Let the earnings season begin!

Big Banks kick off the Q1 2022 earnings season

Editor’s Note: Since last week was the first week of earnings season, the bulk of this week's newsletter will be reserved only for our premium subscribers. Thank you for your support! 

Succinct Summary: Two big forces are pushing against each other in the global economy.  On the one hand, there is consumer spending, which continues to power forward.  On the other hand, there's inflation, which is not at all under control.  The Fed appears to be concerned about inflation but is not acting quickly to fight it.  Despite a lot of talk, the Fed is struggling to get to even a neutral rate.  As a result, it's likely that we will be accepting higher than usual inflation.  It may also be tough to avoid more volatility.  Meanwhile, there are signs that low and middle-income consumers are feeling the pressure.

Macro:

The consumer is unstoppable

"What I have pointed out in my letter is very strong underlying growth, right now, which will go on. It's not stoppable. The consumer has money. They pay down credit card debt. Confidence isn't high, but the fact that they have money, they're spending their money. They have $2 trillion still in their savings and checking accounts, business are in good shape. Home prices are up. Credit is extraordinarily good." - JPMorgan (JPM) CEO Jamie Dimon

"We believe that the consumer is healthy. But we also recognize that right now, we're operating in really unprecedented times. When you think about the high levels of inflation, if you think about the level of uncertainty that we're seeing, we believe that it's going to weigh on consumer confidence over a prolonged period of time." - Macy’s (M) CFO Adrian  Mitchell

Credit card spend at WFC was up 33% in Q1

"Consumer credit card spend remained strong, up 33% from a year ago. All spending categories were up with the highest growth in travel, entertainment, fuel, and dining. After strong growth in the first quarter of 2021, driven by stimulus payments, debit card spending increased 6% in the first quarter of 2022." - Wells Fargo (WFC) CEO Charlie Scharf

But inflation is not in check

"Inflation has not remained in check. And so when we think about where inflation is, there's absolutely pressure on that low and middle-income consumer, which is a large portion of our customer base when we think about the Macy's brand, which is a larger brand within our portfolio." - Macy’s (M) CFO Adrian  Mitchell

This is the worst inflation in 4 decades

"The all items index continued to accelerate, rising 8.5 percent for the 12 months ending March, the largest 12-month increase since the period ending December 1981." - US  Bureau of Labor 

"there's nothing normal about the current environment. So if you just look at how certainly we've had a 26% 2-year inflation stack in Q4. I've been in food for a long time, and I've never seen anything like that. So there's nothing normal right now." - Conagra Brands (CAG) CFO Dave Marberger

And the Fed needs to act

"Our internal indicators continue to point towards the strength of our customers’ financial position but the Federal Reserve has made it clear that it will take actions necessary to reduce inflation and this will certainly reduce economic growth. In addition, the war in Ukraine adds additional risk to the downside." - Wells Fargo (WFC) CEO Charlie Scharf

“I do not envy the Fed for what it must do next: The stronger the recovery, the higher the rates that follow (I believe that this could be significantly higher than the markets expect), and the stronger the quantitative tightening (QT). If the Fed gets it just right, we can have years of growth, and inflation will eventually start to recede. In any event, this process will cause lots of consternation and very volatile markets” -  JPMorgan (JPM) CEO Jamie Dimon

But the Fed is taking its time

"I think that it will take some time to get inflation down because as you know, there's other things going on in the economy that are adding to price pressures, including the commodity price increases and energy price increases that are happening as well. So, I think inflation will remain above 2% this year and even next year, but the trajectory will be that it will be moving down." - Federal Reserve Bank of Cleveland President & CEO Loretta Mester

It's not even at a neutral monetary policy yet

"The best short-term path for us is to move rapidly to the neutral range and then test whether pandemic-era inflation pressures are easing, and how persistent inflation has become. If necessary, we can move further” - Richmond Fed President Thomas Barkin

"We need to really focus on bringing inflation down to our 2% longer-run goal, and to do that over the next few years. So, that is the number-one focus, and I say that because the economy is strong. So I do think from a monetary policy point of view, it does make sense for us to move expeditiously towards more-normal levels of the federal funds rate" - New York Fed President John Williams

The Fed will try to create a soft landing

"We think the Fed needs to do, they need to do to try to manage this economy and try to get to a soft landing, if possible." - JPMorgan (JPM) CEO Jamie Dimon

Most likely, they will just accept higher inflation

"Central Banks are in a difficult position as we look to carefully raise rates to contain inflation without harming economic activity and employment. They may eventually have to live with a supply-driven inflation rather than take policy rates above neutral levels. However, they may be forced to be more aggressive policy stance of inflation expectations become unchartered." - BlackRock (BLK) CEO Laurence Fink

If not, interest rates will be much higher than people expect

"So, I think the implied curve now is like 2.5% at the end of the year and maybe 3% at the end of 2023. And look, no one knows. And obviously, everyone does their forecast. I think it's going to be more than that. Okay?" - JPMorgan (JPM) CEO Jamie Dimo

And this would be a big structural change for capital markets

"In recent decades, we've grown used to low inflation, low-interest rates, and the free flow of people and goods across national borders. I believe we're in through a period that won't be -- that won't be the case and the consequences for financial markets will be meaningful." - Goldman Sachs  (GS) CEO David Solomon

Prepared for increased market volatility

"I cannot foresee any scenario at all where you're not going to have a lot of volatility in markets going forward. We've already spoken about the enormous strength of the economy, QT, inflation, war, commodity prices, there's almost no chance that you won't have volatile markets." - JPMorgan (JPM) CEO Jamie Dimon

International: