Inflation Still Sticky
Will the Fed raise rates again?
Summary: Inflation may not be going away quite as fast as hoped, but consumers are still doing surprisingly well. Will the Fed raise rates again? If it does, can this last?
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Macro
Inflation is still with us
“You saw the CPI data that came out today too. Inflation is still sticky. For us, where we are seeing it being sticky, labor cost is still quite sticky when we see it from suppliers." - 3M (MMM 0.00%↑) CFO Monish Patolawala
"I mean inflation is still with us. And so that is for certain expenses something that's going to increase overall spend levels." - BILL Holdings (BILL 0.00%↑) CFO John Rettig
"If I frame where we are today, the difference is, we do have a lot of inflationary pressure, and the inflationary pressures we have to take care of" - Union Pacific (UNP 0.00%↑) CEO Jim Vena
Prices aren’t going back to where they were before the pandemic
"General merchandise prices are lower than they were a year ago, but not as low as they were two years ago. I don't think that GM gets all the way back down to two-years-ago prices, and I certainly don't think that's going to happen on the food and consumable side. So when this is all said and done, there's been a bit of rebalancing as it relates to higher wages in the country, inflation and higher prices are kind of with us. We'll see disinflation, but not all the way back to deflation, I don't believe, certainly not in the short term." - Walmart (WMT 0.00%↑) CEO Douglas McMillon
"I would tell you on inflation, which may be on many people's mind, I would say we are in a disinflation environment, not a deflationary environment." - 3M (MMM 0.00%↑) CFO Monish Patolawala
The consumer is still doing surprisingly well
"From a macro standpoint, I think what we're seeing is consistent with what you're hearing from other banks, which is the consumer remains strong" - US Bancorp (USB 0.00%↑) CEO Andrew Cecere
"I mean, what we see from a consumer standpoint is that the consumer continues to be resilient. They continue to be spending on travel, they continue to be spending on experiences even as we look at the data through the end of August. ." - Mastercard (MA 0.00%↑) CFO Sachin Mehra
"I'll tell you by the consumer, but there's a big but. So I want to be -- it's pretty good. They have more money than they've had. Home price has gone up for the last 15 years. Asset prices have gone up. Their balance sheet is in great shape. Their incomes have gone up. They've got more cash in their checking accounts than pre-COVID. It was a lot more, and it's been coming down so that excess -- we call it excess savings seems to be normalizing. Wages are going up, particularly at the low end. It's pretty good, which is why you have a pretty good economy." - JPMorgan Chase (JPM 0.00%↑) CEO Jamie Dimon
"But putting all of that together, I think the consumer is really solid position. It's been strong. We see credit normalizing as we would expect. But overall, again, the consumer is looking pretty good." - Capital One Financial (COF 0.00%↑) CEO Andrew Young
“…they are in good shape and they're angling down. They're spending a little bit of it, but they still have on the lower-end probably two to three times more cash than they had pre-COVID." - Bank of America (BAC 0.00%↑) Regional President Dean Athanasia
"Well, as I mentioned, it's still uncertain. The consumer is holding in. We've maintained delinquencies from our -- we've reported our earnings, delinquencies are 30-plus day delinquencies, ex pelotons in the 2% range.” - Affirm Holdings (AFRM 0.00%↑) Chief Capital Officer Brooke Major-Reid
"So broadly, the consumer is still pretty strong. They carried over some savings from COVID that are still on their balance sheets, and their credit scores are still above 2019, which is a good sign. So when we look forward, that's a real positive." - Equifax (EFX 0.00%↑) CEO Mark Begor
But things might change
“And there are huge buts here. And I just think people make a mistake to look at real-time numbers and not look at the future. And the future has quantitative tightening. We've been spending money like drunken sailors around the world, this war in Ukraine is still going on. Those are really big buts. To say the consumer is strong today, meaning you got to have a booming environment for years is a huge mistake." - JPMorgan Chase (JPM 0.00%↑) CEO Jamie Dimon
"Consumer spend right now, I mean we -- economists have pushed things out. So GDP, not seeing a downturn. Consumer spending has seen downturn out to 2025. So if you look at our economists, that's what they're looking at." - Bank of America (BAC 0.00%↑) Regional Banking President Dean Athanasia
“We do see some behavioral change for some customers that are particularly pressured from a budget point of view. We do see pack size changes, moves to private brands, all those kinds of things that you historically have heard us talk about. But not everybody is in the same situation." - Walmart (WMT 0.00%↑) CEO Douglas McMillon
For now, things are generally better than feared
"In the US, things are better than I would have expected them to be when we started the year. I was concerned about the amount of inflation in categories like dry grocery and consumables, and how that would impact discretionary purchases. Had an eye on the consumer balance sheet, all those things that we were all thinking about at the beginning of the year. But things have held up better than I would have guessed." - Walmart (WMT 0.00%↑) CEO Douglas McMillon
But how long will this strong consumer last?
"It's a million-dollar question. We're -- we think it will last by the way looking at from the -- sort of the economy, it's a slow travel down on the consumer side. They're bringing in more cash. There are plenty of jobs out there. Obviously, they're dealing with higher interest rates, but they've got higher wages. They still have a lot of job openings out there. They can find employment and the cash is still coming in. So, I would say, slow angling down, getting to more normalized period out into the first quarter of 2024, but you're just going back to where we were sort of pre-COVID where we had moderate 2%, 3% growth in deposits and things like that revert back into that type of economy." - Bank of America (BAC 0.00%↑) CEO Dean Athanasia
International
EU inflation remains too high for the ECB
"Inflation continues to decline but is still expected to remain too high for too long. The Governing Council is determined to ensure that inflation returns to its 2% medium-term target in a timely manner. In order to reinforce progress towards its target, the Governing Council today decided to raise the three key ECB interest rates by 25 basis points" - ECB
It's been a benign tightening cycle in the UK
“the U.K. is a few months behind, maybe a couple of quarters behind, both in terms of monetary policy adjustment as well as in terms of the control of inflation…I think overall, this is working out to be in this tightening phase, more benign than many had feared and it is coming towards what I'm hoping is a softer landing." - Barclays (BCS 0.00%↑) CEO Coimbatore Sundararajan
Mexico surpassing China in becoming the largest trading partner for the US
"Well, I think we need to leverage our railroad. And the way we look at it, I think Mexico if they haven't surpassed China, as they have the biggest trading partner, I knew that, but I have thought that - so it is. So, we see growth there and we need to have service and we need to have our assets, the way we use them, and what we do and we need to leverage our railroad a lot better." - Union Pacific (UNP 0.00%↑) Jim Vena
"Recent data on macro trends has shown that Mexico has overtaken China as the largest U.S. trading partner. The shift in trade flows confirms the trends of reshoring and onshoring. To reduce dependence on Asian suppliers, OEMs continue to reconfigure supply chains, supplier consolidations and outsourcing trends also support long-term growth for MEC. Energy transition provides large opportunities for MEC to drive deeper penetration into battery electric vehicles and charging infrastructure. Inflation Reduction Act offered significant incentives related to renewable energy and energy infrastructure." - Mayville Engineering (MEC 0.00%↑) CEO Jagadeesh Reddy
International travel looks strong going into 2024
"So, I think the international, again, from what we can see, is going to be strong through next year. And from all the indications and surveys of our customers, we think long-haul international will be strong. We've got China opening up a bit, right? It's not fully open, but it will open a bit. If you look at Europe, China to Europe traffic has been restored to about 50% right now in the single digits right now between the U.S. and China. But when you look at what it's about to be restored, it's probably in the 25% to 30% range." - Delta Air Lines (DAL 0.00%↑) President Glen Hauenstein
Financials
ARM’s IPO showed that capital markets are opening up
"There's no question that the environment for capital markets activity is improving. It's still way, way off what I'll call cycle averages but definitely improving. Just before I came up here, I met with the ARM management. It's the middle of their IPO. From everything I hear, that's going well. We have a handful of other very significant IPOs in the market. It's been quite a while since I could say to you we have a handful of very significant IPOs in the market. That's an improvement." - Goldman Sachs (GS 0.00%↑) CEO David Solomon
"I would say we are more confident now than any time this year about an improved outlook for 2024. I think it's clear to us now that the first half of the second quarter was probably the low point in sentiment around capital markets and M&A. And I think what we're seeing now versus July is that we've moved from maybe sentiment shift or backlog building to early action and some real data points in the market. And we're also seeing improved execution quality across the capital markets and M&A. And so I think that leads us to believe that 2024 should be meaningfully improved versus last year and that we're in the midst of a sustainable recovery….So there's no doubt that there's increased confidence among corporation PE firms." - Morgan Stanley (MS 0.00%↑) Head of Investment Management Dan Simkowitz
"It’s a combination of a wedding, graduation, and Bar Mitzvah in terms of how people feel about the day. In terms of where we landed the plane relative to where we thought we were six to nine months ago, we landed in a great place" - ARM (ARM 0.00%↑) CEO Rene Haas
But loan demand has slowed down significantly
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Credit quality is normalizing
“there's a little more stress and strain, particularly in certain sectors like real estate, you're getting a little more stress and strain in subprime auto and stuff like that. But it's -- I call it more of a normalizing process. If and when you have a recession, which you bet you're going to have, you'll have a real -- a normal credit cycle, which I think is quite predictable. In a normal credit cycle, something always does worse than normal. So this one, the obvious one is office real estate, but there'll be a couple of other industries that probably do worse than normal this time around, too." - JPMorgan Chase & Co (JPM 0.00%↑) CEO Jamie Dimon
“So spend levels are starting to get towards normalization. Credit balances are all starting to normalize. So consumer remains strong, but again, starting to migrate towards normalization." - US Bancorp (USB 0.00%↑) Andrew Cecere
Tough environment for insurance businesses in the US
"Overall, it's still a tough environment for our insurance risk-bearing partners. They are grappling with stubbornly high loss cost inflation and more catastrophe losses at higher reinsurance attachment points. So when I roll it all together, we are not seeing and don't expect a meaningful slowdown in primary P/C rate increases. And thus, we remain steadfast and focused on helping our clients navigate and mitigate premium increases." - Arthur J Gallagher (AJG 0.00%↑) CEO Patrick Gallagher
Consumer
Walmart saw a strong back-to-school season, which bodes well for the holidays
"I'm feeling pretty good about where the consumer is in the US and encouraged by what happened with back to school. As we reported at the end of the second quarter, back to school started off strong and normally that means that the holiday is going to be good. So I feel pretty good about the back half and our position in it...Food and consumables have still gone up as a percent of the total, and I think that'll continue through the year'" - Walmart (WMT 0.00%↑) CEO Douglas McMillon
Consumer electronics remains weak
"When we came into the year, Josh, we had said we see weakness in electronics, we see weakness in consumer, and China was a watch item. As we now look at first half in third and fourth quarters, we are still seeing significant slowness in electronics, consumers. I would say that de-stocking, I think we've got through the worst of it. Of course, what's going to happen is we'll see how the back-to-school and holiday season play itself out. But we believe that that weakness in consumer will continue through the year." - 3M (MMM 0.00%↑) CFO Monish Patolawala
Consumers are cautious about big-ticket purchases
"and we think that that cautious approach to big ticket is just driven by the concern that there may be something else looming. I think there is a more universal view that we've avoided a major recession, and we support that view. And we believe that the homeowner is healthy. Unemployment is stable, but I still think there's some level of malaise and concern with the DIY consumer on big-ticket just because of a lot of what I call noise and other concerns in the marketplace. Having said that, that customer is slightly pulling back based on the cautious approach you're taking to big ticket. We don't have a point of view as to when that inflection point happens, but we're expecting that pressure to remain for the balance of the year." - Lowe’s (LOW 0.00%↑) CEO Marvin Ellison
Retailers may start to run more promotions
"I'd say more recently, there's been more discussion around promotions. I think many of the brand owners that I talked to would say that they have reached the end or close to the end of their pricing cycle. They've taken enormous amounts of price at retail. And I think most of them would say that they're generally coming to the end of that cycle. There's been some chatter about promotions. We haven't necessarily seen that flow through to our volumes yet." - Amcor (AMCR 0.00%↑) CEO Ron Delia
Technology
AI may be the most important computer technology ever
"So, is generative AI the most important new computer technology ever? Maybe, and we are about to find out. Self-driving cars, computer-designed antiviral drugs, voice user interfaces. Generative AI is changing the automobile industry, the pharmaceutical industry, and how people communicate with their computers. Generative AI is changing everything." - Oracle (ORCL 0.00%↑) Chairman Larry Ellison
"I think this is the first time that mankind experienced something smarter than mankind itself. Mankind was the smartest animal on the earth — AI is going to surpass, and surpass big time." - SoftBank CEO Masayoshi Son.
But companies are having a hard time productizing it
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AI-generated code is getting quite good
“The next is to replace feature after feature after feature of the older Cerner system with a new Cerner system, new Millennium, which we are not coding in Java like we usually do. The new Cerner system is being generated, as you know, generative AI generates code. We have an application generator called APEX. And we are not writing code for the new Cerner. We are generating that code in APEX, and it's going extremely well. Again, one of the great things about code generators is they don't make mistakes. Well, either they make the same mistake over and over again or once you fix the mistake, you fix it everywhere. So the code gen -- we are using a code generator, and to write the new features in Cerner and it's coming along very, very nicely” - Oracle (ORCL 0.00%↑) CTO Larry Ellison
Companies cannot build datacenters fast enough to meet demand
"We have a great line of sight into the trajectory of the business, given the bookings momentum. We are extremely confident about our revenue acceleration for the year, even though in any quarter there may be small fluctuations. Because we have far more demand than we can supply, our biggest challenge is building data centers as quickly as possible." - Oracle (ORCL 0.00%↑) CEO Safra Catz
Healthcare
Pet care business has been strong
"Health care has been growing really rapidly, pharmaceutical and medical sales have been very strong for the last 12 to 18 months. Pet care space has been strong. pet care is a premium segment for us. It's an area of focus. On the other hand, we've had soft sales in protein as consumers have down-traded and purchased less fresh meat as an example. We've seen softer sales in some of the other items that are more impulse purchases, confectionery and snacks." - Amcor (AMCR 0.00%↑) CEO Ron Delia
Covid is still a problem in 2023
"When we looked at the data of hospitalizations in the last season, you can see that COVID continues to be about 3 times more hospitalizations than flu and RSV. So this is not during the height of the pandemic. This is just the most recent season. In the United States alone, we're also seeing COVID actually even in 2023 as a top 4 leading cause of death. So COVID is still here. It is still creating a significant burden….What we currently believe is the virus is not going anywhere, people that have high risk are going to need annual boosters” - Moderna (MRNA 0.00%↑) Chief Medical Officer Allison August
Industrials and Transport
The freight recession might be over
“So I've talked about us being in a freight recession now for several quarters. I might change that slightly to say we're coming out of a freight recession. One of the things that we talked about is our customers were working on destocking, switching over to maybe pre-COVID inventory levels. For the most part, our customers coming through July have -- I would say, pretty much completed that as part of their planning process. Our customers are cautiously optimistic about the rest of the year. We tend to be even more cautious than their cautiousness. But I would say most of our customers are saying that Freight will be up slightly coming through the back half of the year. Some are talking about a peak, some are talking about no peak, and more moderate peak I would say it's kind of all over the board depending on which customer you talk to. But I would say, slow and steady up would be more what we're planning for, and hopefully, we'll have a nice surprise." - J.B. Hunt Transport Services (JBHT 0.00%↑) President Shelley Simpson
Rail volumes are still soft though
"We knew that coming into the quarter, but I would say the volume picture is probably even a little bit weaker than what we originally expected. Normally, you'd see some seasonal growth from the second quarter to the third quarter, and that just hasn't materialized here in 2023. Our volumes are flattish going from Q2 to Q3. And if you look on a year-over-year basis, we're down about 3%. So, continued softness in the transportation demand side of the equation." - Union Pacific (UNP 0.00%↑) CFO Jennifer Hamann
Used vehicle prices are softening
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The United Auto Workers strike could affect production
"The other comment we'll make is the newest domestic market, which we described previously as resilient, is showing some sign of weakness. Now a lot of this is actually largely around sentiment. And that sentiment right now is being driven by the United Auto Workers potential strike, and that has absolutely impacted the sentiment of the market." - Sims ($SGM) CFO Stephen Mikkelsen
"Some risk with the discussions with the UAW strike, we'll see how that progresses within the next day. That would have an impact on short-cycle production potentially -- the strike and depending on how long strike goes and the scope of it" - Lincoln Electric (LECO 0.00%↑) CFO Gabriel Bruno
Revenge travel is still strong
"Well, I think we look at all the same economic data you're doing. What we see is our customer and our customer generally is a customer with an average household income of over $100,000. And their savings is still at record levels, right? And if you look at also their intent to purchase and what they want to do with that savings, what's really exciting, I think, for us is where travel sits in that spectrum. And it's still -- even to this day, the most recent survey I saw I just, I think, came out on Monday or Tuesday, where travel was the number one. And -- so people say, "Well, when is revenge travel going to be over?" I think it's got a long way to go, and I think it's got -- for our customer, it will work well through 2024." - Delta Air Lines (DAL 0.00%↑) Glen Hauenstein
Business travel is improving
"We're basically right on our expectations for business travel. We are seeing a modest sequential improvement from Q2 to Q3 on a year-over-year basis. Again, you've got a percent of that business. I keep saying sort of 10% to 15% that is going to be stubborn, which is hard -- very hard to predict how fast that comes back." - Southwest Airlines (LUV 0.00%↑) CEO Bob Jordan
EV sales aren’t accelerating as fast as expected
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Materials & Energy
Fuel prices are rising
"We're getting a little bit of a double whammy though in the near term because fuel prices are starting to come up a bit on us. We're probably going to be around $3.10 a gallon or so here in the third quarter. And so with a two-month lag in our surcharge programs, there is going to be a little bit of a headwind there." - Union Pacific (UNP 0.00%↑) CFO Jennifer Hamann
Copper demand is growing
"When we look at what's going on in copper on the ground, we see a very different situation on the ground than we see in some of the headlines. China, you've been reading all about the property sector being very weak. But in reality, copper demand is actually growing in China. It's grown last year, the second half of last year and the first half of this year. And it's all driven by the copper intensity in renewables, electric vehicles, all those things. All those things are driving copper demand and so here we are in a time where the global economy may be weak and particularly the economy in China has been weak, but copper demand is growing and you talk to our customers here in the U.S. and some of them will say, yes, the manufacturing sector, some of that is down. But some of them will say, we're really seeing growth, we're seeing growth in data centers in the auto sector. And so we're in a situation where copper has been resilient in the face of a weaker economy." - Freeport-McMoRan (FCX 0.00%↑) CFO Kathleen Lynne Quirk
Real Estate
Consumers have adjusted to higher for longer rates in housing
"The consumers have now adjusted to an excessive "higher for longer" interest rates and are willing to purchase or rent what they can afford. …Generally speaking, strong demand for housing has returned within the limits of affordability." - Lennar (LEN 0.00%↑) Co-CEO Stuart Miller
Rents are not likely to grow by a lot
"While we expect a sharp drop off in new starts this year, we don't expect that rents will drop significantly, but they are not likely to grow very much either in the foreseeable future. Rentals and rent equivalents make up a significant part of the CPI calculation." - Lennar (LEN 0.00%↑) Co-CEO Stuart Miller
Retailers are expanding their footprints
"...continues to be great demand from the retailer community for physical real estate. And I think you're hearing that across all public companies that operate in the sector…retailers are expanding their footprint, they're optimizing their footprint, and they're doing so in the best locations with the best landlords. That has not changed. Retailers are investing somewhat countercyclically in the sense that they've recognized that the store is the center of their nucleus, and technology and e-commerce are going to be services that they're going to provide to their retail customers" - Simon Property Group (SPG 0.00%↑) CFO Brian McDade
Nuggets of Wisdom
Stay lean and nimble to scale up
"Anytime you're scaling up a company, you have to make sure you’re working to cut down bureaucracy and staying as lean and nimble as possible. There are many, many areas where we move very fast. Our growth in Cloud wouldn't have happened if we didn’t scale up fast. I look at what the YouTube Shorts team has done, I look at what the Pixel team has done, and I look at how much the search team has evolved with AI. There are many, many areas where we move fast." - Google (GOOG 0.00%↑) CEO Sundar Pichai