Dec Mullarkey
Managing Director, Investment Strategy
& Asset Allocation

The latest inflation print showed a minor deceleration over the year. Good news, but less than expected. Beyond the aggregate numbers, research from the Atlanta Fed dissects inflation into “sticky” and “flexible” price drivers. The split relates to how quickly prices can shift.

Sticky prices include items like rent and the cost of medical services, which are negotiated in advance and take time to change. Last year those were under control but have started to accelerate, as more price setters become influenced by current conditions. Meanwhile, flexible prices, which respond quickly and include items like energy and car prices, seem to have peaked. Extrapolating from this framework suggests it may take well into next year or after to return to a reasonable inflation level.

Fortunately, the highly anticipated switch from goods to services appears underway. The price of durable goods is flattening but some pockets of services are now spiking, with airline fares leading the way. As service capacity adjusts some of this should mitigate.

At this point, forget transitory. We are in a slow grind back to less eye-popping inflation levels.

Source: Financial Times, 2022

Randall Malcolm
Senior Managing Director,
Portfolio Manager, Public Fixed Income

With inflation looking more persistently elevated, the pressure continues to be squarely on the central banks to show their commitment to fighting it. With the Federal Reserve seemingly taking a 75-basis point hike off the table while inflation runs significantly higher than their previous inflation target, it now seems like they are just whistling past the graveyard trying to convince the markets that they are not afraid. Higher inflation will create less certainty in both financial markets and businesses and has already created a source of risk that had been successfully held at bay for decades. Bond investors continue to struggle to interpret central bank communications while central bank actions have already spoken volumes.

Source: Bank of Canada, 2022

Peter Cramer
Senior Managing Director, Head of Insurance Portfolio Management & Trading

Earlier this week the April CPI release surprised to the upside, led by a dramatic increase in core services prices, which rose 0.7% for the month. This increase is concerning because the main determinant of those prices are wages, which have historically been very sticky after they increase. Additionally, both owners’ equivalent rent and medical costs are rising more than expected. Upside inflation surprises like these will drive the Fed to tighten more aggressively, causing increased demand destruction.

This impact can be seen in the tightening of financial conditions, as captured by the Goldman Sachs Financial Conditions Index. This index has increased from a low of just under 97 back in November of 2021 to 99.25 this week. Historically, levels above 100 on this index are associated with periods of market stress, so we are approaching an inflection point that could lead to an acceleration of the market sell off.

Source: Bureau of Labor Statistics, 2022

Daniel Lucey Jr., CFA
Senior Managing Director, Senior Portfolio Manager, U.S. Total Return Fixed Income

The last several CMBS SASB deals have come significantly wider than comparable pricing only a few months earlier, particularly single asset/single borrower retail deals backed by higher-quality malls. But, in our view, fundamentals remain supportive. There has been a marked recovery in loan delinquencies across the CMBS universe. Loan delinquency spiked from low single digits to 10% in 2020 and they're now back below 5%. Most of that increase in loan delinquency status came from lodging and retail assets. While both sectors continue to experience higher delinquency levels than the pre-pandemic levels, the trend remains positive. Diving deeper, retail has seen an occupancy recovery and continued leasing activity across strip centers, but also in higher quality mall properties. We believe an underappreciated trend coming out of Covid was that it highlighted the importance of brick-and-mortar stores as a critical part of that omnichannel network, and so the store remains the most profitable sales channel. It remains the cheapest means of customer acquisition and it also helps to improve ecommerce gross margins by reducing logistics costs. While some of the other CRE subsectors like multifamily and industrial have very strong fundamental stories, many of those stories are well-told and pricing at times already reflects the strong fundamental story. In contrast, the well-positioned Class A+ retail properties remain somewhat unloved by much of the CRE debt investing community, making for a great entry point in a volatile market.

Source: Trepp

Market insights are based on individual portfolio manager opinions and market observations. These are observations only and are not intended to provide specific financial, tax, investment, insurance, legal or accounting advice and should not be relied upon and does not  constitute a specific offer to buy and/or sell securities, insurance or investment services. Investors should consult with their professional advisors before acting upon any information posted her

Timely insights, five minutes a week

Never miss an episode - streaming on Apple, Spotify and Google.

Listen now

Explore more market insights