Inflation Fighters
The Fed is laser-focused on ensuring the economy returns to price stability
Succinct Summary: There are a lot of people who are worried about a recession but for now the economic data is still quite strong. Demand is robust, labor markets are healthy and supply chains are starting to show signs of healing. But along with strong demand comes continued inflationary pressures. The Fed is laser-focused on fighting inflation and is ready to tighten aggressively in order to make sure that the economy returns to price stability. This could ultimately cause the recession that people are worried about.
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Macro
People are getting pretty worried about a recession
“The global economic outlook has deteriorated materially…It is the right time to lock in resilience so that we are well prepared for future possible shocks" - Bank of England Governor Andrew Bailey
"The outlook since our last update in April has darkened significantly. We are in very choppy waters. The risk has gone up so we cannot rule it out. It's going to be a tough '22, but maybe even a tougher 2023. Recession risks increased in 2023" - IMF Managing Director Kristalina Georgieva
But demand is still robust
"While all of this continues to put pressure on our customers, we are not seeing the evidence of an imminent recession that is suggested by the headlines…On the one hand, there are several yellow or red macro indicators, such as high inflation, rising interest rates, and ongoing supply chain shortages and challenges. On the other hand, we are experiencing a more encouraging picture. Order levels, backlogs, and overall activity remains strong. Most segments of the industrial economy are still seeing robust demand patterns, as evidenced by the industrial production index." - MSC Industrial Direct (MSM) CEO Erik Gershwind
“Sector by sector, we’re seeing a varied picture of how inflation is impacting essential vs discretionary consumer spending. One notable highlight is that travel sectors such as airlines and lodging continue to show signs of strong demand.” - Mastercard (MA) Senior Advisor Steve Sadove
"Considering these times, and I don't have to stress them, it's volatile. It's difficult to assess what's happening. The inflation side, the war side, the whole sort of rhetoric that we have around the world right now. It's very instable, but we have seen in our markets, good underlying demand levels in all of our markets, in all products, in all end markets, new housing, also in renovation and in infrastructure on both sides of the Atlantic, Canada and the U.S., strong performance and also in Europe, all around Europe.
We had a very good order intake also. Deliveries are strong" - Wienerberger (VIE: WIE)CEO Heimo Scheuch
“We feel really, really good about how we're positioned right now in wholesale. We haven't seen any signs of cracks." - Levi Strauss (LEVI) CEO Charles Victor Bergh
"Well, in terms of consumer health and volume, I would say that so far, so good. There's a lot of talks about different economic parameters, is there a recession coming or whatever. Right now, it looks like discretionary income is still there. Customers are still coming to our restaurants during the quarter and after the quarter. The traffic is going well. The trends are favorable to us. And we're not seeing a slowdown caused by any economic factors at the moment. If anything, we're struggling to cope with demands more than we're struggling to attract customers." - MTY Food Group (MTY) CEO Eric Lefebvre
And that means that there are still inflationary pressures
"I would say we have not yet seen a slowdown in the rate and pace of increases coming from our suppliers, which Ryan, as you know, is sort of, for us the leading indicator, and I think that's because this inflation wave is driven beyond just commodities. It's driven by so many other factors, oil and fuel wage rates and what's going on, there's multiple variables here. So so far, no slowdown." - MSC Industrial Direct (MSM) CEO Erik Gershwind
"I do believe we have reached peak inflation. Inflation will start to come down as financial conditions tighten as central banks normalize rates but we're not going to get to two percent without significant damage to the real economy" - BlackRock (BLK) Vice-Chairman Philipp Hildebrand
Economic strength will push the Fed to raise rates more aggressively
“The tremendous momentum in the economy to me suggests that we can move at 75 basis points at the next meeting and not see a lot of protracted damage to the broader economy." - Atlanta Fed President Raphael Bostic
The Fed wants the economy to slow down
“We’re starting to see those first signs of slowdown, which is what we need because what we have right now is a great imbalance between supply and demand that’s driving the inflation that we’re seeing." - Atlanta Fed President Raphael Bostic
"Is there a risk that we would go too far [with rate hikes]? Certainly there's a risk. But I wouldn't agree that that is the biggest risk to the economy. The bigger mistake to make would be to fail to restore price stability...The risk is that because of a multiplicity of shocks, you start to transition to a higher-inflation regime. Our job is literally to prevent that from happening. And we will prevent that from happening.” - US Fed Chair Powell
This could lead to recession
"I think it'll be in that kind of deep recession territory if you wanted to really get inflation back to the kind of price stability definition that we've seen in the last decades around two percent. I think that the cost of that will prove to be extremely extremely high and that's the new kind of world we live in." - BlackRock (BLK) Vice-Chairman Philipp Hildebrand
Higher interest rates will affect demand at some point
"We haven't seen really much effect yet from interest rates. And to be candid, even gas prices, the market's not responding the way you'd expect. What we're seeing is that SUVs have dropped in price about 3% since gas prices started going up. That's only about $1,400 off records. And yet, on the other side, truck prices have actually gone up…It's crazy that four months into record fuel prices, used pickup trucks are selling for a higher price than they were before gas prices went up. We've never seen anything like that. The world is upside-down but it's not going to last. The interest rate-- these are big, durable goods just like homes. You can't increase prices of monthly payments that much and not have an impact. So if you want to sell, this is the seller's market. It's why we're here to help. But if you want to buy, if you can wait, it's a great time to wait, because there's no way that these prices in the nearly new cars can stay at these really highly inflated 40%, 50% above normal-- and we're trying to focus on that road back to normal." - CoPilot CEO and Founder Pat Ryan
International
The EU has a higher chance of recession than the US
"I think the chance of a recession in Europe is higher than the chance of a recession in the US. I can't predict what that percentage chance is, but given everything that's going on, you know, I think there are headwinds to growth here that are a little bit more pronounced than in the US, but there are headwinds to growth in the US too right now. The big risk to Europe or the big thing that I think increases the probability of a recession in Europe is the shifts that are going on with respect to energy supply. Europe is, as we all know, very dependent on Russian energy." - Goldman Sachs (GS) CEO David Solomon
China is opening up again and domestic travel is bouncing back
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It may take a while to recover after the lockdowns
"Well, those lockdowns were lifted fairly recently. I mean everything is going back to -- we had about -- about 70% of the country was not in a lockdown, about 30% was, and now we're basically picking up the last 30%. And hopefully, we'll see an increase from there. And -- but it's going to take a while for the overall Chinese economy to pick up again. So we expect basically things to be back normal maybe in 6 months or so." - Northern Technologies (NTIC) CEO Patrick Lynch
Deglobalization would be very expensive
"Everything will get more expensive if we dream of localizing everything, and there are conditions which give some nations an advantage, cost-wise, and we should use that competitive advantage through the world. It’s a dream and it would not improve the world. Everything gets more expensive, and we’re not really getting better." - Volkswagen (VWAGY) CEO Herbert Diess
Financials
It’s getting tougher to make money
"one of the pieces of advice that certainly I would give right now is that people need to expect that the world is going to be more volatile, it's going to be more difficult to make returns on assets than what we've experienced when money was very, very easy. We're tightening monetary policy. That's going to have an impact on asset prices. It's going to have an impact on demand. So, I think you have to be prepared for that volatility and the impact of that volatility. I'm not going to predict any outcome, but certainly we're going to operate with tighter economic conditions and tighter economic conditions have some very direct and predictable consequences." - Goldman Sachs (GS) CEO David Solomon
Even with lower valuations, there are fewer M&A deals happening as high yield markets are closed
"I would say, in theory, what you said should happen (more deals with lower valuations). We've got certainly higher interest rates, high-yield markets. Much higher, if not closed. I don't think we're seeing a lot of private equity opportunity or activity. But there's not been a ton of deal flow either. So I think we need to see a couple of quarters to see what happens. There is some activity. But on our side, we're seeing more right now in Europe and in Asia than we are in the U.S. But that will come, and I've been waiting 4 years for this. The balance sheet is ready, and we're confident there will be some opportunities and probably less competition than what we've seen over the past few years and I think lower multiples as a result." - Alimentation Couche-Tard (ATD.B) CEO Brian Hannasch
Art markets haven’t slowed down
"Art is probably more of a lagging indicator rather than a leading indicator of where the markets are. We don’t necessarily see dramatic corrections. When our market slows down, fewer things become available to sell, but anyone waiting around to get a 30% discount on a masterpiece may be disappointed and frustrated. We’re kind of like the oceanfront property that everyone’s waiting for the right moment to buy, but there’s a lot of money waiting for that moment. As soon as the price for anything goes down even a little bit, people start to jump in. I see a similar dynamic in our brackets." - Sotheby’s CEO Charles F. Stewart
Consumer
Labor markets are still strong
"Sales are strong retention is strong. the only thing that is interesting is employee-initiated leaving. People are leaving jobs. that's up to 2/3 of people who are leaving jobs on their own. That's more than double what it was two and half years ago." - Paychex (PAYX) CEO Martin Mucci
There are some signs of consumer pressure
"Our average bill pre-COVID and really up until recent quarters would have been 10 to 12 gallons per visit, that's declined to 8. So that's a signal to us that there's some pressure on consumers. It likely results in increased visits but I think that's a sign that there are some pressure. And we're very fortunate to see unemployment levels remain at historic lows" - Alimentation Couche-Tard (ATD.B) CEO Brian Hannasch
"Now we are seeing some signs of customers changing behavior in response to the cost of living crisis. But it is also hard to untangle these effects from the COVID normalization we're also seeing. We're seeing some switching into economy own label, but premium is remaining resilient, and Taste the Difference is performing strongly." - Sainsbury (LON: SBRY) CEO Simon John Roberts
“In the quarter, there was an acute shift in customer sentiment and, since then, pressures have materially escalated. This includes steep inflation and fluctuations in purchasing patterns” - Bed Bath & Beyond (BBBY) Interim CEO Sue Gove
Bed Bath & Beyond had a rough quarter
"For our first quarter, total net sales were approximately $1.5 billion, which reflects a decline of 25% and a comp sales decline of 23% versus last year. This comp decline was consistent with the quarter-to-date trends we shared on our April earnings call as sales continue to be challenged throughout the quarter." - Bed Bath & Beyond (BBBY) CFO Gustavo Arnal
But Costco comps are still strong
“...net sales for June came in at $22.78 billion, an increase of 20.4% from $18.92 billion last year. Comparable sales were as follows. On a reported basis, in the U.S., the 5 weeks was at 21.5%; 44 weeks, 16.6%. In Canada, the 5 weeks is at 14.2%; 44 weeks, 15.9%. Other International, the 5 weeks is at 4.7% and the 44 weeks is at 7.4%. Total company in the 5 weeks is at 18.1%; 44 weeks, 15.3%.... Overall, inflation in June was generally consistent with what we saw in May. Food and sundries increased sequentially, while fresh foods inflation was lower versus last month." - Costco Wholesale Corporation (COST) Assistant VP of Financial Planning & IR David Sherwood
Retail inventories have gotten bloated
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It could take some time to right-size inventories
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Office attire is continuing to get more casual
"We've got some recent consumer research. More consumers are now wearing jeans more often in professional settings. I would say maybe even at your bank, the CEO is probably just happy that people are coming into work and wearing a pair of jeans is perfectly acceptable today, and that's very different than a pre-pandemic world. More than half of the people that were surveyed in the survey, and this was done globally, said that they can now wear jeans to work. That's a huge change from pre-pandemic. So the trend towards casualization is definitely helping." - Levi Strauss (LEVI) CEO Charles Victor Bergh
Airplane ticket price increases can't go on forever
"yes, is there a limit to how long this can go, how long customers are going to absorb these increased ticket prices for air travel, which the airlines have to charge not only the jet fuel costs going up significantly, lot of costs going up. But obviously, the big kahuna in terms their cost buy is a jet fuel, which is significantly higher. So yes, there's pent-up demand, we get it, and people of money. But I was just going to go on to Slide 21, sorry. Is this going to just go on forever? Does that make sense? Does it defy gravity?" - Park Aerospace (PKE) Brian E. Shore
Technology
There are signs of weakening demand for PCs and smartphones
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There are still pockets of semiconductor shortages
"Nonmemory component shortages are improving, and we expect that further improvements should support memory and storage demand growth for the rest of this year. However, there are some pockets where semiconductor shortages have not improved as fast as we had expected, and these shortages are likely to continue into calendar year 2023." - Micron Technology (MU) CEO Sanjay Mehrotra
OEMs paring back on memory and storage inventory
"Data center fiscal Q3 revenue grew by a double-digit percentage sequentially and well over 50% year-over-year. Datacenter end demand is expected to remain strong in the second half of calendar 2022, driven by robust cloud CapEx growth. Despite the strong end demand, we are seeing some enterprise OEM customers wanting to pare back their memory and storage inventory due to non-memory component shortages and macroeconomic concerns." - Micron Technology (MU) CEO Sanjay Mehrotra
Industrials and Transport
Supply chains and freights costs are still a challenge
"Despite supply chain constraints easing gradually, we are nowhere near back to a normal environment..there's still real shortages and lead time delays" - MSC Industrial Direct (MSM) CEO Erik Gershwind
"The containership capacity limitations are expected to continue also this year. So we expect continued high freight cost. The biggest challenge really is the port congestion which will keep pressure on freight rates, even though new ships are expected to come in, in 2023, the infrastructure is continuing to be a challenge." - Stolt-Nielsen Limited (SOIEF) CEO Niels Stolt-Nielsen
But they have eased slightly
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Margins are under pressure
"We expect gross margins to be in the range of flat to declining by 50 basis points versus the prior year with a wider-than-usual range reflecting our consideration of a number of scenarios. We expect to benefit from mid-single-digit pricing actions and continued gains from our shift to a more direct business, offset by another 100 basis points headwind from elevated ocean freight costs, increased product costs, discrete supply chain investments and normalization of historically low markdown rates. We expect gross margin pressure to exceed 100 basis points in the first quarter of fiscal '23, both as we recalibrate supply and demand in Greater China and as we anticipate higher promotional activity to sell seasonal inventory, which has arrived late due to a combination of factory closures and longer transit times." - NIKE (NKE) CFO Matthew Friend
"Unfortunately, we continue to face a challenging inflationary environment, and our third-quarter gross margin came in at 48%, reflecting significant increases to our cost of products sold. Inflationary cost pressures are broad-based and continue to increase with little sign of near-term relief. These operational challenges are not unique to WD-40 company." - WD-40 (WDFC) CEO Garry O. Ridge
Auto OEMs are cautiously ramping up production
"We are ramping up the second half of the year, so delivery times should shorten, and then as we are a little bit cautious about the outlook next year, we can significantly reduce the waiting times, but we are also not really doubling up capacities, because the world will remain unstable. That’s our assumption, so we have to be a bit cautious." - Volkswagen (VWAGY) CEO Herbert Diess
Materials & Energy
Prices of commodities fell towards the end of the quarter
"Our third quarter began with market prices for recycled ferrous metals reaching historically high levels in excess of $650 per ton, driven by the initial market disruption associated with the Russian war in Ukraine. By the end of the quarter, prices had dropped to a range of $450 to $500 per ton, driven largely by China's lockdowns, slower purchases by Turkey, low-cost Russian billets and ample scrap flows. Since the end of the quarter, we've seen prices trade in the range of $330 to $350 per ton off the East Coast to Turkey with prices slightly stronger off the West Coast. Copper and aluminum scrap prices also began the quarter at or near multi-year highs, benefiting from the tailwinds of broad-based demand, low global inventories, supply chain disruptions and high inflation. Similar to ferrous, nonferrous prices declined in the latter part of the quarter to levels generally consistent with their 12-month average. Since the end of the quarter, nonferrous prices have further softened due primarily to higher energy prices and slow demand from China." - Schnitzer Steel Industries (SCHN) Tamara L. Lundgren
Lots of bottlenecks for growth in the oil industry
"I think the other challenge we have going forward just as an industry is, I think there's a lot of bottlenecks in industry being able to leverage and grow more than they currently are. We're all seeing it today in the lack of services, the lack of tubulars to get the wells drilled, the lack of frac sand to get things done, the service providers to be able to provide the services they need. So there's a lot of bottlenecks in the industry and trying to grow any more than they currently are." - EOG Resources (EOG) Lloyd W. Helms
Real Estate
Mortgage rates dropped slightly though Rates remain high
"Conditions for homebuyers are improving. Housing remains expensive, but mortgage rates just posted their biggest weekly drop since 2008, which makes buying a home a bit more affordable. One way buyers can take advantage of the shift in the market is seeking concessions from sellers. That could include asking the seller to buy down your mortgage rate, pay for repairs or cover some of your closing costs.” - Redfin (RDFN) Chief Economist Daryl Fairweather.
"For the week ending July 7, 30-year mortgage rates fell to 5.3%—the largest 1-week drop since 2008. This was down from a 2022 high of 5.81% but up from 3.11% at the start of the year. Fewer people searched for “homes for sale” on Google—searches during the week ending July 2 were down 2% from a year earlier." - Redfin (RDFN)
Housing cooling factor in the bay area
"Housing markets in northern California are cooling faster than anywhere else in the U.S. amid high mortgage rates and a faltering stock market. Five of the 10 U.S. housing markets that have cooled fastest this year are in northern California–San Jose, Oakland, San Francisco, Sacramento and Stockton–and three of those five are in the Bay Area. All 10 of the housing markets cooling fastest are in the American West" - Redfin (RDFN)
Nuggets of Wisdom
Take care of yourself and of your family first
"I think it's super important when you work at Goldman Sachs to work hard, to be super competitive, but it's secondary to taking care of your family, taking care of your own personal health, your own mental wellbeing. And everybody's got to find the right balance for doing that. I've had periods in my life when I've done it really well, I've had periods in my life when I haven't. I mean, there have been a lot of pressures. But I do think that one of the things that I can do is I can talk about it openly with people, talk about my own personal journey and just give people room to know that it's not easy to navigate all this. But you have to take care of your family, first and foremost, you've got to take care of your health. And if you want to be successful in business, you have to work really hard, and you've got to be really committed. But it's possible to go on a journey and figure that all out. It's not going to be a straight line. It's not going to be easy all the time. But there are different ways that you can make that happen, and it's important to figure out on your own what works for you." - Goldman Sachs (GS) CEO David Solomon
Learn to ask the right questions
"And if you think about the time you have with other people and how much you can get out of it if you ask good questions, open-ended questions, whether you probe at the right time and so on, and how much time we just lose either because we talk too much ourselves or because we don't ask the right questions, I think there is a huge scope professionally and personally. And you can get some training in this field" - Norwegian Sovereign Wealth Fund CEO Nocolai Tangen
Find your passions and pursue them
"Well, I'm passionate about music, I'm passionate about other things, too. But one of the points I make when people ask me about this is: life's a journey. And certainly, I have more time to work very, very hard and pursue a passion at 60 with kids who are 30 and 28 than I did when I was in my mid to late thirties and my kids were 8 and 6. If I remember back then, there wasn't a lot of time for the passion, there was time for family and work. And, you know, it evolved. So, it's a journey and there are different things that you can do in life. I think one of the things that's important. We run a very young organization, we have lots of people in their twenties here. You know, there are different stages of life when you can do different things. But having things that you're interested in, having things that you want to invest your passion, your heart, your brain in, I think, makes you a more interesting person, I think it keeps you stimulated, I think it keeps your brain functioning. And it's important that you find ways to do that throughout the journey of your life. And there are times when you can do it more; there are times when you can do it less. But you should always hold the things dear that are important to you and find ways to participate, to access them." - Goldman Sachs (GS) CEO David Solomon