by Scott Krisiloff, CIO, Avondale Asset Management
Earnings season is back and CEOs are optimistic. It was really only half a week of earnings, so this post is still light, but next week should bring more data.
I chose to highlight MSC Industrial’s CEO this week because I thought he did a great job of framing where I think we are in the economic cycle. Optimism surged early in the year, activity should lag optimism and inflation should lag activity.
Judging by the 10 year treasury yield, inflation expectations appear to have been falling recently. My guess is that markets are anticipating that the “V” shaped part of an inflation rebound has already passed. We anniversaried low oil prices in Q1.
Right now markets are betting that additional inflation won’t arrive. If the economy continues on its current course though, it probably will. We should start to get a clearer picture on whether or not markets are right around summertime.
The Macro Outlook:
People are no longer just “cautiously” optimistic
“The growing optimism in the industrial economy has continued as the outlook has turned noticeably more positive over the past two quarters…I would say in general we are seeing a building optimism in our customers. So I would describe it more is building optimism than I would cautious optimism” —MSC Industrial CEO Erik Gershwind (Distributor)
Sentiment has gotten ahead of activity, but activity is turning a corner
“While order volumes are not yet as robust as sentiment, they’ve begun to turn the corner for most of our customers…Last quarter, we were cautious not to call December’s improvement a sustained trend. Today, we would. If the indices hold the current levels, we should continue to see improving sales trends for our business.” —MSC Industrial CEO Erik Gershwind (Distributor)
When activity picks up, inflation should too. Keep an eye out for price increases this summer.
“We are…hearing more and more conversation about potential future more meaningful price increases from suppliers…they are all seeing what we are seeing which is commodities recovering from a two year low period…and saying demand environment is getting better…Those of have not yet come to market but if they do as we suspect they will that could mean a more robust increase in the future…the typical catalogue increase is in August-September…and if this trend continues it would be a healthier increase.” —MSC Industrial CEO Erik Gershwind (Distributor)
International:
Consumer confidence has even improved in Mexico
“Well, I do think that the Mexico economy, at the beginning part of the year, I’d say that there was somewhat of a decline in consumer confidence that did occur. I was in Mexico three weeks ago. My sense was that that had changed, it was beginning to come back. But there was definitely a drop in consumer confidence at the beginning of the year” —Citicorp CFO John Gerspach (Bank)
Trump is now talking about a “reciprocal” tax rather than a border adjusted tax
“when you say reciprocal, nobody fights you. When you say I’m going to charge a 10 percent or a 20 percent border tax, everyone goes crazy, because they like free trade. Well, they don’t say that the other countries are charging you much more than that. But when you say a reciprocal tax — and I’m not saying that’s what I’m doing, but there has to be a certain reciprocal nature to it. But when you say reciprocal tax, nobody can get angry. Even the other countries, if like — if they’re charging you a 50 percent tax, you say, OK, whatever you charge, we’re charging.” —United States President Donald Trump (Government)
Financials:
C&I loan growth has slowed, but it’s probably due to some noisiness
“Consistent with the industry broadly, we have seen a slowdown in C&I growth with our loan balances remaining relatively flat sequentially, although up 8% year-on-year. There are a number of factors likely contributing including potential noise in the data from large acquisitions in prior periods and a resurgence in capital markets activity” —JP Morgan CFO Marianne Lake (Bank)
We’re late in the credit cycle but credit quality is still strong
“At the current point in time, we consider ourselves to be somewhat later in the credit cycle and we’re paying even additional attention to prudent lending and credit quality. To that point, our credit quality continues to be excellent. Non-performing assets were at a very low 7 basis points.” —First Republic Bank CEO Jim Herbert (Regional Bank)
Expectations for interest rate increases are still very low
“We were pleased and frankly a little bit surprised to see another interest rate hike by the Fed in March.” —PNC Financial CEO Bill Demchak (Regional Bank)
Consumer:
It’s never been a better time to go to Europe
“what we have seen is, it’s never been a better time to go to the UK or it’s never been a better time to go to Europe for U.S. travelers. And we have seen an offset of UK point of origin, the U.S. point of origin has more than offset the decline in the existing UK weakness.” —Delta Air Lines EVP Glen Hauenstein (Airline)
Technology:
Semiconductor inventories are too high in smartphone and PC markets
“We now estimate fabless DOI is still high, high above seasonal exiting first quarter ‘17. Our second quarter revenue guidance that reflects a quite severe inventory adjustment by our customers, particularly in smartphone and PC markets. However, the overall end market smartphone demand appears stable in second quarter ‘17.” —Taiwan Semiconductor CEO Mark Liu (Semiconductor Manufacturing)
Industrials:
Transportation markets are lagging the industrial rebound
“There remains a great deal of enthusiasm around oil and gas, and during the quarter the outlook for the general manufacturing space and the construction space also improved even as the quarter wore on. The only laggard we could see would be…in transportation markets, things like heavy duty truck, rail et cetera. But other than that, frankly on the whole customer demand strengthened and broadened throughout the quarter and we remain encouraged about the near-term trend.” —Fastenal CFO Holden Lewis (Industrial Distributor)
Materials, Energy:
Fuel costs have become a headwind again for energy consumers
“Fuel presented us with our greatest challenge in the March quarter as our fuel expense increased by 26% or $325 million from the prior year. Our all-in fuel price of $1.71 per gallon was up almost 30% as crude prices climbed roughly $20 per barrel from the first quarter ‘16 low levels. Our fuel price also includes $0.09 per gallon of losses from our legacy hedge book during the quarter.” —Delta Airlines CFO Paul Jacobson (Airline)
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