“The staff’s projection… included a mild recession starting later this year”
This week was indeed heavy on inflation data, with both CPI and PPI releases. The former dropped and was below expectations, but it comes with the caveat that some of the alternative metrics didn’t come back quite as nicely. The latter “unexpectedly fell”, but the size of the drop reflected the “plunge” in gasoline prices as well as drops in “prices for diesel fuel, residential natural gas, jet fuel, and electric power”. However, while these releases were indeed garnering headlines, the bigger splash came from the ongoing potential of banking fallout and a potential credit crunch. This was made all the more explicit by Wednesday’s Fed minutes, “Given their assessment of the potential economic effects of the recent banking-sector developments, the staff’s projection at the time of the March meeting included a mild recession starting later this year”. While the use of “mild” here is a little jarring to us, one should respect the Fed’s adroit handling of its PR. If Marie Antoinette had the same PR advisors, she might have avoided all the unpleasantness associated with her heartfelt “let them eat cake” plea. The negative outlook did not ultimately deter the Fed from hiking, though there are indications that the FOMC is not entirely of one mind: “several participants” noting “that, in their policy deliberations, they considered whether it would be appropriate to hold the target range steady at this meeting” as “doing so would allow more time to assess the financial and economic effects of recent banking-sector developments”. (Uh oh). The NFIB’s survey respondents are saying that recent economic ‘developments’ aren’t exactly positive.
“Not anticipating a downturn in the economy, although, of course, that remains a risk”
Yellen opted to go the optimistic route, saying that she has “not really seen evidence at this stage suggesting a contraction in credit, although that is a possibility”. While we admit it’s tough sometimes to be the hype-man on a sinking ship, Lael Brainard appears to have little compunction about seemingly contradicting the former Fed head, though she tempered her statement with a nice diminutive, saying, “banks are showing some signs of pulling back a little on credit”, emphasis our own. Nevertheless, morale must be maintained, and the Whitehouse pushed back against the projections of a recession, asserting that one need only look at “job gains, the unemployment rate and consumer spending” as “indicators that show us that we are not headed to a recession or a pre-recession”.
“Floating rate mortgages… are now causing all kinds of havoc”
Whether headed into a recession or not, the carnage continues in real estate (though, at this point, it may be mentally “priced in”?). As anticipated in a previous newsletter, Blackstone did restrict (but not gate!) withdrawals from its BREIT fund, though its managers may have a sense of humour given that it “fulfilled March withdrawal requests of $666 million”, which turned out to be “only 15% of the $4.5 billion in total redemption requests for the month”. Perhaps it’s an omen? The fund could be feeling a little sensitive about the situation as a “Blackstone spokesperson” wrote that “BREIT is not a mutual fund and has never gated”, going further to say, “It is a semi-liquid product and is working exactly as planned”. We suspect a brief perusal of the docs would confirm this. We also suspect that most of its investors have never read those docs. Meanwhile, California’s commercial real estate market appears to be continuing on its merry way in a handbasket: CBRE’s latest data show that despite an increase in “Office Using Employment” in San Francisco County, the vacancy rate rose to “29.4%, a new high for the San Francisco market”. Multifamily may not be immune either…
