Every day is “deja vu all over again” for global stock markets which hovered close to all-time highs on Monday as the best start to a year in eight years showed little sign of running out of steam, thanks to “goldilocks” – the combination of global growth and low inflation – which has sent risk appetites into overdrive

For traders returning from holiday, Wall Street last week posted its best start to a year in more than a decade; In yet another case of “bad news is again good news”, Friday’s disappointing jobs report, while weaker than expected, encouraged hopes that “brisk growth and low inflation can be sustained this year.” The MSCI world index was flat, just below record highs. It has gained 2.5% in the first five trading sessions of the year, its best start since 2010, according to Thomson Reuters data.

After surging every day last week, U.S. equity futures are little changed while European stocks followed Asian markets higher before the start of another earnings season that’s expected to produce strong profit outlooks. The euro and the pound retreated against the dollar which snapped a two-day drop as traders unwound stale short positions, while the euro slid under 1.20 after it failed to find support from data showing speculative long positioning on the common currency reached a record even as Euro-area economic confidence rose to a two-decade high; euro-area bonds and Treasuries were steady, with U.S. two-year yields within sight of psychological 2% level

European stocks climbed for a fourth day, rising to the highest levels since August 2015 and poised for their longest winning streak in two months. Europe’s Stoxx Europe 600 Index added 0.2%, following a weekly gain of 2.1%, the best start to a year since 2013 and its biggest weekly advance since April. Miners and carmakers lead gains, with the latter poised for the highest level since May 2015. Novo Nordisk shares pushed marginally higher after they said they had made a bid for Belgian rival Ablynx, whose shares are yet to open but were indicated higher by as much as 45%. Commerzbank and Deutsche Bank are propping up the DAX after Cerberus said they oppose a merger between the two lenders.

Earlier, Asian markets inched towards all-time peaks. Australia’s ASX 200 (+0.1%) and KOSPI (+0.4%) were positive ahead of inter-Korean talks which begin tomorrow. The tone for the rest of the Asia-Pac region was mostly reserved throughout the day amid the absence of Japanese participants due to public holiday. Chinese shares continued their strong start to the year, with property developers and energy stocks among the top gainers amid optimism over real estate sales and after the government said it would support mergers in the coal sector. The MSCI China Index climbed 0.7%, taking its advance this year to 6.3%; the gauge is at its highest in 10 years. The Hang Seng Index rises 0.3% for 10th straight gain, its best run since October 2012, while the Hang Seng China Enterprises Index rose +0.2%. The Shanghai Composite Index rose +0.5%; its seventh day of gains and the longest streak since March 2016. Real estate companies accounted for five of top 10 advancers on Hang Seng Index, as China developers listed in H.K. build on their best week since January 2015, while property subgauge outperforms in Shanghai. Of note: the PBoC refrained from liquidity operations for the 11th consecutive day, draining a net 40bn yuan in liquidity, amid reports of tighter shadow banking regulations, as well as PBoC researcher comments regarding scope for higher rates.

In an otherwise quiet FX session, South Korea’s won sharply dropped  after the government warned it would take action to stem one-sided moves in the currency, which spurred speculation of central bank intervention.

The KRW climbed against the dollar early Monday before sharply reversing to sink as much as 0.7% as traders speculated that the government was in the market. In response to a request for comment from Bloomberg News on the move, an official at the nation’s FX authority said that South Korea will take steps “sternly” in the case of one-sided moves in the won as the dollar weakens globally.  The currency had dropped to an intraday low of 1,069.80 per dollar, reversing an earlier gain to 1,058.80, with traders speculating that the swing was due to central bank intervention.

The won was Asia’s best-performing currency last year, climbing almost 13 percent, as its economy benefited from thriving exports and the central bank raised interest rates for the first time since 2011. The Korean government may find that room to act against further advances will increasingly be limited as talks to revise a free-trade agreement with the U.S. proceeds, according to Schroder Investment Management.

Losses in most other emerging Asian currencies accelerated through the trading day.

As emerging market assets advanced this year, other Asian governments including Thailand and the Philippines have also flagged that they would act to smooth volatility if needed. “Since the start of the year, Asian currencies backed by strong trade and current account surpluses, particularly the TWD, THB and KRW have continued to strengthen,” said Heng Koon How, head of markets strategy, global economics and markets research at United Overseas Bank Ltd. “It’s not surprising that local authorities may act to stabilize FX markets in the interim and prevent excessive strength.”

The dollar index rose for the first time in three days as the rally in the euro faded and options signaled bets on a weaker common currency according to Bloomberg; support also came from the Fed’s Williams who said in Reuters interview that three rate hikes in 2018 “makes sense”. The dollar rose against all G10 peers on Monday, even as gains failed to push the Bloomberg Dollar Spot Index markedly away from a three-month low reached during Asian hours.

The greenback has been pressured since the start of the year amid doubts on the strength of the U.S. economic recovery and its impact on the pace of Federal Reserve policy tightening. Market players are focusing on riskier assets such as stocks, while persistent political worries in the U.S. have also weighed on the greenback.

“The dollar may recover in the short-term due to stale short positions and lack of any meaningful catalysts in other currencies to take the dollar another leg lower,” said Viraj Patel, a currency strategist at ING Bank NV. “But this doesn’t mask the structural problems — we think these political and protectionist risks for the dollar could be more evident ahead of President Trump’s State of the Union speech on Jan. 30.” Elsewhere, the Australian dollar reverses gains made since Friday’s U.S. non-farm payroll miss as macro accounts short spot against both kiwi and dollar. The MSCI EM Asia Index gained for a fifth day.

In commodity markets, many commodities paused after the recent run-up in prices, supported by a broadly weak U.S. dollar and the rise in global growth expectations. WTI and Brent crude futures both modestly in the green near 3-year highs that were hit late last week as the rig count last week showed that drillers lowered the number of rigs by 5 in the latest week. Precious metals were slightly lower with silver falling from 6-week highs and gold pulled back 0.1% after rising for its fourth straight week last week.

Attention in the U.S. will turn to the quarterly earnings season, which kicks off this week with the Street expecting solid growth of around 10 percent. Analysts at Bank of America Merrill Lynch said that the global economy had entered 2018 “firing on all cylinders”. “This growth is keeping our quant models bullish and driving earnings revisions to new highs,” they added. “We stay long outside the U.S., with Asia ex-Japan and Nikkei our growth plays, Europe still for yield.”

Meanwhile, in Europe attention is returning to Germany’s struggle to form a government, restraining the single currency. The pound fell and U.K. stocks were flat following weak economic data and reports that Prime Minister Theresa May is considering creating a position for a minister in charge of contingency planning for a no-deal Brexit.

Expected data today includes only US consumer credit. Other things to watch this week include U.S. inflation data; Fed spearkers including San Francisco Fed President John Williams and head of the New York Fed Bill Dudley; China producer and consumer prices data are due Wednesday, while a reading on the country’s money supply is expected in coming days;  U.S. firms announcing earnings this week include JPMorgan Chase & Co., Wells Fargo & Co. and BlackRock Inc.

Market Snapshot

• S&P 500 futures little changed at 2,742.75
• STOXX Europe 600 up 0.2% to 398.28
• MSCI Asia Pacific up 0.2% to 179.67
• MSCi Asia Pacific ex Japan up 0.3% to 589.26
• Nikkei up 0.9% to 23,714.53
• Topix up 0.9% to 1,880.34
• Hang Seng Index up 0.3% to 30,899.53
• Shanghai Composite up 0.5% to 3,409.48
• Sensex up 0.6% to 34,370.28
• Australia S&P/ASX 200 up 0.1% to 6,130.37
• Kospi up 0.6% to 2,513.28
• German 10Y yield fell 1.1 bps to 0.428%
• Euro down 0.3% to $1.1989
• Italian 10Y yield fell 0.9 bps to 1.737%
• Spanish 10Y yield fell 2.0 bps to 1.502%
• Brent futures up 0.3% to $67.80/bbl
• Gold spot down 0.2% to $1,317.11
• U.S. Dollar Index up 0.4% to 92.27

Top Overnight News

• Stephen Bannon’s apology for his comments trashing Donald Trump’s family did little to tamp down the president’s anger at his former chief strategist, as aides describe the president demanding a stark choice from supporters of both men: you are either with Bannon, or with me
• Angela Merkel’s own party bloc is making her life more difficult as hard-liners seek to force the German chancellor to shift to the right in talks on setting up a government, while she is also seeking a commitment this week from the rival Social Democrats to start formal negotiations on extending their governing alliance
• U.K. PM Theresa May is starting the new year with a Cabinet reshuffle which will see her move her education and health ministers and create a post for a no-deal Brexit minister, according to newspaper reports
• Berlusconi could end up holding the aces after Italy’s election
• Merkel calls for deal as make-or-break government talks begin
• China’s foreign-currency holdings rose $129 billion in 2017, posting the first annual gain since 2014 amid tighter capital controls, a stronger yuan and resilient economic growth
• Euro-area January Sentix investor confidence at 32.9 vs 31.1 in December
• Germany November factory orders fall 0.4% m/m; estimate unchanged m/m

Asia equity markets traded mostly higher as the positive tone seeped through from last Friday’s record performance on Wall Street where all major indexes printed at all time high levels despite the NFP miss, while the DJIA extended above the 25,000 level and posted its best start to the year in over a decade. As such, ASX 200 (+0.1%) and KOSPI (+0.4%) were positive in which with the latter outperformed ahead of inter-Korean talks which begin tomorrow. The tone for the rest of the Asia-Pac region was mostly reserved throughout the day amid the absence of Japanese participants due to public holiday, while Shanghai Comp. (+0.4%) and Hang Seng (-0.1%) were choppy after the PBoC refrained from liquidity operations and amid reports of tighter shadow banking regulations, as well as PBoC researcher comments regarding scope for higher rates. Opining in the China Daily, PBoC Deputy Head of Research Ji Min stated that there is room for a rate increase in the short-term, although he later reversed himself. On Monday, the PBoC skipped open market operations again today citing relatively high bank liquidity.

Top Asian News

• China’s Currency Reserves Bounced Back Last Year Amid Cash Curbs
• China Insurer Up $101 Billion Trades Like a Technology Stock
• Aramco Joins Saudi Companies Boosting Pay After Royal Orders
• Won Swings to Loss as Korean Government Warns of Stern Steps
• Won’s Whipsaw May Be a Warning to Emerging-Market Currency Bulls
• Asia Stocks Extend Rally on Earnings, Korea Talks Outlook
• Macron Calls for China-EU Relationship to ‘Enter 21st Century’
• China’s Richest Woman’s Wealth Rose by $2 Billion in 4 Days

European equity markets continued their march higher on Monday with all the major indices trading in positive territory. With little major macro news over the weekend, equity markets continued where they left off in the US where all the major indices closed at record highs. In individual equity news, Novo Nordisk shares pushed marginally higher after they said they had made a bid for Belgian rival Ablynx, whose shares are yet to open but were indicated higher by as much as 45%. Commerzbank and Deutsche Bank are propping up the DAX after Cerberus said they oppose a merger between the two lenders. A firm rebound in core bonds, and the recovery started on Eurex where Germany’s 10 year debt future caught a bid ahead of nearest chart support below 161.50. Market contacts noted light buying amidst a paring of Dax gains and then more of an intraday short squeeze once the opening peak was breached. Bunds have now been up to 161.80 (+21 ticks vs -20 ticks at worst), and last
Friday’s 161.87 session high is next on the radar, although firmer than forecast Eurozone retail sales may stall further upside. Gilts have also reversed early Liffe losses to trade at 124.82 (+17 ticks vs -24 ticks at one stage), awaiting news from UK PM May on her new Cabinet Ministers/posts.

Top European News

• German Factory Orders Dip But Economy Continues Upward Trend
• May Emerges Stronger in 2018, Ready to Finally Reshuffle Cabinet

In FX markets, the USD is higher against most of its major counterparts after initially trading lower at the beginning of Asia-Pac trade. The turnaround appeared to be intervention from South Korea who were said to buying dollars to weaken the KRW. GBP/USD trades lower as markets await a cabinet reshuffle from UK PM Theresa May although no major changes are expected. AUD/USD is back down below 0.7850, with the AUD undermined by a marked slowdown in Australia’s construction index and Government forecasts for a sharp 20% decline in iron ore prices this year.

In commodities, WTI and Brent crude futures both trade relatively flat and near 3-year highs that were hit late last week as the rig count last week showed that drillers lowered the number of rigs by 5 in the latest week. Precious metals were slightly lower with silver falling from 6-week highs and gold pulling back after rising for its fourth straight week last week. Markets will be looking out for comments from Fed speakers later in the session on the future path of Fed policy given the its sensitivity to rate hikes. Australia’s government sees iron ore prices dropping 20% this year to an average USD 51.50/ton, due to increasing global supply and moderating Chinese demand.

Looking at the day ahead, the November consumer credit numbers are due. The Fed’s Williams and Rosengren speak at an Inflation targeting conference, while the Fed’s Bostic will also speak on monetary policy and the US economic outlook. Elsewhere, France’s President Macron arrives in China today for a three day state visit.

US Event Calendar

• 3pm: Consumer Credit, est. $18.0b, prior $20.5b
• 12:40pm: Fed’s Bostic Speaks on Economic Outlook in Atlanta
• 1:35pm: Fed’s Williams Speaks at Inflation Targeting Conference
• 4pm: Fed’s Rosengren Speaks at Inflation Targeting Conference

DB’s Jim Reid concludes the overnight wrap

If you’ve just come back to work from holidays today, you’ve missed a bit of a melt up in risk assets so far in 2018 with US equities climbing every day this year (S&P500 +2.60% so far) and Europe increasingly getting in on the act (Stoxx +2.10% YTD) after a hesitant start on an initially surging Euro. Basically the year has started as a turbo charged version of 2017 with many of the same themes still present. Data on both sides of the Atlantic has generally been strong but we’re yet to see signs of elevated inflation pressures with Friday’s US average hourly earnings ‘only’ in-line and with a 0.1ppt downward revision to the prior month.

In a relatively quiet week for data the main highlight has to wait until Friday with the latest US CPI report due. Last month’s release was another miss (the 7th in 9 months) with one of the standout contributors a 1.3% fall in apparel prices, the third largest drop in history and the largest since 1998. Our economists expect the change in apparel prices to largely unwind and, as such, core CPI (+0.2% forecast, +0.2% consensus vs. +0.1% previously) should come in relatively healthy as a result. A print in line with DB’s expectation would see YoY core CPI slip two basis points to 1.69% but the six-month annualised change would rise about 17 basis points to 2.08% and the three month annualised change would rise almost twice that to 2.19%, providing some evidence of core inflation firming. With the price of most refined energy products falling in December, headline CPI (+0.1% vs. +0.4% previous) should moderate correspondingly.

A reminder that our credit view is positive in Q1 based on assumption of still subdued inflation and still contained government yields in the early part of the year. However we think both will move higher from around Q2 and exhibit more volatility and will thus create more headwinds for credit from then, albeit at tighter spreads than today’s levels. If we’re wrong on inflation though the carry trade will likely last longer as growth looks very solid at the  moment.

Staying with inflation, we also see US PPI data on Thursday and China CPI and PPI on Wednesday. Outside of the data, US Q4 earnings kicks off from Tuesday, with Friday seeing results from Wells Fargo, JP Morgan and Blackrock.

Back to credit, as mentioned at the top, on Friday my team produced the review of 2017 in Euro HY (link) and a report “Capitalising on the CDS-Bond Basis and Term Structure of Credit Spreads” which analyses the CDS-bond basis and curve steepness in EUR and USD corporate credit. Cash bonds have richened to CDS meaningfully since the ECB announced corporate bond purchases in early 2016. Michal Jezek expects this to reverse as they prepare for exit in 2018. At the same time credit curves are too steep and are expected to flatten, particularly in the CDS space as structured credit activity intensifies. The report provides macro credit trade ideas to take advantage of these dislocations and discusses the implications for hedging bond portfolios.

Over in China, December foreign exchange reserves rose for the 11th consecutive month to US$3.14trn (vs. $3.13 trn expected) amid tighter capital controls and resilient economic growth. This morning in Asia, markets are trading modestly higher. The Kospi and China’s CSI 300 are up 0.47% and 0.65% respectively, while the Nikkei is closed for a national holiday. The Hang Seng and China’s RMBUSD are marginally lower as we type with the former looking to extend a winning run to a tenth day.

Moving on now to the various central bankers speak from Friday and over the weekend. On rates, the Fed’s Williams expects unemployment to fall to 3.7% this year, but he is “not worried about inflation suddenly taking off” and suggested that “something like three rate hikes makes sense to me”. Conversely, the Fed’s Harker who is not a FOMC voter this year, believes two rate hikes will be appropriate in 2018 and “want to be slow and steady with any additional rate increases”. Although he sees the flat yield curve “worries so far have been a little inflated and don’t think the situation we’re in now is analogous to the inversion…. (seen) in the 70’s and ‘80’s”.

On potential impacts from the tax cuts, Mr Williams expect it to have a “modest, positive effect” on GDP growth and that the US economy will be in a very positive place two years from now, with “inflation at 2% and around 4% unemployment”.

Similarly, Mr Harker didn’t expect tax cuts to have a large impact on US economic growth. Elsewhere,the White House Chief economist Kevin Hassett noted the administration’s own analysis suggests the tax cuts should not alter the Fed’s projection of three rate hikes in 2018, in part as “if you have supply side stimulus, then it doesn’t put upward pressure on prices”. Finally, the Fed’s Bullard was more optimistic, he noted “there is some possibility that (tax cuts) could light a fire under investment and really drive growth higher…I have some sympathy for this idea…”

Following on, the Bundesbank’s Weidmann reiterated his views that setting a clear end for ECB’s QE bond buying program is justifiable and that “even after the end of net purchases, monetary policy will remain very expansive”. Elsewhere, the Fed’s Mester said US monetary policy should remain focused on price stability and maximum employment and “not be given a third objective of financial stability”.

Now recapping other markets performance from Friday. The S&P rose 0.70% to fresh highs with only two sectors marginally in the red (energy and utilities). European markets were all higher, with the Stoxx 600 up 0.93% back near its 2.5 year high and all sectors in the green. Across the region, gains were by led the DAX (+1.15%) and CAC (+1.05%), while the FTSE was the relative laggard (+0.37%).

Government bonds weakened with core 10y bond yields up c1-2bp (Bunds +0.4bp; Gilts +1.1bp; UST +2.4bp). Across the pond, Canada’s 10y bond yields rose 7.2bp after its December unemployment rate came in below expectations at 5.7% (vs. 6%) and to the lowest since 1976. In currencies, the US dollar index and Sterling gained 0.10% and 0.15% respectively, while the Euro weakened 0.32%. Elsewhere, precious metals softened (Gold -0.26%; Silver -0.04%) and other base metals also fell modestly (Zinc -0.06%; Aluminium -0.76%; Copper  -0.98%).

Away from the markets and onto Germany, where Ms Merkel and the SPD have begun exploratory talks on Sunday to form the next coalition government. Rhetoric appears to be cautiously optimistic, with SPD leader Mr Schulz noting “we aren’t laying down any red lines”, while Ms Merkel noted “I’m going into these talks with optimism, though it’s clear to me that a huge amount of work lies ahead”. Both sides want to finish initial talks by Thursday and if there are enough common grounds, formal negotiations could start from late January.

We wrap up with other data releases from Friday. In the US, the macro data was mixed. The December change in nonfarm payrolls was lower than expectations at 148k (vs. 190k), but the six-month average gain of 166k was still slightly ahead of the 12-month average of 161k. The labour market remains tight with the unemployment rate in line at 4.1% and steady mom at a record 17 year low. The growth in average hourly earnings was in line at 2.5% yoy. Elsewhere, the ISM non-mfg composite was below market at 55.9 (vs. 57.6 expected) but still above the long term average, while the headline November factory orders was above market at 1.3% mom (vs. 1.1% expected). Finally, the final reading for November durable and capital goods orders was broadly in line at 1.3% mom and -0.2% mom respectively, while the November trade deficit was slightly wider than expectations at -$50.5bln (vs. – $49.9bln). Factoring in the above, the Atlanta Fed’s GDPNowestimate of 4Q GDP growth is now at 2.7% saar, down from 3.2% previously.

In Europe, the macro data ranged from broadly in line to above market expectations. Firstly on the CPI, the Eurozone’s headline CPI was in line at 1.4% yoy, but core was a tad softer at 0.9% (vs. 1.0%) – steady for the third consecutive month. Across the countries, France’s CPI was in line at 1.3% yoy but Italy was below at 1% yoy (vs. 1.1% expected). Elsewhere, Germany’s November retail sales was materially above market at 4.4% yoy (vs. 2.3% expected), along with France’s December consumer confidence at 105 (vs. 103 expected) – a level exceeded in only two months in the last 15 years. Finally, the Eurozone’s November PPI was also above market at 2.8% yoy (vs. 2.5% expected).

Looking at the day ahead, Germany’s November factory orders will be out as this note hits inboxes. Then we get a range of confidence indicators for the Eurozone, including the January Sentix investor confidence along with the December economic, consumer and business confidence stats. Elsewhere, the Eurozone’s retail sales and the UK’s December Halifax house price index are due. Over in the US, the November consumer credit numbers are also due. Onto other events, the Fed’s Williams and Rosengren speak at an Inflation targeting conference, while the Fed’s Bostic will also speak on monetary policy and the US economic outlook. Elsewhere, France’s President Macron arrives in China today for a three day state visit.

It’s official – 2018 is a lock for stock investors.

Thanks to today’s gains, the S&P 500 is up 2.5% – doubling the gains in gold – as bonds are suffering so far…which means, as Ryan Detrick notes, “since 1950, when the first 5 days are up over 2%, the S&P 500 is higher for the year 15 out of 15 times with an average return of +18.6%. ”

Unless, of course, this time is different.

On the day, The Dow managed to scramble back to unchanged then stick there before closing lower… Trannies (blue) were best, Nasdaq continued higher with more record highs…

This is the first day of the year so far that we did not gap higher at the open.

There has been a notable regime shift from December as late-day buying returns…

The Smart Money Flow Index is calculated by taking the action of the Dow in two time periods: the first 30 minutes and the close. The first 30 minutes represent emotional buying, driven by greed and fear of the crowd based on good and bad news. There is also a lot of buying on market orders and short covering at the opening. Smart money waits until the end and they very often test the market before by shorting heavily just to see how the market reacts. Then they move in the big way. These heavy hitters also have the best possible information available to them and they do have the edge on all the other market participants.

But while stocks remain notable, it was the chaos in cryptocurrencies that caught many eyes. Ripple crashed over 30% on the day, before ramping back…

One apparent reason for the sudden plunge: an adjustment from a popular website on its digital-currency price quotes. A website called coinmarketcap.com on Monday removed data from some South Korean exchanges from its price quotes for a range of virtual currencies including bitcoin, Ethereum and Ripple’s XRP. The move followed a South Korean government crackdown on cryptocurrencies.

And while everyone sees cryptos as being in a bubble, we couldn’t help but note the crisis in ‘camera on a stick’ as it crashed 30%, ripped back on rumors, then dumped on denials… and is now down 95% from its post-IPO highs (now that sounds like a burst bubble)…

Additionally, SeaGate soared after rumors it was working with Ripple…

Treasuries were unchanged today – literally – after a small dip in yields early ramped back to unch (Tokyo on holiday again)… (the entire curve is around 7-8bps higher on the year)

The Dollar Index bounced most in 3 weeks

Crude was higher on the day and copper lower once again as the industrial metal has not had a great 2018 so far…

Finally, the longest win streak in the history of gold futures… is over…

On Friday, 11 straight days higher beat the 10-day streak from 1994 but today’s 12th day loser ends the streak.

For the past several months, we’ve written frequently about the epic collapse of the centerpiece of the 1980’s retail model: the shopping mall.  With the growth of online sales finally starting to take a toll on brick-and-mortar retailers, shopping malls have faced a tidal wave of store closures and have been forced to backfill empty square footage with everything from libraries to doctors offices (see: America’s Desperate Mall Owners Turn To Grocers, Doctors & High Schools To Fill Empty Space).

Alas, a new report from property-research firm Green Street Advisors, which analyzed 950 mall locations over 2017, 230 of which were collateralized within commercial mortgage-backed securities (CMBS) loans, the financial troubles for American mall owners might be even worse than feared due to organic tenant losses from lease expirations. 

First, just to put the mall economic model into perspective, Green Street points out that while massive department store closures tend to dominate headlines, they represent a very small portion of mall income.  The real financial losses for mall owners come via the ancillary traffic impact on national and regional tenants which pay of the majority of mall lease income.

Facing widespread department store closure announcements over the last year and a dark prognosis from most industry experts, mall landlords have been doing their best to redevelop vacant boxes and prepare for a future with fewer anchor tenants. Although department store struggles have dominated headlines, they provide only a small portion of a mall’s net operating income (NOI) because many anchor tenants own their stores or pay little-to-no rent.

In-line tenants therefore have an outsized impact on mall NOI, and their performance offers a preferred indicator of mall health. With shorter lease terms and a higher rent burden, many tenants are making decisions in real time within each mall. The best in-line tenants to track are the ~300 national tenants who have at least 50 mall locations nationwide and are constantly judging the performance and cost of occupying space within any given mall.

“While the department stores take up a lot of space, they don’t generate much revenue for the mall owner,” Sullivan said. “The mall owner makes most of its money from the in-line tenants.”

Of course, many large national tenants (e.g. Wet Seal, The Limited, etc.) have openly announced store closures which have presumably already been digested by investors.  That said, Green Street says the far more pressing issue for mall investors is to analyze which stores are quietly shrinking their mall footprints organically by simply choosing to forego lease renewals.  As Jim Sullivan of Green Street told Bloomberg, “when leases expire, they just don’t renew them, as opposed to breaking leases and doing something a bit more aggressive.”

First, roughly 70% of the 950 malls studied experienced a decrease in national retailer in-line tenants. Second, while the average amount of net closures increased materially at lower-quality malls, there was a wide dispersion of net closures impacting malls across the quality spectrum. Third, while half of the top 25 net closing retailers have publicly announced store closures, the other half are closing relatively quietly and thus present significant risk to the sector.

As reported in the media, a wide range of retailers have been downsizing or closing their entire brick-and-mortar footprint (e.g., Wet Seal, The Limited). While some of these brands have publicized their closures, others have been doing so more quietly by choosing not to renew expiring leases. Given that in-line tenants have a higher rent per square foot burden and have shorter lease terms, these trends will often occur long before any anchor store closing announcements. The challenge for market participants is to not only track the closures, but also to assess the quality of new tenants backfilling the space.

Meanwhile, even though lower quality malls are bearing the brunt of store closures, Green Street notes that A-grade malls are also experiencing significant closures as well.

Across the 950 malls studied, over two-thirds saw a net decrease in the number of national tenants. While ‘A’ malls performed relatively well, they have not fully escaped the closures due to some retailers shuttering all their locations regardless of mall quality. Furthermore, most top-quality centers already have more of the national retailers as tenants, limiting their ability to find other national tenants to replace those that leave. Conversely, many lower-quality centers are seeing significant changes in their ability to retain and attract national retailers despite already housing fewer national retailers on average than ‘A’ malls. This trend demonstrates the challenge that many malls are now facing as they fill vacancies with more local and regional tenants.

In conclusion, the key takeaway is that it’s hard to assess what real estate is worth in the retail sector today. In-line tenant activity can provide a window into individual mall health. The Advisory & Consulting group’s analysis concludes that ~70% of malls have suffered a recent decline in the number of national tenants. Understanding which malls are most at risk in a timely fashion is key to anticipating possible “death spirals,” where malls can lose as much as 90% of their value (much more than other property types).

But we’re sure it will all work out just fine and wall street will go on buying those mall reits with reckless abandon…you know, because dividend yields.