Until the Job is Done
Jerome Powell says labor markets “clearly out of balance”
Succinct Summary: Jerome Powell gave a speech in Jackson Hole last week and reiterated that the Fed is sharply focused on fighting inflation. He called labor markets “clearly out of balance” and acknowledged that he is comfortable with a sustained period in which the economy grows below its more recent trend. Barring a clear recession, it’s unlikely that the Fed would lower interest rates until 2024.
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Macro
Jerome Powell is ready to act forcefully
"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance." - US Federal Reserve Chair Jerome Powell
Demand and supply are still clearly out of balance
"While the latest economic data have been mixed, in my view our economy continues to show strong underlying momentum. The labor market is particularly strong, but it is clearly out of balance, with demand for workers substantially exceeding the supply of available workers. Inflation is running well above 2 percent, and high inflation has continued to spread through the economy." - US Federal Reserve Chair Jerome Powell
One month of lower inflation is not enough to prove that inflation is moving down
"While the lower inflation readings for July are welcome, a single month's improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down." - US Federal Reserve Chair Jerome Powell
The Fed is prepared to accept a sustained period of below-trend growth
"Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions." - US Federal Reserve Chair Jerome Powell
At some point, they’ll slow the pace of increases
"At some point, as the stance of monetary policy tightens further, it likely will become appropriate to slow the pace of increases." - US Federal Reserve Chair Jerome Powell
But they’re probably not loosening until 2024
"Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy. Committee participants' most recent individual projections from the June SEP showed the median federal funds rate running slightly below 4 percent through the end of 2023." - US Federal Reserve Chair Jerome Powell
The Fed is laser-focused on inflation
"Our responsibility to deliver price stability is unconditional." - US Federal Reserve Chair Jerome Powell
International
Most of the world is fighting inflation and could be for a while
"I think it's too early to say that. Yes, we have inflation almost everywhere there are important exceptions like china and japan but everywhere else we have high levels of inflation. There are global factors like energy prices and food prices that are driving it but there's also kind of more sticky components of inflation that are high now. I would be careful about looking at one data point for the US. I think last year around the same time there was a good inflation reading and everybody thought we were on track for inflation to come down and then October inflation went up again so I think one needs to be very wary about one inflation rating uh we are in a period where inflation is likely to be high for a while at least for another year or two" - International Monetary Fund Deputy Managing Director Gita Gopinath
Central Banks globally have to act
"The story is pretty clear. Inflation is much too high. And so the answer in a situation like this is also obvious. This is what central banks have to do in a situation like that. We have to raise rates" - German Bundesbank Governor Jens Weidmann
“Central banks cannot hope to smooth out all economic air pockets, and must instead focus first and foremost on keeping inflation low and stable. Monetary policy needs to meet the urgent challenge of dealing with the current inflation threat." - Bank for International Settlements Head Agustin Carstens
And they need to act decisively
"Central banks must act decisively to bring inflation back to target and anchor inflation expectations..the pandemic and war suggest that temporary supply shocks may have broader and more persistent effects on inflation when an economy is very strong, or the shocks are very large. Under such conditions, central banks may need to react more aggressively to control inflation" - International Monetary Fund Deputy Managing Director Gita Gopinath
“In this environment, central banks need to act forcefully. They need to lean with determination against the risk of people starting to doubt the long-term stability of our fiat currencies -- In other words, central banks are likely to face a higher sacrifice ratio compared with the 1980s, even if prices were to respond more strongly to changes in domestic economic conditions, as the globalization of inflation makes it more difficult for central banks to control price pressures" - ECB Board Member Isabel Schnabel
Chinese growth to be low this year
"China is a country where we've had a substantial downgrade in July for instance for this year we have the growth for china to be around 3.3 percent which is well below what they normally grow at and there are two factors that are playing an important role one is the fact that you have more transmissible versions of Covid than the zero covert policy that's leading to more frequent lockdowns and the second is the real estate sector which is increases and we haven't seen a turnaround yet so we are quite concerned about it and which is what these are the reasons why we've downgraded growth" - International Monetary Fund Deputy Managing Director Gita Gopinath
Financials
Credit card delinquency rates are up slightly but still at historical lows
"We continue to monitor delinquency rates, which we view as a leading indicator for future credit card origination trends. While delinquency rates have increased slightly, they remain near historical lows. We expect credit cards to be less negatively impacted by a mild recession than personal loans. In the mild recession of ‘01-02, credit card originations declined only a few points. And for context, credit cards represent nearly half of credit card revenue in fiscal year 2022." - Intuit (INTU 0.00%↑) CEO Sasan Goodarzi
Consumer
Consumer behavior is shifting
"The customer is reacting just like we thought she would. And that is she's shopping closer to need. She's being very intentional in her shopping patterns, as well as her shopping while she's inside the four walls of the Dollar General store. It is a little bit more skewed to need-based, which we thought would also occur. But the great thing is what we're seeing is that if we do have the right product out there, which we do, on the discretionary side, she's shopping that as well. As an example, our harvest in Halloween is off to a fabulous start, well over what we expected -- she's coming more often, but spending less on each trip. And again, that's a reversal to what we saw there in the pandemic." - Dollar General (DG 0.00%↑) CEO Todd J. Vasos
"...spending trends fell as June progressed with Macy’s brand seeing a decline in customer traffic and spending. Post Father’s Day into July, Macy’s brand year-over-year sales trended nearly 5 percentage points lower than the proceeding weeks of the quarter." - Macy's (M 0.00%↑) CEO Jeff Gennette
There are signs that higher-income consumers are trading down
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Retailers are sitting on too much inventory and demand is slowing
"For furniture manufacturers like Flexsteel, slowing demand is being further exasperated by retailer inventories that remain stubbornly high. Many retailers have warehouses full of inventory orders to support the post-COVID demand that was delayed due to supply chain disruptions. Until retailers are able to move some of this product, they won't have room to replenish their Flexsteel inventories in the short-term." - Flexsteel Industries (FLXS 0.00%↑) CEO Jerry Dittmer
"During the quarter, we observed that all retailers were working to shed their excess inventory, setting the industry up for higher permanent markdowns and promotional levels. The industry-wide inventory levels along with the slowdown in consumer discretionary spend resulted in elevated inventory levels within certain categories. Additionally, supply chain pressures continued to ease as the quarter progressed." - Macy's (M 0.00%↑) CEO Jeff Gennette
This is leading to higher markdowns and squeezed margins
"For the six months ended July 31, 2022, the gross profit rate decreased by 407 basis points compared to the prior year’s comparable period. Gross profit dollars decreased 5.2% to $697.9 million. The decrease in gross profit rate and dollars was primarily due to higher markdowns at all three brands and lower initial merchandise markups driven largely by higher inbound transportation expenses -- Based on today's current sales performance and plan, we believe that growth profit margins could decline by more than 400 basis points for the third quarter. The decline in third-quarter gross profit margins could largely be driven by higher markdown rates versus last year's exceptionally low markdown rates at all brands as well as elevated inventory levels this year." - Urban Outfitters (URBN 0.00%↑) CFO Melanie Marein-Efron
"In certain categories inventory levels remain elevated due to reduced year-over-year sell-throughs since Father's Day driven by the industry-wide levels of excess inventory and a slowdown in consumer discretionary spend. The company is targeting appropriate inventory levels by the end of the year -- the company is taking the required markdowns to clear aged inventory, in seasonal goods, private brand merchandise, and pandemic-related categories, such as active, casual sportswear, sleepwear, and soft home." - Macy’s (M 0.00%↑) CEO Jeff Gennette
Promotional activity may clear by early 2023
“We believe the inventory overhang across the retail industry is likely to clear over the next several months. We expect that by early 2023, once this overhang has cleared, promotional activity will have declined significantly. Secondly, we anticipate that the supply environment will tighten somewhat. Many vendors have been hurt by the current imbalance and they are likely to pull back but with weak consumer demand, we think there will still be plenty of merchandise supply for the off-price channel. We also expect to carry attractive reserve inventory into 2023” - Burlington Stores (BURL 0.00%↑) CEO Michael O’Sullivan
E-commerce growth has decelerated from the pandemic
"We were seeing the tailwinds of the pandemic accelerate the adoption of e-commerce shopping, and I personally pushed hard to hire a strong team to support that growth. This year, that growth has not materialized as we had anticipated. Our team is too large for the environment we are now in, and unfortunately, we need to adjust.” - Wayfair (W 0.00%↑) CEO Niraj Shah
Peloton’s new CEO is convinced they are turning around
"The naysayers will look at our Q4 financial performance and see a melting pot of declining revenue, negative gross margin, and deeper operating losses. They will say these threaten the viability of the business. But what I see is significant progress driving our comeback and Peloton’s long-term resilience. Important milestones reached include new executive leadership, renegotiated supply contracts, and significantly reduced cash outflow." - Peloton (PTON 0.00%↑) CEO John Foley
Technology
NVIDIA saw a sharp slowdown in gaming revenue. Will there be a respite soon?
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Salesforce saw more measured buying behavior from customers
“Now for those of you who have been on these calls with us, we've all been through a number of these economic cycles. And we've especially seen that over our last 23 years. And once like this come around, we see customers becoming more measured in the way they buy. Sales cycles can get stretched. Deals are inspected by higher levels of management, and all of this, we began to start to see in July. Nearly everyone I've talked to is taking a more measured approach to their business” - Salesforce (CRM 0.00%↑) Co-CEO Marc Benioff
“As you heard from Marc, we're in a more measured buying environment. Executive teams are scrutinizing all purchasing decisions, and we are seeing some deals take longer to close. I personally met with over 100 CEOs this quarter in my travels across Latin America, Europe, and North America, and digital transformation remains their top priority. But the focus of the conversation has shifted meaningfully towards productivity, efficiency and time to value” - Salesforce (CRM 0.00%↑) Co-CEO Bret Taylor
"As both Marc and Bret mentioned, we started to see more measured buying behavior from our customers, which began in the last month of the quarter. This resulted in stretched sales cycles, additional deal approval layers, and deal compression." - Salesforce (CRM 0.00%↑) CFO Amy Weaver
Xiaomi is growing its market share
"In the second quarter, we maintained our number three position in global smartphone shipments and continue to advance our market position quarter-over-quarter. In the second quarter, our smartphone market share grew quarter-over-quarter to 14% globally; 16% in Mainland China; and 22% in Europe. Meanwhile, our smartphone market share was among the top 3 in 55 markets and among the top 5 in 77 markets. We continue to attract new users through our increasing popular new smartphones, both globally as well as in Mainland China." - Xiaomi ($XIACF) Partner & President Wang Xiang
Healthcare
Moderna filed patent infringement lawsuits against Pfizer and BioNTech
"We believe that Pfizer and BioNTech unlawfully copied Moderna's inventions, and they have continued to use them without permission. Outside of AMC 92 countries, where vaccine supply is no longer a barrier to access, Moderna expects Pfizer and BioNTech to compensate Moderna for Comirnaty®'s ongoing use of Moderna's patented technologies. Our mission to create a new generation of transformative medicines for patients by delivering on the promise of mRNA science cannot be achieved without a patent system that rewards and protects innovation." - Moderna (MRNA 0.00%↑) Chief Legal Officer Shannon Thyme Klinger
Industrials and Transport
Freight rates are going down
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“On freight, rates are continuing to track lower. They still remain at elevated levels, whilst the Baltic Dry Index is now at its lowest point since December 2020, ocean capacity still remains tight” - OZ Minerals ($OZL: ASX) CFO and Finance & Governance Executive Warrick R. J. Ranson
Airline travel is returning to normal from “white hot”
"We're seeing, in many ways, a return to normalcy in many ways, normal travel patterns, a shift from -- it was a white-hot summer, and the shift that we're seeing as we go into fall really do resemble seasonal shifts in what demand is. And the demand, I mean, predictability in airline demand is like to say, it is the most important thing because when you can predict demand and you can go and build the capacity plan there for the cost base of the airline around that. And so the resumption of predictability is a really big and important thing." - American Airlines (AAL 0.00%↑) CCO Vasu Raja
The changing face of business travel
"Through the pandemic that there's been less and less demand for what we call single day business trips, where you leave in the morning, you return in the evening. But interestingly, we've seen more demand for blended trips, where somebody leaves on a Thursday from Dallas to go to New York. They don't return on Friday. They stay through the weekend, and they come back on Sunday. In some cases, the spouse will meet them." - American Airlines (AAL 0.00%↑) CCO Vasu Raja
Materials & Energy
Farm income should be strong this year
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Europe is the driver in global LNG market
“Global LNG trade rose 4.5% in the second quarter of 2022 compared to the second quarter of 2021. Europe continues to be driving the demand for LNG, on the back of the uncertainty around the flow of Russia pipeline gas. The European LNG imports have increased by 52% in the first half of 2022 compared to the first half of 2021..the global LNG demand growth is projected to remain robust, mainly driven by Europe and the Asian region. In the current geopolitical situation, European countries seem determined to secure both LNG and LNG import capacity to safeguard the energy supply and shift away from Russian pipeline gas” - Höegh LNG Partners LP (HMLP 0.00%↑) CEO Håvard Furu
There have been significant production cuts in fertilizer production in Europe
"As a result of record high gas prices in Europe, Yara is implementing further curtailments which will take its total European ammonia capacity utilization to around 35%. With this, Yara will have curtailed an annual capacity equivalent of 3.1 million tonnes ammonia and 4.0 million tonnes finished products (1.8 million tonnes urea, 1.9 million tonnes nitrates, and 0.3 million tonnes NPK) across its production system in Europe." - Yara ($YARIY) Corporate Release
Real Estate
There are signs that housing markets are improving
“As our third quarter progressed, we saw a significant decline in demand as the combined impact of sharply rising mortgage rates, higher home prices, stock market volatility, and macroeconomic uncertainty caused many prospective buyers to step to the sidelines. However, in more recent weeks, we have seen signs of increased demand as sentiment is improving and buyers are returning to the market. Average weekly deposits in the first three weeks of August were up 25% compared to July. We have also seen digital leads and foot traffic to our model homes increase.." - Toll Brothers (TOL 0.00%↑) CEO Douglas Yearley
The share of for-sale homes with a price drop is leveling off
“Sellers are coming to terms with the fact that volatile mortgage rates have dampened demand. Some sellers are pricing lower, and some homeowners are staying put because they’re nervous they won’t get a good offer or they’re hesitant to give up their low mortgage rate - - Because the number of homes for sale is no longer rising, buyers’ newfound bargaining power is reaching its limit. It’s worth noting that early demand indicators such as tours and requests for help from agents are elevated from their June lows and remain steady. So there is a pool of interested buyers out there, but sellers need to price fairly to attract them. If more sellers and buyers find that middle ground on price, we could see sales strengthen a bit.” - Redfin (RDFN 0.00%↑) Economics Research Lead Chen Zhao
Wisdom
Turnarounds take time
“In high school, I spent three summer months working on a cargo ship. After midnight on my second voyage, I was asleep when the alarm for general quarters woke me. My reporting station was on the bridge. Fear is a great motivator. I dressed while I ran. The 720 ft ship was doing 27 knots and the helm was hard alee. The ship was healing sharply to starboard and the steel hull was shuddering. The captain was trying to turn the ship around, but a ship that big, going that fast, takes miles and miles to change direction. We saved two men’s lives that night. They’d been lost at sea, in the Mediterranean, for several days. A fortunate, happy ending. Peloton is like that cargo ship. We’ve sounded the alarm for general quarters. Everyone’s at their station. We continue to add new inputs to evolve our go-to-market strategy to restore growth. When will the ship respond is the question. Our goal is FY23” - Peloton (PTON 0.00%↑) CEO John Foley
As part of our new initiative, we welcome you to join us in reading a new book every month and sharing insights on what we learn from them. For August/September we will be reading Sam Walton’s Made in America. Here are 2 quotes that stood out for this week:
Summarising the story of Walmart
“It’s a story about believing in your idea even when maybe some other folks don’t, and about sticking to your guns. But I think more than anything it proves there’s absolutely no limit to what plain, ordinary working people can accomplish if they’re given the opportunity and the encouragement and the incentive to do their best. Because that’s how Wal-Mart became Wal-Mart: ordinary people joined together to accomplish extraordinary things. At first, we amazed ourselves. And before too long, we amazed everybody else, especially folks who thought America was just too complicated and sophisticated a place for this sort of thing to work anymore. The Wal-Mart story is unique: nothing quite like it has been done before. So maybe by telling it the way it really happened, we can help some other folks down the line take these same principles and apply them to their dreams and make them come true”
The beginnings of Walmart had very few believers
“Nobody wanted to gamble on that first Wal-Mart. I think Bud put in 3 percent, and Don Whitaker—whom I had hired to manage the store from a TG&Y store out in Abilene, Texas—put in 2 percent, and I had to put up 95 percent of the dollars. Helen had to sign all the notes along with me, and her statement allowed us to borrow more than I could have alone. We pledged houses and property, everything we had. But in those days we were always borrowed to the hilt. We were about to go into the discount business for real now. And from the time those doggone Wal-Marts opened until almost today, it has been a little challenging.”