Slowing Down
As the Fed slows its increases, the economy also continues to show signs of slowing
Succinct Summary: The Fed is planning to slow its pace of rate increases and indicated that policy may be approaching a sufficiently restrictive stance. Still, the Fed is concerned that inflation is too high and wants market participants to focus on the ultimate level of rates and how long they will need to stay there. While the Fed slows its increases, the economy also continues to show signs of slowing.
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Macro
The Fed is getting ready to slow rate increases
"...it makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.”- US Federal Reserve Chair Jerome Powell
Monetary policy is approaching a “sufficiently restrictive stance”
"With monetary policy approaching a sufficiently restrictive stance, participants emphasized that the level to which the Committee ultimately raised the target range for the federal funds rate, and the evolution of the policy stance thereafter, had become more important considerations for achieving the Committee's goals than the pace of further increases in the target range. Participants agreed that communicating this distinction to the public was important in order to reinforce the Committee's strong commitment to returning inflation to the 2% objective." - FOMC Minutes
But they need to see more data to feel comfortable that inflation is coming down
"While October inflation data received so far showed a welcome surprise to the downside, these are a single month's data, which followed upside surprises over the previous two months. As figure 1 makes clear, down months in the data have often been followed by renewed increases. It will take substantially more evidence to give comfort that inflation is actually declining. By any standard, inflation remains much too high." - US Federal Reserve Chair Jerome Powell
"We have begun to see some improvement in the inflation data. The October report on consumer prices was encouraging, particularly the slowing in core inflation—the measure that excludes more volatile categories, such as food and energy. Producer price inflation also moderated in October, suggesting that inflation pressures on businesses may be easing. Nonetheless, I would be cautious about reading too much into one month of relatively favorable data." - US Federal Reserve Governor Lisa Cook
Psychology is still tilted toward inflation
"As we go into next year, I don’t think inflation is going away anytime soon. I don’t think we are going to see maybe the spikes -- the spikiness that we had this year, but I think inflation is going to moderate a little bit, but it’s going to be with us." - Honeywell International (HON 0.00%↑) CFO Gregory Lewis
"We have a long way to go to get inflation down -- I suspect they’re going to need more increases in interest rates than the market is now judging or than they’re now saying..My sense is that inflation is going to be a little more sustained than what people are looking for." - US Treasury Former Secretary Lawrence Summers
The Fed really wants us to focus on how high rates will go and how long they must stay there
"Given our progress in tightening policy, the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level. It is likely that restoring price stability will require holding policy at a restrictive level for some time." - US Federal Reserve Chair Jerome Powell
They will do what it takes to get the job done
“Despite some promising developments, we have a long way to go in restoring price stability -- History cautions strongly against prematurely loosening policy. We will stay the course until the job is done." - US Federal Reserve Chair Jerome Powell
"...as we get closer to that uncertain destination, it would be prudent to move in smaller steps. How far we go, and how long we keep rates restrictive, will depend on observed progress in bringing down inflation. But rest assured, we will keep at it until the job is done." - US Federal Reserve Governor Lisa Cook
Economic activity may be softening
"I'm seeing a lot of buying behavior that really reflects a lot of what we've seen during other crisis, whether it's 2008, 2009 or even 2001. And obviously, the current economic situation is nowhere near as severe as what happened beginning in 2008, but there are some patterns that we've seen repeat themselves." - Salesforce (CRM 0.00%↑) Co-CEO Marc Benioff
Consumers are starting to feel it
"I think it's still pretty tough out there for the consumer. I think they've held on for a pretty long time and they've kind of blown through savings, taking up debt on their credit cards. They're starting to feel it. And I think they're looking for ways to cut back on some expenses." - Match Group (MTCH 0.00%↑) COO & CFO Gary Swidler
"Some areas in industrial, like, for example, the things that are closer to the consumer like power tools and that is going to -- that’s softening. That’s expected because it’s stacked to the consumer and the demand." - ON Semiconductor (ON 0.00%↑) CEO Hassane El-Khoury
The economy may get worse before it gets better
"We told you then we didn't believe this challenging macro environment was going to be a short-term problem. And you know we're not economists. You know that we don't know exactly what is happening or when the recovery will happen, et cetera, but we do see a lot, and I think we understand a lot about what's going on because we have such strong global data. And we're not assuming that this economy gets any better anytime soon." - Salesforce (CRM 0.00%↑) Co-CEO Marc Benioff
"Adding to the challenge is a global macro environment that we anticipate becoming worse before it improves." - Okta (OKTA 0.00%↑) CEO Todd McKinnon
"Is it a soft landing that the Fed engineers I hope it is. I don't know if it will or won't be. But that will also determine the consumption of electronics, which is where semiconductors go. So part of it, everybody wants me to tell them, "Hey, when is the cycle going to turn? I'm not sure because I'm not exactly sure what the economy is going to do." - Lam Research (LRCX 0.00%↑) CFO Doug Bettinger
International
China’s zero COVID policy is impacting supply chains
"The supply chain is still partially jammed up. The simplest example is the semiconductor shortage, which stagnated automotive production. Subsequently, as mentioned earlier, China introduced the zero-COVID policy. Not to your surprise, we have relied on Chinese manufacturers to produce the various parts we use. Hence now, we are unable to assemble products using Chinese-made parts. Not only automobiles, but the same is also true for home appliances and various constructions and related products. The Japanese manufacturing industry has been hit extremely hard and still continues to be affected -- While the zero-COVID policy remained in effect for a prolonged time, some manufacturing companies in the locked-down locations have lost the ability to procure parts, and eventually, even the end mills.." - NS Tool CEO Hiroji Goto
Financials
Banks are tightening credit standards
"Consumer default rates remain relatively low by historical standards, reflecting strong consumer cash balances coming out of the pandemic. However, we continue to see partners pull back from extending credit, reflecting the uncertainty in the economic environment and the risk of deterioration in credit performance." - Intuit (INTU 0.00%↑) CEO Sasan Goodarzi
“The leveraged loan market is having a problem, both on rate and availability. Banks used to look at something and say, ‘OK, I’ll lend you five times EBITDA’. That same exact deal might be three times EBITDA today." - Moelis & Co (MC 0.00%↑) CEO Ken Moelis
Blackstone had to halt redemptions from its REIT
"BREIT received repurchase requests equal to 2.7% of NAV in October, or approximately $1.8 billion, and received approval from its majority independent Board of Directors to fulfil 100% of repurchase requests. BREIT has now received repurchase requests exceeding both the 2% of NAV monthly limit and 5% of NAV quarterly limit, triggering proration for the remaining 2.3% of NAV for the quarter." - Blackstone (BX 0.00%↑) REIT
Janet Yellen said that crypto is experiencing a “Lehman moment”
"It’s a Lehman moment within crypto. And crypto is big enough that we’ve had substantial harm of investors and particularly people who aren’t very well informed about the risks that they’re undertaking, and that’s a very bad thing -- I think everything we’ve lived through over the last couple of weeks, but earlier as well, says this is an industry that really needs to have adequate regulation, and it doesn’t" - US Treasury Secretary Janet Yellen
More venture capital may be headed towards hard science
“I don’t believe we need another food delivery company. I think more venture capital money will be going into decarbonization. It’s not going to go to all this stuff that provided us good utility to get food quicker or find a taxi sooner. I think it will be much more hard science, and require a lot more technical understanding." - Blackstone (BX 0.00%↑) CEO Stephen Schwarzman
Consumer
There are some signs that consumers are becoming more budget conscious
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Higher-income customers are shopping at dollar stores
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It’s been a pretty good year for retail
"Well, first of all, it's been a good year for retail, you know, we're on top of a 14% increase of retail sales last year, We are going to have a 7% gain this year. Overall it's been a good year and we'll finish these next six weeks strong, so I understand, you know lots of commentary back and forth about waiting and the like at the end of the day we'll end up with record sales this holiday season and it will be very strong over these next few days between today and Cyber Monday. Consumers still have money." - Macy's (M 0.00%↑) Former CEO Terry Lundgren
And consumer spending has been resilient
"I mean the good news is the consumer, the customer at Foot Locker is showing great resilience and momentum for the category and for the array of brands that we're offering." - Foot Locker (FL 0.00%↑) CEO Mary Dillon
"...the simplest way to describe the trends through the 21st is there was no change. It's been remarkable for the past nine months or 10 months -- So between the 21st and the 27th, you can compare to last year, but you can't compare to 2019 because 2019 was a late Thanksgiving. It was the 28th and 29th and you had to go in December before you really got a clean comparison. But if you look at the last week, 21 to 27, and compare it to last year, again, it's very stable. Really no change in trend." - Visa (V 0.00%↑) CFO Vasant Prabhu
But it could be a tough December
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January could get fairly promotional
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Consumers probably won’t cut back on delivery even though they know it’s expensive
"...even though people are starting to finally realize how expensive delivery is -- I just think people have an irrational ability to pay for the convenience of things to come and show up in their house -- I think it's going to stay strong. It's one of those things -- I think it is going to be one of the last luxuries people take away from themselves. You would think it should be the first. But I don't think people are canceling their Netflix subscriptions, and I don't think they're going to stop getting delivery. Our ability to sit at home on a couch is very high." - Shake Shack (SHAK 0.00%↑) CEO & Director Randall J. Garutti
Netflix CEO regrets not going all in on ads earlier
"You're right to say I didn't believe in the ad-supported tactic for us. And I was wrong about that; Hulu really proved that you could do that at scale, and offer consumers lower prices and that that was a better model. So we did switch on that, and credit to Hulu and Jason Kilar for figuring that out. And I wish we had flipped a few years earlier on it, but we'll catch up, and in a couple of years we won't remember when we started it -- What I failed to understand is that there is a lot of TV advertising that now couldn't find the viewers because the 18- to 49 segment had moved on and were not watching linear TV. We didn't have to steal away the advertising revenue. It was pouring into connected TV. The inventory was there." - Netflix (NFLX 0.00%↑) Co-CEO Reed Hastings
Technology
Cloud security companies are seeing more hesitant customers
“With regards to the macro environment, while we didn't experience a meaningful change in sales cycles, we are seeing signs that the environment has further weakened since we spoke last quarter. For example, in Q3, new pipeline is more weighted towards upsells, and we're experiencing some softening demand in the SMB market in North America." - Okta (OKTA 0.00%↑) CFO Brett Tighe
"...even though we entered Q3 with a record pipeline, we are expecting the elongated sales cycles due to macro concerns to continue, and we are not expecting to see the typical Q4 budget flush given the increased scrutiny on budgets. While we do not provide net new ARR guidance given the current macro uncertainty, we believe it is prudent to assume that Q4 net new ARR will be below Q3 by up to 10%." - CrowdStrike (CRWD 0.00%↑) CFO Burt Podbere
Cloud companies are pulling back on CapEx
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Semiconductor companies are under pressure
"We did announce -- had a press release on the 16th of November, where we announced a reduction in wafer starts, 20% off of our fourth quarter '22 levels, and that's across both DRAM and NAND. It is a really tough environment. We still see customers doing inventory adjustments. That continues. And then in a number of markets, we see weak end-market demand. So we're working through that, but it's been very difficult. And again, that's why we chose to take the supply action. I'll talk a bit more about that later. I'm not going to provide a full update on the guidance today. But what I would say is that pricing has trended well below what we thought it would be when we had our earnings call. So the pricing environment has been difficult. And that's despite what we think have been very good and disciplined actions on our part around pricing." - Micron Technology (MU 0.00%↑) CFO Mark Murphy
Storage could be disproportionately affected
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Apple is taking heat for its app store fees
"So how much longer will we look away from this threat to the future of the internet? How many more consumers will be denied choice? There's been a lot of talk. Talk is helpful but we need action" - Spotify (SPOT 0.00%↑) CEO Daniel Ek
"Apple has sort of singled themselves out as the only company that is trying to control unilaterally what apps get on a device. I don’t think that’s a sustainable or good place to be -- It is problematic for one company to be able to control what app experiences end up on a device -- the vast majority of profits in the mobile ecosystem go toward Apple, -- Google might control what goes in the play store, but they have always made it so you can side-load and have other app stores and work directly with phone manufacturers..the fact that companies have to deliver their apps exclusively from platforms controlled by competitors -- there is a conflict of interest there" - Meta (META 0.00%↑) CEO Mark Zuckerberg
80% of META’s investment spending is not in the Metaverse
"About 80% of our investments – a little more – go towards the core business, what we call our family of apps, so that's Facebook, Instagram, WhatsApp Messenger, and the ads business associated with that. Then a little less than 20% of our investment goes towards Reality Labs -- So still the vast majority of what we're doing is, and will continue to be, going towards social media for quite some time until the metaverse becomes a larger thing -- You can debate whether 20% is too much for this bet, but it's not the majority of what we're doing. We're not going to be here in the 2030s communicating and using computing devices that are exactly the same as what we have today. If someone has to build that and invest in it and believe in it, there's a lot of new technology that needs to get invented to create that. So I'm still very optimistic about that" - Meta (META 0.00%↑) CEO Mark Zuckerberg
Industrials and Transport
Industrial markets seem to be holding up
“Anecdotally, our customers continue to tell us on the -- for our industrial business, they continue to be quite bullish. And our customer stories and discussions from -- through sales, through executives, including the CEO, tend to be more optimistic. But all the macro data that we look at, and that I'm sure you look at, tends to be more pessimistic. So we're trying to reconcile how those can be so different." - Analog Devices (ADI 0.00%↑) CFO Prashanth Mahendra-Rajah
"Industrial is holding up. And again, you have to look within industrial, what is holding up. Energy storage, renewable energy, energy generation, energy distribution, chargers, solar, wind and energy storage." - ON Semiconductor (ON 0.00%↑) CEO Hassane El-Khoury
"In the near term, order books across our businesses are full into the third quarter. And it's important to note that not only do the order books continue to fill when we open them, but the velocity of orders has remained strong. We opened North American combine EOP back in August -- And this replacement cycle will have an extended duration. I am confident we will produce more large ag equipment in 2023 than we did in 2022. And not just more equipment, but more value per machine." - Deere (DE 0.00%↑) CEO John May
We're still struggling with supply chain but it's gotten incrementally better
"I would describe it as getting incrementally better. By no means what I tell you, we're like through the challenges. We still have constrained parts. We're still struggling to get certain things, most notably actually semiconductors." - Lam Research (LRCX 0.00%↑) CFO Doug Bettinger
"...the difficulty of the supply chain is substantially behind us -- When does it get back to completely normal? I would guess, towards the middle of the year, we would expect to be at full capacity on read and react. There is no structural change in the base of supply or the way that we do business that indicates that it won't do." - Victoria's Secret (VSCO 0.00%↑) CEO Martin Waters
"...this time last year was a period of high anxiety right through the holiday period kind of studying what chip's going with which engine (inaudible) a leadership team. Were we going to get through Q1? Were we going to get through Q2? It was very much on a knife edge, it doesn't feel like that today. We're not having that kind of -- I mean, we literally we're meeting daily or every other day right through the holiday. So it doesn't feel like that. There has been an improvement in the continuity of supply. I would say the biggest challenge we face today, part of which showed up in our Q3 results, which were not as good as we hoped. It was just the capability of the broader supply base to deliver exactly the number of parts we want every single day. So we won't shut down, but still a lot of chasing, encouraging, and coordinating suppliers. Part of that's due to labor shortages here in the U.S. So that drove some inefficiencies we didn't have like days or weeks down, but it created some inefficiencies. So I think, touch wood, that is improving" - Cummins (CMI 0.00%↑) CFO Mark A. Smith
"So as we look ahead, we anticipate supply chain costs, both internal and external in 2023 to be down quite a bit. We're obviously seeing it improving as others market for carrier costs as well. And so that as a potential tailwind going forward." - Dollar General (DG 0.00%↑) CFO John Garratt
Freight costs are going down
"So freight costs are definitely way down. We're seeing them anywhere between probably 4x and 5x lower now than they were even 6 months ago. But because those freight costs are capitalized into inventory, it will take a little while for them to kind of flush through COGS." - American Outdoor Brands (AOUT 0.00%↑) Michael Zabran
"As we move into the fourth quarter, given that both ocean and air rates have now moderated significantly, given that we've been able to put more of our merchandise on both and take less -- or take merchandise off of aeroplanes, which is a good thing for the business. We believe we'll recognize about an incremental $65 million of good news or lower supply chain costs in the fourth quarter." - Victoria's Secret (VSCO 0.00%↑) CFO Timothy Johnson
"In terms of the freight costs, yes, we are seeing that the freight costs have continued to come down and have come down since the beginning of this year, but still not down versus -- when you compare it to 2019. In terms of the flow of the product, yes, it will take some time that cost will -- or the benefit of this reduced cost will be realized into 2023." - DICK'S Sporting Goods (DKS 0.00%↑) CFO Navdeep Gupta
Business jet flight hours above pre-pandemic levels
"From an aftermarket perspective, business jet flight hours are above where they were pre-pandemic. I mean that’s been a really big shift to people flying private during the pandemic and that doesn’t seem to be going backwards. But we are probably at a place where the aftermarket growth there is going to moderate single digits type of thing." - Honeywell International (HON 0.00%↑) CFO Gregory Lewis
Real Estate
Falling interest rates are relieving some pressure on housing markets