Daily Commentary

MarketMinder’s View: We believe the titular measure, owners’ equivalent rent (OER), has more influence over the widely watched Consumer Price Index (CPI) than it deserves—and this analysis does a terrific job showing why. OER is the government’s attempt to tally the “consumption value” of owning a home by calculating the cost of renting it. Given no one actually pays this, the merits of inclusion are debatable. Additionally, as this piece explains, calculating that number is a bit wonky. To do so, it calculates rent’s weight in CPI and tracks what rents are doing. “Step 1, the weight, is based on two survey questions: If you own, how much could you get if you rented out your house or apartment? And if you rent, how much do you pay? Step 2, the change in price, is based on actual rental data. The government collects data from a rolling sample of rental housing units, checking in on each unit every six months to see if the landlord is charging more.” Above and beyond the fact that the cost is imaginary, checking on rental prices every six months implies a substantial lag. Consider, “When market rent prices jumped in 2021, not all tenants immediately saw their rents reset to higher levels: Landlords have gradually reset leases to higher prices, causing that earlier pop to slowly show up in official housing inflation data. Forecasters thought the catch-up process would peter out in 2023 and 2024, allowing housing costs and overall inflation to come down notably. But the convergence between new and existing rent inflation is taking a lot longer than expected.” Economists probably wouldn’t be so annoyed if OER weren’t one of the primary factors keeping inflation elevated, which continues dragging on sentiment toward stocks. But it is also one reason stocks see through stubborn inflation, in our view.

MarketMinder’s View: Japanese Q1 GDP contracted at a -2.0% annualized rate, and upon a quick glance, things look bad: Private consumption dipped -2.0% annualized while imports fell -12.8% and exports plunged -18.7% (the steepest decline since Q2 2020). Yet a couple one-time factors appear to be behind the weak GDP reading. “The economy was hit by fraudulent testing scandals at some automakers, whose impact spread to private consumption, exports and corporate capital expenditures. The contraction, which stood at 0.5% on a nonannualized basis, also stemmed from stalled economic activities in areas affected by the Jan. 1 Noto Peninsula earthquake in central Japan.” As these short-term headwinds ease, output will likely rebound—though that doesn’t mean the country’s longer-term economic issues (e.g., tepid domestic demand, bizarre monetary policy) will have dissipated. In our view, the current economic environment favors Japan’s largest multinationals, which can take advantage of external demand. Japanese firms reliant on domestic demand aren’t likely to fare as well. For more, see our February commentary, “Assessing the UK and Japan’s ‘Recessions.’”

MarketMinder’s View: Back in November 2023’s Dutch general election, the Party for Freedom (PVV) and its firebrand leader, Geert Wilders, won the most seats—stirring fears right-wing populists were going to enter government and implement extremist policy. We had our doubts, for the PVV was far from a majority and needed to work with other parties to govern. As party leaders negotiated, Wilders conceded in March he couldn’t bridge the divides between the PVV and other parties, bowing out as prime minister-elect and giving way to the possibility of an “extra-parliamentary” government. That possibility now appears to be reality, as the PVV and three other parties have a provisional agreement to form a government. “The four party leaders are not expected to be part of the new cabinet but will remain in parliament. Unusually, the so-called extra-parliamentary cabinet is likely to be made up of ministers who are not in the parliament either, but will have to follow the main terms of the agreement.” Details on policy priorities have started to emerge, but in our view, this outcome all but assures gridlock in Holland for the foreseeable future. Personalities aside, the upshot is that the next Dutch government will be a multiparty coalition that may have some ideological similarities—but will likely struggle to agree on a whole lot. That reduces legislative risk and uncertainty, a fine environment for stocks.