Two-Sided Risk

There is a balanced risk between inflation and recession

Summary: Growth seems to be slowing and several data points suggest that the consumer may be starting to be less resilient. The Fed is still biased towards fighting sticky inflation but is increasingly aware that there is a balanced risk between inflation and recession.

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Macro

Growth is slowing

"...recent data, including first-quarter household spending and retail sales for April and May, suggest that growth is slowing. And, in April, the total amount of credit card balances and other types of revolving consumer debt declined for the first time since 2021. Signs of strain continue to emerge among consumers with low-to-moderate incomes, as their liquid savings and access to credit have increasingly become exhausted. Credit-card delinquency is on an upward trend, and the rate at which auto loans are transitioning into delinquency is at a 13-year high. These rates are not yet concerning for the overall economy but bear watching." - US Federal Reserve Governor Lisa D. Cook

"We assumed...in the second half that the consumer would get somewhat stronger...that is not the case. The consumer is absolutely stunned by the absolute prices of things, and the fact that some of them may not be inflating doesn’t actually change their resistance to the current pricing," he added."So we’ve had to get really keen, particularly in discretionary things" - Walgreens (WBA 0.00%↑ ) CEO Tim Wentworth

"And no surprise, consumer or health of the consumer is the first question. We keep wanting to be able to say something different, but it's just been very consistent. And we've talked about this for several quarters now. The consumer is being choiceful. There -- we see a shift from general merchandise to food as wallets have become more stretched." - Walmart (WMT 0.00%↑) CFO John Rainey

Inflation is trending lower

"Although we've seen a continued rebalancing in the labor market and inflation, after pausing in the first quarter, now shows signs of resuming its disinflationary trend. So it's a little bit different journey. Where that leaves us is we've made quite a bit of progress in bringing inflation back down toward target while the labor market has remained strong and growth has continued. We want that process to continue. I think the last reading, and the one before, suggests that we are getting back on a disinflationary path. We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of reducing—how tight our policy is—loosening policy. That's what we've said and what we would like to see: more data like we've been seeing recently. We'd also like to see a labor market that remains strong. We said that if we saw the labor market unexpectedly weaken, that could also be something that could call for a reaction" - US Federal Reserve Chair Jerome Powell

"I expect that the longer-run disinflation trend will continue as interest rates weigh on demand. Anecdotal reports, including from the Fed's Beige Book, suggest consumers are pushing back on price increases. Several national retailers have announced plans to lower prices on certain items, and there is increasing evidence that higher-income shoppers are trading down to discount stores…My forecast is that three- and six-month inflation rates will continue to move lower on a bumpy path, as consumers' resistance to price increases is reflected in the inflation data." - US Federal Reserve Governor Lisa D. Cook

“...just focusing on year-over-year price changes, general merchandise is still deflationary, a couple of percentage points deflationary. Consumables, call it, roughly flat, and food is up modestly." - Walmart (WMT 0.00%↑) CFO John Rainey

The labor market is cooling

"...you can see the labor market is, you know, cooling off, appropriately so, and we're watching it very carefully...it looks like it's doing just what you would want it to do, which is to cool off over time—not quickly, not suddenly, not steeply. It's kind of what we've been hoping to see and haven't seen." - US Federal Reserve Chair Jerome Powell

"The unemployment rate was a still-low 4 percent in May, but it has gradually risen over the past year since touching a more than half-century low of 3.4 percent in April 2023. Last month's rate was also modestly above readings just before the pandemic took hold." - US Federal Reserve Governor Lisa D. Cook

"Our small business employment watch has shown stabilization in job growth and continued downward pressure in hourly wages in the recent months." - Paychex (PAYX 0.00%↑) President John Gibson

The Fed is still concerned about sticky inflation

"However, with average core CPI inflation this year through May running at an annualized rate of 3.8 percent, notably above average inflation in the second half of last year, I expect inflation to remain elevated for some time." - US Federal Reserve Governor Bowman

"Inflation in services, a spending category that accounts for about two-thirds of household budgets, has slowed significantly, though it remains noticeably above pre-pandemic rates." - US Federal Reserve Governor Lisa D. Cook
The Fed sees the risk of inflation and recession as balanced

"I'm not going to be landing on any specific dates here today. Let me also say that we're well aware that if we go too soon, we could undo the good work we've done in bringing down inflation. And if we go too late, we could unnecessarily undermine the recession, the recovery, and the expansion. And, uh, so we're aware that we have two-sided risks now, more so than we did a year ago. That's a big change. I'd say risks are coming much more into balance now." - US Federal Reserve Chair Jerome Powell

International

General Mills saw a downturn in consumer sentiment in China

"The rest of the decline in International was really a function of the difficult market conditions in both Brazil and China...And then China, after a strong start to the year, we saw a real souring or downturn in consumer sentiment in the quarter that had a negative impact on our shop traffic for Häagen-Dazs and our premium dumpling business." - General Mills (GIS 0.00%↑) CFO Kofi Bruce

Financials

Small businesses and lower-income households are experiencing diminished access to credit

"...banks have significantly tightened credit standards over the past two years. In particular, small businesses, some small banks, and community development financial institutions are experiencing diminished access to credit. Many of these businesses also face short-duration loans that need to be refinanced at higher interest rates. With rising delinquencies, a number of low-to-moderate-income households are also likely experiencing diminished access to credit. On the other hand, the largest firms and the largest banks do not report a lack of access to funding. Larger firms, like many homeowners, were able to lock in low interest rates for longer terms a few years ago before rates rose." - US Federal Reserve Governor Lisa D. Cook

Consumer

Consumers have financial anxiety

"Consumers continue to exhibit value-seeking behavior. Financial anxiety remains elevated, particularly in the United States, and especially with mid-to-low-income households due to the compounding impact of inflation. In addition, inflation in the food service channel is leading to softness in food away from home consumption and impacting restaurant traffic, particularly with QSRs across many of our regions. Volumes on the retail side, particularly in the center of store, remain soft. Consumers continue to buy just for what they need and make more frequent trips to the store. On the other hand, they are increasingly shopping the perimeter and continuing to cook at home." - McCormick (MKC 0.00%↑) CEO Brendan Foley

Nike expects FY25 revenue to be down mid-single digits

"For the full year, revenue was flat on a reported basis and up 1% on a currency-neutral basis. ...we now expect fiscal '25 reported revenue to be down mid-single digits with the first half down high single digits. Foreign exchange headwinds have also worsened and will now have a 1-point translational impact on revenue in fiscal '25." - Nike (NKE 0.00%↑) CFO Matthew Friend

Walgreens lowered their earnings outlook

"In U.S. Retail Pharmacy, we witnessed continued pressure on the U.S. consumer. Our customers have become increasingly selective and price-sensitive in their purchases...We expect the operating environment to remain challenging. We do not expect an improvement in the U.S. retail environment. And finally, we expect script volume growth to remain muted and anticipate continued pressures on pharmacy margins...In light of these factors, we are reducing our outlook. In light of these factors, we are reducing our outlook. We now expect to deliver adjusted earnings per share of $2.80 to $2.95 for the fiscal year 2024." - Walgreens (WBA 0.00%↑) CEO Tim Wentworth

Home improvement spending is weak

"So let me start with the DIY consumer. This consumer remains very cautious, specifically when you think about larger ticket discretionary purchases. And the segment and the sentiment for the DIY consumer remains a bit weak influenced by things like persistent inflation, while we see the more affluent DIY consumer, they're still spending on services and experiences, and that's still a result of being up doing the pandemic people are getting out and they want to experience things again. In addition to that, as you know, mortgage rates remain high in turnover is at historic lows. And so you have what we describe as a locked-in place for a lot of homeowners with these low rates. So given these trends, as we look at home improvement spend in the near term, we think it's going to be focused more on smaller projects and looking for value." - Lowes (LOW 0.00%↑) EVP of US Stores at Home Depot Marvin Ellison

Pool construction activity could be down 15-20% this year

"The most recent pool permit data suggests persistently weak demand for new pool construction, and with the peak selling season almost complete, we now believe that new pool construction activity could be down 15% to 20% for the year with remodel activity down as much as 15%." - Pool (POOL 0.00%↑) CEO Peter Arvan

The luxury watch market is strong though

"The luxury watch market, which is more than 90% Swiss is robust, resilient with our long-term focus on product quality and innovation. Demand for Swiss luxury watches exceeds supply for key brands and consumers often wait patiently for their chosen timepiece, in many cases for years." - Watches of Switzerland (WOSGF) CEO Hugh Duffy

Demand for cruises is also strong

"We are hitting records on top of previous records, which clearly tells us the strength and demand we have been building is continuing into next year and beyond. In the near term, pricing on bookings taken in the second quarter has continued to run considerably higher for each of the third and fourth quarters. And again that's on top of record per diems last year. This strength has enabled us to take up yield guidance for the year by another 75 basis points." - Carnival (CCL 0.00%↑) CEO Josh Weinstein

Technology

An AI “factory” requires more than just GPUs

"NVIDIA's offering starts with the most advanced GPU, but an AI factory is much more, combining Blackwell GPUs, NVLink, Grace CPUs, Quantum and SpectrumX switches and a rich ecosystem of software, systems, and data center partners. The Blackwell platform will be adopted by every major cloud service provider, server maker, and leading AI companies including Amazon, Google, Meta, Microsoft, OpenAI, Tesla, and XAI." - Nvidia (NVDA 0.00%↑) CEO Jensen Huang

How Walmart is leveraging AI

"I would say we're using it in three areas that are probably most notable. The first is on how we serve our customers, meaning that when you go search at sams.com or at walmart.com, how we're using AI to better curate the results of that search. An example would be here in a couple of weeks in the United States, we have the July 4th holiday. A lot of people throw parties or barbecues for July 4th. Instead of going and looking for hotdogs individually and charcoal or whatever it is, you can simply say, I want to throw a July 4th party. Give me the items that I need. And we can bring all of those things into that experience. That's one example of how we're using AI to better serve our customers. The second example would be how we're using this in our supply chain automation. So I described the environment in one of our FCs, where you've got this vertical storage of inventory with robots that are going and retrieving this. Every time one of those robots takes a less circuitous or more circuitous route or runs into another robot when it goes back, it's recalibrating and learning through AI to take the most optimal route to make -- to minimize the amount of time it takes to retrieve that inventory. The third use case is in how we're using it to reduce overhead costs and reduce inefficiencies in our business. And so an example would be perhaps Walmart uses claim services. So when we have a workers' comp claim or there's an injury in one of our stores or clubs, there's a lot of back and forth that takes place between a claims agent and that associate or that customer. And the way that that takes place is you may call me up to 10 times to 20 times, and I'm writing down text of the interaction of that call. It's what we call unstructured data." - Walmart (WMT 0.00%↑) CFO John Rainey

IT spending improving

"The IT spending market continued to improve and after a prolonged period of challenging market conditions and transformation, which we navigated well, we returned to positive year-on-year gross billings growth in the quarter." - TD SYNNEX (SNX 0.00%↑) CEO Richard Hume

Meta is almost ready to start showing its prototype of holographic glasses

“I think the glasses are a big deal. We’re almost ready to start showing the prototype version of the full holographic glasses. We’re not going to be selling it; sadly, we’re focused on building the full consumer version of it rather than selling the prototype, but we’re going to start demonstrating the prototype to people” - Meta (META 0.00%↑) CEO Mark Zuckerberg

Threads has 175 million monthly active users

"Threads now has more than 175M monthly actives. What a year." - Meta (META 0.00%↑) CEO Mark Zuckerberg

Healthcare

25% of Walmart’s stores are unprofitable

"We are at a point where the current pharmacy model is not sustainable and the challenges in our operating environment require we approach the market differently...To start, we are finalizing a multifactor store footprint optimization program, which we expect will include the closure of a significant portion of these underperforming stores over the next 3 years..Currently, 75% of our U.S. stores contribute roughly 100% of segment AOI. For the remaining 25% of the stores in our network which are not currently contributing to our long-term strategy, changes are imminent.” - Walgreens (WBA 0.00%↑) CEO Tim Wentworth

Industrials and Transport

There’s acute softness in metalworking

"It does feel like things have softened further and you can look no further than yesterday's MBI reading as another proof point in line with what you're saying. I would say in terms of visibility, Tommy, and by the way, definitely what we're seeing and experiencing is that the softness is more acute in metalworking-related end markets. So you think machinery, equipment, metal fabrication, kind of like our core, which is part of what's going on with our core customer. The closer you get to the core, the softer things appear." - MSC Industrial (MSM 0.00%↑) CEO Erik Gershwind

Lower economic activity is leading to tight scrap markets

"Lower economic activity has been constraining scrap supply flows for more than a year. For 18 out of the last 19 months, U.S. manufacturing PMI has been below 50, which indicates contractionary territory. Lower auto production, as well as higher prices and financing costs for new and used cars, have contributed to the average age of vehicles reaching their highest level on record, resulting in lower scrappage rates of end-of-life vehicles. These tight supply conditions have led to stickiness in scrap purchase costs, which have not moved in line with the drops in selling prices." - Radius Recycling (RDUS 0.00%↑) CEO Tamara Lundgren

Chinese steel is making its way back into US markets

"...the surge in Chinese steel exports continued to negatively impact global demand. In the first five months of calendar year 2024, China's finished steel exports increased 23% year-over-year, impacting both steel production and ferrous scrap demand, particularly in Asia and the Middle East." - Radius Recycling (RDUS 0.00%↑) CFO Stefano Gaggini

"...steel imports hit sustainable -- unsustainable levels, they've shown no signs of slowing down, violating a 2019 agreement between the U.S. and Mexico. This year alone, corrosion-resistant steel imports from Mexico are on track to increase to 3x over the historic average, triple the historic average…What's worse, it's not just Mexican steel that's coming on, that's coming in, it's Chinese steel. Mexico is just a pit stop along the way as Chinese steel makes its way into the U.S. illegally all to evade tariffs. We've seen China do it again. And again, they find new ways to cheat. They find they continue to engage in unfair trade practice and it works, Mexican imports of Chinese steel and iron doubled between 2015 and 2023." - Cleveland-Cliffs (CLF 0.00%↑) Ohio Senator Sherrod Brown

High rainfall in the mid-west is impacting ag markets

"Turning to our key end markets. In North America irrigation, market conditions continue to weigh on farmer sentiment, resulting in overall demand softness. High precipitation levels and wet field conditions across the mid-west contributed to lower year-over-year sales of irrigation equipment and replacement parts in that region while we experienced volume growth in the west and northeast regions. We did see higher-than-expected storm damage activity that hit the Midwest in late April and early May. However, delays in insurance approvals and wet field conditions shifted most of that demand into our fiscal fourth quarter." - Lindsay (LNN 0.00%↑)CEO Randy Wood

Materials & Energy

High demand for AI energy

"In this case, the customer has come to us and come to many in the industry and said ‘I need as much power as you can make available" - Vistra (VST 0.00%↑) CEO Jim Burke

Data centers are projected to require 10% of global electricity by 2030, up from 2% today 

"...the highly power-intensive nature of artificial intelligence is acting as a multiplier on energy demand, which is increasingly becoming a key bottleneck for growth of cloud computing. For example, the integration of AI uses up to 10x more power when integrated into a typical web search process…It is widely estimated that global electricity consumption from data centers will increase to approximately 10% of total electricity demand by 2030, up from approximately 2% today. To put this in context, this means that to satisfy the needs of data centers alone, which doesn't factor into -- in the penetration of EVs or broader economic electrification, the additional generation capacity required by data centers is equivalent to the size of the current U.S. power grid." - Brookfield Renewable (BEP 0.00%↑) Managing Partner of Renewable Power & Infrastructure Brookfield Asset Management Connor Teskey

Real Estate

The housing market may be softening

“We're starting to see some early softening in the market. Homes are taking a bit longer to sell, they're selling for under asking price on average, and that means that buyers are getting a little bit more negotiating power” - Redfin (RDFN 0.00%↑) Chief Economist Daryl Fairweather

“​​The typical U.S. home that sold during the four weeks ending June 23 sold for 0.3% less than its asking price. This marks the first time the typical home has sold under list price this time of year since the onset of the pandemic in 2020 when the housing market nearly ground to a halt. The typical home sold for exactly its list price one year ago, and roughly 2% above its list price two years ago” - Redfin (RDFN 0.00%↑) Chief Economist Daryl Fairweather