Waiting for More Data
The Fed closely watching inflation and employment data before their next meeting
Succinct Summary: Some Fed Governors spoke last week and addressed the hot economic and inflation data from January. They were concerned about the readings but also communicated that they didn’t want to overreact. The Fed will be closely watching inflation and employment data before their next meeting on March 21-22. Company commentary suggests that inflation isn’t coming down as fast as hoped, but labor markets are softening some.
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Macro
Inflation is not going down as fast as the Fed would like
“...recent data suggest that consumer spending isn't slowing that much, that the labor market continues to run unsustainably hot, and that inflation is not coming down as fast as I had thought." - US Federal Reserve Governor Christopher Waller
“We must determine when inflation is irrevocably moving lower. We're not there yet. That's why I think we need to raise the federal funds rate to between 5-5.25% and leave it there well into 2024…there is more work—in the form of interest rate increases—to do." - Atlanta Fed President Raphael Bostic
But the Fed doesn’t want to over-react to January’s data
"Given the data in the last month — higher inflation than we expected and a strong jobs report — these are concerning data points suggesting we're not making progress as quickly as we'd like. At the same time shouldn't overreact to one month of data even if the data is troubling." - Minneapolis Fed President Neel Kashkari
“It could be that progress has stalled, or it is possible that the numbers released last month were a blip, perhaps associated with unusually favorable weather, and that forthcoming data will show that economic activity and inflation resumed their decline." - US Federal Reserve Governor Christopher Waller
Upcoming data is critical
"Fortunately, we will get the next employment report and CPI release ahead of the March 21–22 FOMC meeting, information that will affect my assessment of the appropriate next step for monetary policy. If job creation drops back down to a level consistent with the downward trajectory seen late last year and CPI inflation pulls back significantly from the January numbers and resumes its downward path, then I would endorse raising the target range for the federal funds rate a couple more times, to a projected terminal rate between 5.1% and 5.4%. On the other hand, if those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released." - US Federal Reserve Governor Christopher Waller
Consumer spending is still strong
"I don't mean to disappoint you. But when we look at our data around the world globally, by country, by product, by consumer segment, it is remarkably stable…So resilient, stable, consistent, that's what we're seeing in our data around the world." - Visa (V 0.00%↑) CEO Ryan McInerney
"...the consumer continues to be resilient, and it's one of the things which we are closely tracking is what is the strength of the labor market as part of this process. And we all know that the labor market, certainly in the U.S. but in various other parts of the globe is actually holding up pretty nicely, record low unemployment rates. And when people are employed, they generate paychecks, when they generate paychecks, they tend to spend money, and that's what we've been seeing thus far." - Mastercard (MA 0.00%↑) CFO Sachin Mehra
"So it’s going well. We don’t see any particular change from all the trends that we talked about in Q4 on the January earnings call" - American Express Company (AXP 0.00%↑) CFO Jeffrey Campbell
Price pressures aren’t fully going away
“Upward pricing pressures have eased slightly but are still elevated.” - [Finance & Insurance]
“Inflation, though somewhat eased from the peaks of the past six months, continues to drive higher-pricing demands from suppliers. Hospital volumes are improving but have not returned to pre-pandemic levels in all cases.” - [Health Care & Social Assistance]
“The current dynamics in the marketplace are such that it is getting harder to reduce costs. Most industries are being pinched by inflation and more expensive labor markets. Before, cost reduction was the goal; it’s now cost avoidance. That said, since we’re not able to reduce cost to maintain margins, we have to reduce the employee base more aggressively to achieve margins.” - [Information]
(quotes from ISM services survey)
But there is a slowdown in hiring
"While job openings, quits and low unemployment remained favorable, we have seen a slowdown in hiring activity that leads us to expect a lower demand environment in the near term." - Advantage (FA 0.00%↑) CEO Scott Staples
"While employment grew modestly and wage growth increased at a moderate pace, there were reports of a slowdown in hiring and an increase in layoffs." - Independent Bank Grooup
The market is pricing in higher rates
"Last month we received a barrage of data that has challenged my view in January that the Federal Open Market Committee (FOMC) was making significant progress in moderating economic activity and reducing inflation. I'm not the only one whose outlook has shifted. Since the end of January, financial market participants have revised their outlooks in a way that has led them to mark up their expectations for the federal funds rate at the end of 2023 by about a half percentage point." - US Federal Reserve Governor Christopher Waller
International
China is rebounding
"In February, the Caixin China General Manufacturing PMI grew 2.4 points from the previous month to 51.6, rising above 50 for the first time in seven months and logging a new high since June…In a nutshell for February, the economy saw a faster pace of recovery following a peak in the recent wave of Covid infections as supply and demand expanded, overseas demand surged, employment started to rebound, and logistics recovered at a faster pace." - Caixin Insight Group Senior Economist Dr Wang Zhe
"We're seeing a lot of new momentum in Beijing, which even though we launched a while ago at this point, it's still a brand-new park for most people and haven't been able to visit it, and all of a sudden, the restrictions are lifted. So, I think we've got a very good outlook for park." - Comcast (CMCSA 0.00%↑) CFO Jason Armstrong
Cross-border travel to and from China may take 3 to 9 months to pick up
"As everybody knows, the borders have opened, but there's still a lot of infrastructure that has to happen for travel in and out of China to get back to where it was pre-pandemic. You got to get planes, gates, seats, visas, and all the stuff that the rest of the world has gotten close to back having. In terms of a well-oiled travel system, it's going to take 3, 6, maybe 9 months before we really start to see meaningful travel in and out of China." - Visa (V 0.00%↑) CEO Ryan McInerney
Supply chains are moving away from China
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Financials
AT&T isn’t seeing any change in credit losses
"...in terms of credit losses. Since the spring of last year, we said that we saw an uptick in bad debt, but it really got us back to pre-pandemic levels, maybe a little slightly worse. But that has not degraded at all over the course of the back half of 2024 -- 2022 collections…Bad debt and collections are basically at pre-pandemic levels. So customer continues to hang in there." - AT&T (T 0.00%↑) CGO Pascal Desroches
E-commerce is changing the mix of cross-border payments
"...as more buyers around the world are buying things internationally outside of their home country, we've seen the per cent of cross-border that comes from e-commerce as opposed to travel grow. Before the pandemic, it was about 1/3 of our cross-border business. As we sit here today, it's more than 40% of our cross-border business." - Visa (V 0.00%↑) CEO Ryan McInerney
Consumer
Low-income consumers are under pressure
"We saw customers starting to pull back in late June, primarily in Nordstrom Rack, and this trend continued through the holiday season. Across both banners, the softening trend was more pronounced in customers with lower income profiles." - Nordstrom (JWN 0.00%↑) CEO Erik Nordstrom
"In the past, I've stated that most of America has -- about 67% or so of Americans have a household income under $100,000...And the lower household income customers are pinched. Basically, at this point, 30% of that lower household income customer, their expenses today are greater than their income coming in. And 70% of them have curbed spending as a result of that" - Big Lots (BIG 0.00%↑) Jonathan Ramsden
Middle-income consumers are trading down
“I mean what we're seeing is the consumer making $80,000 a year is trading down. And that's -- timing is everything. We're doing better on so many fronts with a long way to go. They're having an experience they can relate to. But as far as planning for that in our outlook, no, we don't do that” - Dollar Tree (DLTR 0.00%↑) EO Richard W. Dreiling
The rich keep spending more
"Burberry’s got a challenge. The constant trend is people going for more and more and more premium items. The rise of the superbrands is getting absolute, so that middle ground of the market is becoming tougher and tougher." - Harrods Managing Director Michael Ward
Retail comps are slowing
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Tax refunds are smaller this year, but coming in earlier
"The tax refunds, while they're coming in maybe a little bit earlier this year than last year, they're about 10% to 15% less per refund than last year." - Big Lots (BIG 0.00%↑) CFO Jonathan Ramsden
Technology
AI is a hot topic in corporate America
"AI is absolutely the hot topic today. Generally, I helped fuel it. AI is now basically at the top of every CEO’s agenda..It’s just talk. They figure they have to have AI in their messaging but don’t do a thing about it. It’s kind of curious" - C3.ai CEO Tom Siebel
“And then the buzzwords of today is all about AI and ChatGPT, how exactly that will result into commerce use cases and when is to be seen” - Mastercard (MA 0.00%↑) Digital Officer Jorn Lambert Chief
It feels a bit like the internet in 1995
"So yes, first of all, that's a great question about AI. I think your question about AI sort of reminds me of 1995, 1996, when the Internet was -- the first wave of the Internet revolution. I was so excited. That's why I moved to Silicon Valley, right, to embrace that first wave of revolution. And since then I was a sucker for real-time collaboration until today. I can tell you, speaking of AI, I'm as excited as 1995, maybe sorry I'm wrong, maybe more excited than 1995, 1996, given my engineering and product background. I think AI [Indiscernible] sort of faces a challenge; at the same time, also have a huge opportunity ahead of us, right?" - Zoom (ZM 0.00%↑) CEO Eric Yuan
Tech companies are scrambling to rebrand themselves as AI companies
"This is the milestone we’ve been waiting for to establish Qualcomm as an AI company. You want to generate any image that you want to share with somebody, you want to do it in real-time — think about what Microsoft is doing with search, and you want to chat with the search results. For you to make that happen, you can’t run everything in a data center, you’re going to have to bring the AI to the devices. The ability to create that much processing power in a smartphone and run that without compromising the battery life is something that only Qualcomm can do," - Qualcomm (QCOM 0.00%↑) CEO Cristiano Amon
"...if you believe that AI is going to drive strong growth in compute, then you have to believe it's going to drive strong growth in memory to sort of match there." - Micron Technology (MU 0.00%↑) CFO Mark Murphy
And promising that they have not missed the boat
"There are other companies taking shots at us saying that we are late to market. We've missed the AI boat. They have new products that we don't have. I would tell you this is the very first minute of a new game, and the game is never done in the first minute. The game is done when the game ends…I can promise you that our engineers are going to deliver amazing technology in AI to our customers" - Alphabet (GOOG 0.00%↑) Google Cloud CEO Thomas Kurian
Amazon is partnering with Hugging Face
"Hugging Face and AWS are making it easier for customers to access popular machine learning models to create their own generative AI applications with the highest performance and lowest costs. This partnership demonstrates how generative AI companies and AWS can work together to put this innovative technology into the hands of more customers." - Amazon (AMZN 0.00%↑) AWS CEO Adam Selinspky
Snowflake has completed moving its data warehouse workload to Amazon’s generic chip Graviton
“As I said before, we factor in a 5% revenue headwind every year associated with both hardware and software improvements and don't see any material hardware improvements happening. This year, as of today, there are a number of software improvements that we're constantly working on those. And so I feel pretty good about that 5%, as I mentioned. The Graviton2 deployments are all completed as of today. We didn't quite get them all done last year. There were a number of them were finished in the first month of this quarter and so didn't quite have the full impact as we thought last year, but it's really hard to tell. But it's baked into our forecast for this year” - Snowflake (SNOW 0.00%↑) CFO Michael P. Scarpelli
Consumer electronics markets remain challenged
"As we enter FY24, the consumer electronics industry continues to feel the effects of the broader macro environment and its impact on consumers. As a result, our outlook assumes comparable sales decline 3% to 6% for the year, with the most sales pressure in the first quarter, as year-over-year comparisons ease through the year." - Best Buy (BBY 0.00%↑) CFO Matt Bilunas
“The PC market remains challenged. From a historic 2021, the PC market slowed markedly in June and experienced a sharp decline in calendar Q4. Consequently, our fiscal Q4 CSG revenue declined 23% to $13.4 billion. It was a continuation of trends we've seen in recent quarters.” - Dell (DELL 0.00%↑) Co-COO Chuck Whitten
Gaming is getting better
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Industrials and Transport
Ocean freight shipping times have improved
"...talking to the buyers a year ago, their estimate of just timing of getting things across the ocean was 70-plus days. Today, it's back down to 30-ish days. And so supply chain improvement across the board and rates, of course, coming down." - Costco (COST 0.00%↑) CFO Richard Galanti
Even GM is making layoffs
"We are looking at all the ways of addressing efficiency and performance. This week we are taking action with a relatively small number of global executives and classified employees following our most recent performance calibration. They will be departing the company starting from today." - General Motors (GM 0.00%↑) Chief People Officer Arden Hoffman
Materials & Energy
Lithium demand is surging
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OEMs are taking stakes in mining companies to secure supplies for EVs
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Renewable energy is driving large increases in demand for copper
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Oil demand is expected to get back to pre-pandemic levels in 2023
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But oil investment is down significantly since 2014
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Real Estate
Rental rate growth is slowing as homeowners opt to rent homes rather than sell
"There's evidence of higher rental supply in our markets, partly caused by (inaudible) home sellers opting to rent at their homes given the challenging mortgage environment and having attractive legacy mortgages locked in place at very low rates. Taken together, the combination of strong demand but higher supply of rental listings over recent months has contributed to a moderation of rent growth on new move-ins, although rent growth in our same home portfolio remains strong by historical measures and has shown signs of strengthening into 2023." - Tricon Residential (TCN 0.00%↑) CEO Gary Berman
The mortgage industry is reeling
"The mortgage industry faced an extremely difficult environment in 2022…To put the demand headwinds in perspective: The MBA's mortgage application index dropped nearly 70% in 2022, the largest intra-year drop in the history of the data set going back to 1990. At the same time, demand was falling, the mortgage industry faced excess capacity." - Rocket Companies (RKT 0.00%↑) CFO Brian Nicholas Brown
Housing affordability is poor
"...housing affordability is painfully high. U.S. mortgage rates more than doubled from the mid-3% range to above 7% in 2022. Housing expense-to-income is now approximately 35% higher than last year." - New York Mortgage Trust (NYMT 0.00%↑) CFO Jason T. Serrano
Nuggets of Wisdom
Invest in IT security infrastructure that gives you greater visibility
"My biggest recommendation and piece of advice is [to invest in] anything that helps you optimize visibility. Visibility is one of the most key things to what a CISO does, regardless of the size of the company — if you’ve got five employees or you’ve got 500,000 employees. Any tool in your tool belt that helps you know your environment is going to give you data. The more data, the better decisions you can make." - HP (HPQ 0.00%↑) CISO Joanna Burkey