The Fed’s preferred inflation measure, the core personal consumption expenditures price index (“PCE”) fell to 1.9% in November. This latest data confirms inflation is slowing. On a year-over-year basis, the PCE was 2.6%, the lowest since February 2021. With the full impact of interest rates yet to be felt (housing is struggling, and the Conference Board’s index of leading economic indicators is down 3.3% in the past six months) the Fed remains concerned. “It’s far too early to declare victory and there are certainly risks“[1]. The Fed held rates steady at its December meeting but is now anticipating three rate cuts in 2024. The pivot makes a recession less likely. December projections see the federal funds rate ending 2024 between 4.5% and 4.75%, down from the current range of 5.25% to 5.5% (.75% lower than today). The markets have responded. The S&P is up 14% over the last two months, the 10-year Treasury yield has fallen nearly a percentage point (to 4.03%), and the dollar has dropped 3% against major currencies[2]. The Fed’s estimate of the long-term “neutral” policy rate remains unchanged at 2.5%. That implies that a lower interest rate environment will return even though the Fed is continuing to allow $95 billion a month in proceeds from maturing bonds to roll off its balance sheet (with no indication of stopping).
Aviation capacity issues continue. Airbus and Boeing will have delivered around 1,400 aircraft in 2023 (a 27% increase over 2022). However, the Aero industry continues to grapple with costly and time-consuming quality control issues. Regulators require close monitoring of parts for authenticity and quality. Dealing with manufacturing defects, the certification of aircraft engine components, and airframe maintenance is leading to the grounding of delivered aircraft as well as delays in new equipment deliveries. The resulting shortage of capacity leads to better returns on existing mid-life equipment. Out-of-production single-aisle aircraft have shown meaningful increases in lease rates as the lessor idle fleet returned to service (and there’s not a lot of existing equipment left). New equipment supply remains constrained, underpinning existing equipment values & lease rates. The result is mid-life single-aisle equipment remains in high demand (current OEM backlogs mean the first available delivery slots for new equipment will be in the 2030s).
Even with flat loadings, railcar prices up 12% to 15%. Scrap rates remain elevated. In the last twelve months, railcar lease rates are up 26% to 33%, with lease terms extending to five years[3]. Both GATX’s Lease Price Indicator and TrinityRail’s Forward Lease Rate Differential continue their upward trend. “Forward-looking metrics continue to point toward consistent strength in lease rates[4]. ”Key commodity market demand across all railcar types is driving substantial new equipment order backlogs at both Trinity and Greenbrier. The eleven North American railcar assembly plants have an estimated industry build capacity of up to 55,000 cars annually (FreightCar America’s new production facility in Mexico is expected to deliver 3,150 to 3,300 railcars in 2023). With a soft landing in sight for the U.S. Economy, concerns surrounding inflation and interest rates are subsiding. But, elevated geopolitical risk and 2024 election year dynamics require expert Aero and Rail equipment investment insight. Call RESIDCO.
Glenn Davis 312-635-3161
[1] Fed Chief Powell’s Post Meeting Press Conference, December 13, 2023.
[2] The Wall Street Journal, December 14, 2023 “Capital Account”.
[3] Railway Age, Sea Change in Railcar Supply, December 5, 2023. Higher new railcar prices drive higher lease rates on existing equipment.
[4] Trinity Industries, third-quarter 2023 earnings statement.
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