by Scott Krisiloff, CIO, Avondale Asset Management
Earnings season started this week, but only with a few reports. Many more companies will report next week. A couple of industrial distributors, MSC and Fastenal, confirmed that the industrial economy is holding strong. Prices haven’t moved yet, but probably will if the economy continues to improve.
While there weren’t a lot of companies speaking, a lot of central bankers were. Yellen spoke about balance sheet normalization with Congress, and other central banks around the world are likely to begin normalizing soon too.
Bank of the Ozarks made a comment about commercial construction markets that bears watching though. The regional bank said it expects markets to slow because of high costs of labor, increasing interest rates and satisfaction of pent up demand. If this is true, it’s an interest rate sensitive market that is showing signs of sluggishness. This is a classic late cycle event. We will watch what other bank CEOs say next week for confirmation.
The Macro Outlook:
The industrial economy is showing continued and steady improvement
“Feedback from customers is consistent with the theme of continued and steady improvement…From an end market perspective, aerospace, fabricated metals and machine jobs continued to improve as did oil and gas related business…end markets like heavy truck and agriculture have appeared to bottom and showed some improvement.” —MSC Industrial Direct CEO Erik Gershwind (Industrial Distributor)
Pretty much all markets are performing well
“In fact, it’s difficult to identify a major market that is acting particularly poorly at this point. And the feedback that we’re getting from our RVPs remains overall very favorable.” —Fastenal CFO Holden Lewis (Industrial Distributor)
Prices still haven’t moved, but that could change
“…even if the commodities have moved and to be honest that’s something that surprised a bit over the last call it 6 months to 12 months these commodities certainly for a while have firmed up and there wasn’t as much manufacturer movement. Now, that could change. We are hearing bits and pieces that that could change as capacity starts to get fueled out by the manufacturers. But really for us the trigger is seeing a manufacturer move their list prices.” —MSC Industrial Direct CEO Erik Gershwind (Industrial Distributor)
A better economy will eventually allow companies to take price
“if we continue to see demand get better and the environment remains somewhat inflationary, then a window would probably open for us to take advantage of a little bit of pricing if the market affords.” —Fastenal CEO Daniel Florness (Industrial Distributor)
But the Fed continues to expect that interest rates will remain low for the longer run
“the Committee continues to anticipate that the longer-run neutral level of the federal funds rate is likely to remain below levels that prevailed in previous decades.” —Federal Reserve Chair Janet Yellen (Central Bank)
The global economy is strong and central banks are noticing
“for the first time in many years, the global economy is experiencing synchronous growth, and authorities in the euro area and the United Kingdom are beginning to discuss the time when the need for monetary accommodation will diminish.” —Federal Reserve Governor Lael Brainard (Central Bank)
If the Fed keeps hiking, the ECB will have to follow