks, with pending home sales slumping to the “lowest level since the start of the pandemic”, and with an increasing number of listings opting to cut prices. The latter metric might itself be muted by the number of listings getting pulled… Cheery stuff!
All this may be true, but this week, we were thinking about metaphorical collateral damage rather than literal damage to collateral values. The first apparent victim of “collateral damage” is that of the now seemingly daunted consumer. Having had Target and Walmart already flag weakness, this week Kohl’s earnings report was another voice adding to the chorus. In addition to posting “a surprise quarterly loss” instead of the expected small profit, the company “cut its annual sales and profit forecasts”. The one-two punch set the stock up for it’s “worst day ever” as the CEO warned that the “discretionary spend of Kohl’s middle-income customers continues to be pressured by a number of economic factors including high interest rates and inflation, while it has remained steady among high-income customers”. Ah, that old Athenian chestnut, “The strong do what they can and the weak suffer what they must”. Have companies greedflationed all of the savings out of certain parts of the market? Going the other direction, companies such as Amazon, Walmart, Target, and Walgreens are “slashing prices” on thousands of items. While this may offer a nice opportunity to claim altruism, “Walgreens understands our customers are under financial strain and struggle to purchase everyday essentials”, the cynical out there might wonder if it has more to do with supply and demand. Altruism, however, isn’t free. As the Fed’s latest Beige Book noted, “Contacts in most Districts noted consumers pushed back against additional price increases, which led to smaller profit margins as input prices rose on average.”
Another locus of apparent collateral damage is in… central banking? It appears that when it comes to forward guidance, inflation targets, and confidence in forecasts, central banks are currently confirming the adage that “No plan survives first contact with the enemy”. Stateside this week saw a few Fed heads talking across purposes. Bill Dudley, an ex-Fed official, took to the pages of Bloomberg to argue that the Fed’s Short-term interest rate target might “not be high enough to cool the economy”. Meanwhile, the Empire Fed’s John Williams said that Fed policy was “well-positioned” and “restrictive”, remarking that he expected “inflation to resume moderating in the second half of this year”. The Cleveland Fed’s latest Economic Commentary seemed unconvinced by Mr. Williams, concluding that if “forces that have been pushing down inflation, notably, resolution of supply chain issues, have run their course, then the last half mile [to bring inflation back to target] could take several years”. And we would add, “could be politically tricky” (as noted by Monsieur Blanchard quite some time ago…). In the meantime, as the Fed’s “communication continues to favor Fed hikes rather than Fed cuts” according to a Bloomberg Natural Language Processing Model, other central banks, such as the RBNZ, are noting that “persistence in… inflation remains a significant upside risk”. “Monetary policy may need to tighten and/or remain restrictive for longer if wage and price setters do not align with weaker productivity growth rates”. Perhaps we can split the difference: maybe they are both right?
