Softer Spend Environment
Credit card companies sounding more cautious, a shift from last quarter
Summary: Most companies still sound upbeat about the economic environment, but credit card companies are sounding more cautious, which is a noteworthy shift from last quarter. There is some fear creeping into markets.
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Macro
Credit card companies are seeing a softer spend environment
"Overall, while we do continue to see a softer spend environment, our spending volumes are tracking in line with our expectations to support our revenue guidance for the full year and we are pleased with the continued strong engagement of our customers as the number of transactions from our card members continued to grow double-digits this quarter." - American Express (AXP 0.00%↑) CFO Christophe Le Caillec
“So you’re seeing the consumer hang there and continue to spend, but spend at a level that’s more consistent with a more trend type of economy and we will see all that play out over the sense of the next quarter…if you just extended that through from the fourth quarter of 2019 to today, given that the economy is 30% larger, we kind of feel like consumer is approaching that floor, so we’re still in this belief that Q2 is going to be--Q3 may be the turning point for consumer. You can see that slowing now." - Bank of America (BAC 0.00%↑) CFO Alastair Borthwick
“Sales slowed across categories with the largest decline occurring in the everyday category, which includes supermarkets, gas and wholesale clubs. While we continue to add new accounts, in general, we are seeing card members spend less, particularly among lower-income households which are most impacted by the cumulative effects of inflation. Based on trends in the period, we expect sales to be flat to slightly negative this year” - Discover Financial Services (DFS 0.00%↑) Executive VP & CFO John Thomas Greene
But many other companies still sound upbeat
"The economy continues to perform well, and the labor market remains strong despite the challenges faced by firms and new consumers. The economic outlook that we discussed on the January earnings call remains unchanged." - M&T Bank (MTB 0.00%↑) SVP & CFO Daryl N. Bible
"Most broad economic data, from unemployment to retail sales, to the health of the consumer, remain very strong." - Prologis (PLD 0.00%↑) SVP, Strategic Planning and Analysis Timothy D. Arndt
"...there is not a lot of change from our view back in February. The U.S. consumer and our customers remain broadly resilient. Employment remains at historic levels with low unemployment, which is a positive for consumers and customers. Employment turnover and hiring at lower levels entering 2024 than last year, hiring levels in January and February were at their lowest levels in three years. This is more pronounced for higher salaried roles than lower-salaried or hourly jobs." - Equifax (EFX 0.00%↑) CEO Mark Begor
"...the environment is supportive of growth in our business. In general, we see continued economic growth in most of our major markets, inflation and interest rates remain elevated, labor markets are tight, the cost of risk is up, and healthcare costs continue to rise." - Marsh & McLennan (MMC 0.00%↑) CEO John Doyle
"The economy, we all see the aggregate metrics that are released. There's an underlying strength." - Huntington Bancshares (HBAN 0.00%↑) CEO Stephen Steinour
Inflation is trending lower but slowly
"In terms of inflation, despite the recent U.S. CPI readings, we are seeing a decelerating wage growth and minimal input cost increases across many of our companies. In real estate, we see shelter costs moderating, contrary to government data. We believe inflation will trend lower this year, although the pace of decline has slowed recently." - Blackstone (BX 0.00%↑) CEO Stephen Allen Schwarzman
"Inflation is trending downwards, but slower than expectations, as energy price risks and shipping cost volatility remain. Labour markets are still resilient." - Rio Tinto (RIO 0.00%↑ )
Labor markets are cooling
“Labor markets are cooling in North America and in Europe yet remain strong. In our most recent ManpowerGroup Employment Outlook Survey, employers reported increased caution in their hiring due to economic uncertainty." - ManpowerGroup (MAN 0.00%↑) EVP, CFO & Head of IR John Thomas McGinnis
Investors are losing confidence in rate cuts
"The Fed most recently telegraphed three rate cuts in 2024, but last week's CPI print has lowered market expectations. This will continue to evolve and be highly data-dependent. I'm also mindful that U.S. equity markets are hovering near record levels at a time when we see -- when we continue to see headwinds, including concerns around inflation, the commercial real estate market, and escalating geopolitical tensions around the world." - Goldman Sachs (GS 0.00%↑) CEO David Solomon
"Market expectations for rate cuts have clearly been pushed out compared to our January earnings call. We continue to believe that there will be rate cuts over time, and the impact of beta will be a function of the duration in this pause from the Fed." - Huntington Bancshares ( HBAN 0.00%↑) Senior EVP & CFO Zach Wasserman
"Over the past few weeks, the outlook for potential rate cuts in 2024 has meaningfully changed as long-term rates have backed up. Client behavior across the industry is adjusting in response to the potential higher for longer interest rate environment that has impacted our deposit mix and pressure deposit costs." - U.S. Bancorp (USB 0.00%↑) CEO Andrew Cecere
There is some fear creeping in
"The barrage of bad news, inflation, towards the border, the Red Sea, the election, the Iran bombing for the people of work, the fear of what's coming around the corner impacts the outlook and paraphrasing the characters of Dune, fear is the outlook killer. It erodes confidence." - Snap-on (SNA 0.00%↑) CEO Nick Pinchuk
International
China’s economic recovery has been uneven
"China’s economic recovery has been uneven, prompting more government support to sustain growth and meet the target of around 5% GDP growth this year. The manufacturing sector remains strong, given increased industrial production and exports, while property activity remains weak, despite improved policy support. There is continued issuance of financing for infrastructure projects, although efforts are being taken to restructure local government debts" - Rio Tinto (RIO 0.00%↑)
Procter & Gamble’s China sales were down 10%
"Greater China organic sales were down 10% versus the prior year, progress versus the December quarter, but still impacted by weak underlying market conditions and headwinds for SK-II and other Japanese brands in the market. SK-II sales in Greater China were down around 30% for the quarter. We have seen some month-to-month improvement in overall Greater China sales trends, though we expect it will be another quarter or 2 until we return to growth." - Procter & Gamble (PG 0.00%↑) CFO Andre Schulten
LVMH isn’t seeing inflation in China
"It's quite interesting that we don't see it in China. The reason why we don't see it in China is that there is no such thing, at least for the time being as inflation in China. So, I think as long as inflation will be a factor for this group of customers, we will not do miracles, and basically, we expect only a gradual improvement with this population in the coming quarters" - LVMH ($LVMHF) CFO Jean-Jacques Guiony
The Eurozone economy has been stagnant
"The eurozone economy stagnated in the fourth quarter of 2023 and is likely to have stayed weak in the first quarter of this year. It is expected to pick up gradually over the year on the back of a further decline in inflation, cuts in official interest rates, recovery in industrial production and investments in the energy transition." - Rio Tinto (RIO 0.00%↑)
“Right now, frankly, we feel that Europe is following a more traditional cycle. The economy is cooling. It's likely that the ECB will lower interest rates, maybe even before the Fed lowers interest rates. And that will be a good signal that now comes the time to start to gear up and generate more economic growth in Europe, and we would then hope to see improving PMIs in Europe.” - ManpowerGroup (MAN 0.00%↑) CEO Jonas Prising
CEOs are anxious about the geopolitical backdrop
"The geopolitical backdrop remains unsettled with multiple major wars and rising tensions globally. More than half the world's population will go to elections in 2024, and the economic outlook remains uncertain as well." - Marsh & McLennan (MMC 0.00%↑) CEO John Doyle
"...there are many tail risks, including a variety of different market scenarios, the possibility of escalation in one of the ongoing geopolitical conflicts or an unexpected result in the many elections taking place worldwide this year." - The Bank of New York Mellon (BK 0.00%↑) CEO Robin Vince
Financials
17 quotes – Capital markets opening up and credit quality has remained solid.
Consumer
Inflation is impacting luxury consumers
“I don't think the situation of aspirational customers in the western part of the world is connected in any way with the offer. The question is inflation, which is taking its toll, with particular intensity on this group of customers, and which is the same thing in the US and in Europe” - LVMH ($LVMHF) CFO Jean-Jacques Guiony
Travelers are spending on upgrades
“Premium passenger revenue mix improved 1.9 points versus Q1 2023 and 3 points versus Q1 2019. In other words, we're seeing near-term acceleration. Premium revenues were up 14% year-over-year on 10% more capacity and we estimate that United's premium revenue streams lead the industry” - United Airlines (UAL 0.00%↑) EVP & Chief Commercial Officer Andrew Nocella
Netflix will no longer provide quarterly membership numbers
"In our early days, when we had little revenue or profit, membership growth was a strong indicator of our future potential. But now we’re generating very substantial profit and free cash flow (FCF). We are also developing new revenue streams like advertising and our extra member feature, so memberships are just one component of our growth. In addition, as we’ve evolved our pricing and plans from a single to multiple tiers with different price points depending on the country, each incremental paid membership has a very different business impact. It’s why we stopped providing quarterly paid membership guidance in 2023 and, starting next year with our Q1'25 earnings, we will stop reporting quarterly membership numbers and ARM. We’ll continue to provide a breakout of revenue by region each quarter and the F/X impact to complement our financials." - Netflix (NFLX 0.00%↑)
Technology
AI is going to require huge infrastructure investments
"The amount of money that’s being invested in this area is breathtaking. And it’s happening now all over the world. And one of the things that I never considered is that in most countries, they’re going to start running out of electricity..Just as we recognized the rise of e-commerce nearly 15 years ago and started buying warehouses, we anticipated a paradigm shift around the demand for data centers driven by growth in content creation, cloud adoption, and most importantly now, the revolution underway in artificial intelligence. Others now know that AI requires exponentially more computing power and capacity than was previously imagined." - Blackstone (BX 0.00%↑) CEO Stephen Schwarzman
“AI cannot truly happen unless there’s a huge investment in infrastructure. The amount of energy that is required for AI or -- is enormous, and the amount of power generation. We will run out of electricity if we are going to fully adapt to a full AI world. And so, the need to build on -- this is all going to stimulate our economy, by the way, to build out a more AI and -- which at the backside is that means building out more electricity, power, And we’re going to have to be building out, you know, tens and tens of giga -- you know, gigawatts. Not like -- not megawatts, gigawatts, and that’s -- we’re talking trillions of dollars of investing. And so, the opportunity is enormous in the coming years” - BlackRock (BLK 0.00%↑) Chairman & CEO Larry Fink
“...these technologies require certain things including infrastructure, power, and these things require financing to drive the scale that's going to be necessary for people to execute on the investments that they see as important to keep their businesses competitive at pace. And that is creating an ecosystem of activity in our investment banking and markets business that we've seen in the context of other areas of significant shift or macro expansion over a long period of time. So I actually think it's a very, very constructive runway of opportunity set for us with our clients as people reposition their businesses, and we're talking about a level of scale that is candidly unprecedented. And so I think that opportunity is something, over the course, this is not a quarter-to-quarter thing. This is over the next 5 to 10 years. And we're very, very focused on it and very engaged. And by the way, it's not just companies, it's governments, obviously, that are making enormous investments and bringing infrastructure into their locale, and so all of this is something that we're very strategically focused on." - Goldman Sachs (GS 0.00%↑) CEO David Solomon
Meta released its Llama 3 large language model
"With this new model, we believe Meta AI is now the most intelligent AI assistant that you can freely use,...With Llama 3, we set out to build the best open models that are on par with the best proprietary models available today. This next generation of Llama demonstrates state-of-the-art performance on a wide range of industry benchmarks and offers new capabilities, including improved reasoning. We believe these are the best open-source models of their class, period..I don't think that today many people really think about Meta AI when they think about the main AI assistants that people use. But I think that this is the moment where we're really going to start introducing it to a lot of people, and I expect it to be quite a major product." - Meta (META 0.00%↑) CEO Mark Zuckerberg
TSMC lowered its semiconductor market outlook for FY 2024
"Looking at the full year 2024, macroeconomic and geopolitical uncertainty persists, potentially further weighing on consumer sentiment and end-market demand. We thus expect the overall semiconductor market, excluding memory, to experience a more mild and gradual recovery in 2024. We lowered our forecast for the 2024 overall semiconductor market, excluding memory, to increase by approximately 10% year-over-year, while foundry industry growth is now forecast to be mid- to high-teens percent, both are coming off the steep inventory correction and/or base of 2023." - TSMC (TSM 0.00%↑) CEO C. C. Wei
Smartphone continues to recover albeit slowly
"Yes, smartphone end-market demand is seeing a gradual recovery and not a steep recovery, of course. PC has been bottomed out and the recovery is slower. However, AI-related data center demand is very, very strong. And the traditional server demand is slow, lukewarm. IoT and consumer remain sluggish." - TSMC (TSM 0.00%↑) CEO C. C. Wei
It may take until next year for TSMC to have enough supply to meet AI demand
"Let me say it again, the demand is very, very strong, and we have done our best where we put all the effort to increase the capacity. It's probably more than double this year as compared with last year. However, it's still not enough to meet the customers' demand, and we leverage our OSAT partners to complement TSMC's capacity to fulfill our customers' needs. Still not enough, of course. But in my mind, my first priority is to make our customer to be successful, no matter which one. And of course, the long-term partners will have better cooperation with TSMC in terms of technology and processing complexity, so much easier to be ramped up. However, no matter what, let me say again, the demand is very high, extremely high. And we do our best to increase the capacity to alleviate the shortage. We also leverage the OSAT partners. We want to make sure that all our customers get supported, probably not enough this year; but for next year, we try, we try very hard." - TSMC (TSM 0.00%↑) CEO C. C. Wei
Industrials and Transport
Global industrial production is subdued
"Looking ahead, while global industrial production remains at low absolute levels, we believe that demand in China for our products will deliver solid organic growth. In Europe, demand is expected to stabilize as we progress through 2024, despite unevenness by country. In the U.S., economic conditions have remained subdued in several end-use markets, but we expect overall improvement as the year progresses. In Mexico, we forecast strong momentum to continue." - PPG (PPG 0.00%↑) CEO Tim Knavish
It's a tough operating environment for freight
"It's -- here we are in going on 2 years of a really difficult freight market. And the hardest freight market, I think, in my 30-year career, and I think certainly for the entire leadership team, and it's hard to see what's really happening good when you see financial performance struggling as a result, we did have some really great things I want to make sure to call out for our people." - J B Hunt Transport Services (JBHT 0.00%↑) President Shelley Simpson-President
The truckload industry is under stress
"...the truckload industry and smaller borrowers is under some stress and valuations -- equipment valuations are also under stress. I mean, obviously, if you think about real estate-related portfolios, office and senior housing, in particular, you can understand why those are also under stress, but transportation would be the one area where I would say it feels like across that industry for the truckload related. The less in truckload businesses are still doing okay, but truckload-related carriers are having challenges." - Regions Financial Corporation (RF 0.00%↑) CEO John M. Turner
“While we believe that weak truckload pricing due to overcapacity is influencing customer decision-making, we continue to see a large amount of freight that should be converted from over-the-road to Intermodal and we have the capacity and people in place to grow with our customers and recapture share from the highway” - J.B. Hunt Transport Services (JBHT 0.00%↑) President of Intermodal Darren Field
Lithium prices are subdued even though EV sales are up 31% this year
"Lithium prices have remained at subdued levels through the first quarter with the weak sentiment impacting price outlooks, triggering production curtailment and project delays. Conversely, global EV sales growth rose 31% year-on-year in the first two months of this year, compared to 26% year-on-year over the same period last year. Chinese EV makers announced a series of price cuts in the first quarter to increase sales further" - Rio Tinto (RIO 0.00%↑)
Materials & Energy
Data centers used 2.5% of US electricity in 2022, projected to reach 20% by 2030
"One recent survey showed a projected increase in electric demand to power data centers of 13% to 15% compounded annually through 2030. Put another way, data centers used about 2.5% of U.S. electricity in 2022 and are projected to use about 20% by 2030. AI demand alone is projected at about 15% of demand in 2030. If just 40% of that AI demand is served by natural gas that would result in incremental demand of 7 to 10 Bcf a day. Utilities throughout America are sounding alarm, one Southeast utility announced its expectation that its winter demand would increase by 37% by 2031. PJM Interconnection, which operates the wholesale power market across part of the Midwest and the Northeast, has doubled its 15-year annual forecast for demand growth and estimates that demand in the region by 2029 will increase by about 10 gigawatts. Now to put that in perspective, 10 gigawatts is about twice the power demand in New York City on a typical day." - Kinder Morgan (KMI 0.00%↑) Executive Chairman Rich Kinder
Renewables will not be able to scale to supply the required energy
"The power needed for AI and the massive data centers being built today and plan for the near future, require affordable electricity that is available without interruption 24 hours a day, 365 days a year. This type of need demonstrates that the emphasis on renewables as the only source of power is fatally flawed in terms of meeting the real demands of the market. This is not a knock on renewables. We all know they will play a significant role in the future of electric generation. But it's a reminder, all of us that natural gas and nuclear still have an extremely important role to play in order to provide the uninterrupted power that AI and the data centers will need. The primary use of these data centers is big tech and I believe they're beginning to recognize the role that natural gas and nuclear must play. They like the rest of us, realize that the wind doesn't blow all the time, the sun doesn't shine all the time, that the use of batteries to overcome the shortfall is not practically or economically feasible. And finally, that unfortunately, adding significant amounts of new nuclear power to the mix is not going to happen in the foreseeable future. In addition to all these factors, the market is now understanding that building transmission lines to connect distant renewables to the grid, typically takes years to complete and that's a timeframe inconsistent with the need to place these data centers into service as quickly as possible. All this means that natural gas must play an important role in power generation for years to come." - Kinder Morgan (KMI 0.00%↑) Executive Chairman Rich Kinder
Steel exports from China to remain elevated
"Iron ore prices declined by 27% over the quarter, while the average monthly price in the first quarter of $123/dmt (Platts CFR 62% Fe index) was 4% lower than last year’s fourth quarter. China’s domestic steel demand trended at levels similar to last year, but steel exports rose 30% year-on-year during the first two months and are likely to remain historically elevated, in turn, supporting iron ore demand. Seaborne shipments in the first quarter rose 1% year-on-year and China’s portside inventories increased by 24 million tonnes to 144 million tonnes. Steel mill margins in China oscillated around break-even levels, maintaining iron ore product price relativities within historically narrow bands, while lump premiums declined in the absence of pollution controls and sintering restrictions in China'' - Rio Tinto (RIO 0.00%↑)
Real Estate
Blackstone sounds like it’s ready to start buying some distressed CRE assets
“Interestingly, of course, there'll still be plenty of challenging headlines from assets that were financed in a different environment as they work their way through the system. And that's sort of -- it's almost as if something happened to a ship at sea and then it comes ashore. We saw this after the financial crisis, where real estate values bottomed in that summer of '09, but you had negative headlines in real estate for the next 3 years. We spent a lot of that time, of course, deploying capital into that dislocated period where people were still cautious. What gives us confidence as we look forward here is one is this reduction in the cost of capital. We've obviously seen spreads tighten a fair amount, probably 125 basis points in CMBS in the first quarter and through the end of the fourth quarter last year. We also saw CMBS issuance go up fivefold versus the first quarter of 2023. So that -- and the fact that the Fed at some point here will be bringing rates down, and that's important as well. The other thing I'd add is on the supply front. We've seen in logistics an 80% decline in new starts. We've seen in multifamily a 50% decline in peak starts -- from peak starts as well. And so that starts to lay the groundwork. In terms of timing, I would think about this period of time is a time of seed planting that you want to be investing into this dislocation because there's a lot of uncertainty. There may be [ for ] sellers, there may be public companies trading at discounts. And then over time, as things start to normalize, you start to accelerate on the realization. But first, I think it's the deployment period then the realization period as you move out similar to that post-GFC period. That's certainly the way we're playing it. And in terms of capital, we obviously have a very large $30 billion global fund. We said we've raised over [ EUR 7.5 billion ] in Europe. We have most of our $8-plus billion Asia fund still uninvested. So a lot of opportunistic capital to deploy. So we're forward-leaning as it relates to deployment, even though we recognize there's still going to be a lot of assets from the previous period working their way through the system." - Blackstone (BX 0.00%↑) President & COO Jonathan D. Gray
Rental housing is a major investment theme for Blackstone
"Rental housing remained a major investment theme for us given the structural shortage in this space. The U.S. is building roughly the same number of homes today as in 1960 despite having almost twice the population." - Blackstone (BX 0.00%↑) President & COO Jonathan D. Gray
Leasing activity is running below expectations for Prologis
"...overall leasing activity and net absorption are running below expectations. Net absorption in the U.S., for example, was very low this quarter at just 27 million square feet. So while the macro landscape and supply chains continue to generate a need for space, we think it prudent to expect continued headwinds on overall absorption over the next few quarters." - Prologis (PLD 0.00%↑) SVP, Strategic Planning and Analysis Timothy D. Arndt
Demand for homes has been good
"Although inflation and mortgage interest rates remain elevated, our net sales orders increased 46% for the first quarter and 14% from the prior year quarter as the supply of both new and existing homes at affordable price points is still limited and the demographics supporting housing demand remained favorable. Homebuyer demand during the spring selling season thus far has been good despite continued affordability challenges." - D.R. Horton (DHI 0.00%↑) CEO Paul Romanowski
Mortgage markets are recovering
"When we think about a mortgage recovery, we think about it being multifaceted and actually mostly driven by purchase. The purchase activity has come down dramatically as what I would call as normal refis….the U.S. mortgage market is on the order of 50% below its historic average inquiry levels. As the market bottoms and moves from a headwind to a tailwind and the mortgage market recovers towards its historic norms that presents over $1 billion of annual revenue opportunity for Equifax, none of which is reflected in our current 2024 guidance." - Equifax (EFX 0.00%↑) CFO John Gamble
Nuggets of Wisdom
YOLO
"COVID left a clear message – you call it a YOLO effect. In Italy, we say carpe diem. You make money, you can make good investments in equity, bonds, real estate, but your lifespan is limited, so you also have fun" - Ferrari (RACE 0.00%↑) CEO Benedetto Vigna