What’s Priced In?

Rising rates and inflation may finally be starting to impact the real economy

Editor's note: Welcome to this week’s edition of The Transcript. We have reserved all the quotes below the International section for our paid subscribers only. To enjoy the full newsletter, become a paid subscriber.

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Succinct Summary: The Fed met last week and signaled that “significant additional tightening” is still in the pipeline, but also commented that it may be appropriate to slow the pace of interest rate increases. Equity markets responded bullishly, indicating that perhaps they have already priced in the worst. The macro section of this week’s newsletter highlights continued strong demand; however, in the industry sub-sections we picked up many early recessionary indicators. Credit conditions “have deteriorated over the last few weeks,” consumers are “clearly trading down,” and advertisers “significantly curtailed spend.” Rising rates and inflation may finally be starting to impact the real economy.

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Macro

The Fed reiterated its strong commitment to bring down inflation 

"My colleagues and I are strongly committed to bringing inflation back down, and we’re moving expeditiously to do so -- We've been saying we would move expeditiously to get to the range of neutral, and I think we’ve done that now. We’re at 2.25 to 2.5, and that’s right in the range of what we think is neutral -- There would be the risk of doing too much and, you know, imposing more of a downturn on the economy than was necessary. But the risk of doing too little and leaving the economy with this entrenched inflation, it only raises the cost. If you fail to deal with it in the near term, it only raises the cost of dealing with it later." - US Federal Reserve Chair Jerome Powell

“The committee is united in our determination to get inflation back down to 2 percent, and I think we’re going to continue to do what we need to do until we are convinced that inflation is well on its way back down to 2 percent — and we are a long way away from that.” - Minneapolis Fed president Neel Kashkari

They anticipate that ongoing increases will be appropriate and may at some point slow the pace 

"Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2 percent. We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate. The pace of those increases will continue to depend on the incoming data and evolving outlook for the economy. As the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases while we assess how our cumulative policy adjustments are affecting the economy and inflation." - US Federal Reserve Chair Jerome Powell

There's probably still significant additional tightening in the pipeline

"In light of all that data, the question we’ll be asking is whether the stance of policy we have is sufficiently restrictive to bring inflation back down to our 2 percent target. And it’s also worth noting that these rate hikes have been large and they’ve come quickly, and it’s likely that their full effect has not been felt by the economy. So there’s probably some additional tightening—significant additional tightening in the pipeline." - US Federal Reserve Chair Jerome Powell

The Fed wants to get this done now rather than let inflation linger

"To the extent people start to see it as just part of their economic lives and they start to factor high inflation into their decisions, when that—on a sustained basis—when that starts to really happen—and we don’t think that’s happened yet. But when that starts to happen, it just gets that much harder, and the pain will be that much greater. So I really do think that it’s important that we—that we address this now and get it done." - US Federal Reserve Chair Jerome Powell

They’re not planning for a soft landing

"Having a soft landing is what we’re aiming for, of course. That has to be our goal. It is our goal. And we’ll keep trying to achieve it. I think—I do think events—at the beginning we said it was not going to be easy. It was going to be quite challenging to do that. It’s unusual. It’s an unusual event. It’s not a typical event, given where we are." - US Federal Reserve Chair Jerome Powell

But capital markets may have already priced in the worst

"Between the Fed and the media, I think you've [priced in] a pretty bad recession. So people kind of as I said if it's a hurricane they board it up, they put the plywood up and they've gotten ready for the hurricane. Now the part of the economy that probably isn't as ready and because there's no way to avoid it is the consumer. And I think you're seeing that the consumer has no way to really get out of the way of increased high gas prices and food inflation and things of that nature" - Moelis & Co (MC 0.00%↑) CEO Ken Moelis

Companies are also preparing for a downturn

"...we are currently not seeing any material impact on our expectations for users or subs growth from the economic downturn. In fact, we are seeing several markets trending ahead of our forecasts. That said, in anticipation of a potential slowdown, we already shared that we proactively reduced our hiring by 25% and instituted a double-down weekly revenue monitoring. I have said this before, I do believe only the paranoid survive, and we are preparing as if things could get worse, but it’s hard to be anything but optimistic given what I am currently seeing." - Spotify (SPOT 0.00%↑) CEO Daniel Ek

"While demand remains strong, there are growing concerns about the economy to be sure. That’s why we are already taking proactive steps to manage costs and cash flows, including reducing some discretionary spending and limiting hiring to critical needs and positions that support growth." - General Motors (GM 0.00%↑) CEO Mary Barra

"With respect to Alphabet headcount, we added 10,108 people in the second quarter with the majority of hires for technical roles. Given the uncertain global economic outlook and the hiring progress achieved to date, as Sundar previously announced, we intend to slow the pace of hiring. We expect our actions on hiring to become more apparent in 2023." - Alphabet (GOOGL 0.00%↑) CFO Ruth Porat

"...we seem to have entered an economic downturn that will have a broad impact on the digital advertising business. And it's always hard to predict how deep or how long these cycles will be, but I'd say that the situation seems worse than it did a quarter ago. In this environment, we're focused on making the long-term investments that will position us to be stronger coming out of this downturn, including our work on our discovery engine and Reels, our new ads infrastructure, and the metaverse. And we're also focused on being rigorous about measuring returns and sizing these investments correctly." - Meta Platforms (META 0.00%↑) CEO Mark Zuckerberg

But demand remains strong

"We're not economic forecasters, so I'm not going to predict the future or a potential likelihood of a recession. Instead, let's focus on the facts. From the numbers I just reviewed relative to 2019 levels, growth has been stable or improving in overall domestic payment volume, credit, debit, card-present, and card-not-present volume, and this indicates the most of 2022 with no indication of any slowdown, including in more recent weeks." - Visa (V 0.00%↑) CEO Al Kelly

"We had strong revenue and earnings growth again this quarter, as overall consumer spending remained robust and cross-border volumes grew 58% versus a year ago. Increasing inflationary pressures have yet to significantly impact overall consumer spending but we will continue to monitor this closely." - Mastercard (MA 0.00%↑) CEO Michael Miebach

"For the month of July through 25 days -- It is up about 10% from last year’s July first three weeks. The transaction will grow by 7%. That means it is growing. People are spending on vacations. European transactions are through the roof right now. Theme parks, home improvement, a little more mitigated, but still holding on. Bigger than 19. People are missing the comparison with 19, which is critical. We feel good about the American consumer. They are spending" - Bank of America (BAC 0.00%↑) CEO Brian Moynihan

"In terms of our customers, they are not lower-end consumers. They are squarely in the middle class. They represent the vast demographic of America. And what we are seeing is they're earning more and they are spending more and certainly, with unemployment in their historic lows and their wage is up from where it was back in 2019, we believe they have ample savings and resources and they are wanting to travel more than ever this year." - Wyndham Hotels and Resorts (WH 0.00%↑) CEO Geoff Ballotti

"So if I think about what are we seeing in our business, we're seeing very strong strength, right? In terms of the macro, obviously, when you read the papers or wherever information source, lots and lots of challenges in the world -- if we see a downturn, and we're not seeing the signs of one, but that doesn't mean that there won't be one." - Thermo Fisher Scientific (TMO 0.00%↑) CEO Marc Casper

"...all the data that we’re seeing continues to give rise to strong demand for our products." - General Motors (GM 0.00%↑) CFO Paul Jacobson

Some of the inflationary pressures are abating 

"I think the new thing this quarter is additional pressure on the energy, electricity rates in our data centers because of the ramp up in natural gas prices, if you've seen that. So that's probably the new information and then the other inflationary factors. Well, some of them are coming down slightly. They're still significantly a penalty year-over-year" - Amazon.com (AMZN 0.00%↑) CFO Brian Olsavsky

"Inflation might be trending down -- More Tesla commodity prices are trending down than up" - Tesla (TSLA 0.00%↑) CEO Elon Musk

“Well I think it's a dangerous business to predict the future at the moment, but we certainly see peak inflation coming sometime in the second half we're not there yet and so I think we'll expect that sometime probably towards the end of q3 beginning of q4 we'll start to see the full flow through of commodity prices into uh retail prices in the market yeah that's certainly true in fact we've only passed along about 70 percent of the input costs that we have felt through to retail pricing and we have guided the market that our margins, our percentage margins will be down this year so we're certainly going to spread out the cost of increases that we're seeing over a couple of years and we are doing everything in our power to find savings and efficiencies and make sure that the pressure that is brought to the consumer as the minimum possible one” - Unilever (UL 0.00%↑) CEO Alan Jope

International

China is on the rebound