2024-08-15 05:30:24
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Good morning. Alphabet took some time Friendly Fire Yesterday, former CEO Eric Schmidt said the rise of working from home has cost the company its edge in artificial intelligence. We think the ping-pong tables and free lunches of the Schmidt era have made Googlers soft. At Unhedged, the only perk is the reader’s email: robert.armstrong@ft.com and aiden.reiter@ft.com.
Consumer Price Index
One can pick apart good inflation reports without feeling ungrateful, which shows how much progress we have made in keeping inflation in check. Yesterday’s CPI report, while good, could have been a bit better. Unhedged likes to look at the CPI in annualized form of the month-over-month change, excluding food and energy. Measured this way, July was flat with May, but warmer than June:
All three readings were below the magic 2% level, but we still like the line to go down. Perhaps that’s why the market was flat on Wednesday. If the readings were exactly like the June readings, the odds of a big (50 bps) rate cut in September might have gone up. But since it wasn’t, the odds went down slightly.
Note that the biggest reason for July’s warmer temperatures was a pickup in housing inflation, a category that has consistently disappointed forecasters. But if one believes that timely private housing data must lead the lagging CPI housing measure, one could conclude that July was a blip. Meanwhile, the nonhousing services category, which is of particular interest to the Fed, continues to cool.
The exact number of rate cuts this year is not something anyone should obsess over except rate traders. What matters is that three months of benign inflation reports clearly pave the way for easing policy. The key question now is how the Fed will present those cuts, and how the market will interpret them. Will the cuts be motivated purely by concerns about reducing inflationary pressures – or by fears of a recession? Risk assets like the first type of cut, not the second. Inflation is fine. Keep an eye on the job market.
Earnings season tells us something about the American consumer
Walmart reported second-quarter results this morning, one of the last major U.S. companies to report. To put the biggest U.S. retailer’s performance in context, we combed through earnings reports from the largest U.S. consumer goods companies. A few interesting themes stood out:
In terms of food, Demand varies widely depending on where you are on the price/quality spectrumIn restaurants, the key difference may be the brands people consume arriveIn contrast, the brands they consume fromThat doesn’t mean the cheapest product wins. Chipotle (booming) is more expensive than McDonald’s (floundering), but it looks like a solid deal to wealthier consumers.
Snack maker Mondelēz International emphasizes that in grocery stores, the price must be right:
Probably the most important thing we’ve seen with consumers is that the definition of value has changed for many people, because if you look back two or three years ago… people were more gravitating toward family and party sizes, which is a positive for us. Now, especially for lower-income consumers, they’ve moved to a basket size that they can afford. If their favorite biscuit brand is available at the right price, they’ll buy it. Otherwise, they won’t buy any biscuits.
PepsiCo echoed the sentiment:
In the U.S., there is clearly a group of consumers who are more challenged and who tell us that in certain specific parts of our portfolio, they want more value to stay with our brands.
Travel and leisure sectors are doing well, but consumers are more cautiousYou can see this in booking windows. In the two years since the pandemic, travelers booked vacations far in advance—excited to get out and eager to lock in prices before they rose further. But consumers are now booking trips with much less lead time, according to data from Booking.com and Airbnb.
Still, American consumers are definitely still taking vacations. Data from Booking.com:
So both the star rating and the length of stay are relatively stable compared to what we’ve seen before, with perhaps one exception. The U.S. did see some signs of deterioration.
Meanwhile, cruise lines such as Royal Caribbean Cruises and Norwegian Cruise Line are seeing strong performance and are expected to maintain pricing power.
Large consumer brands Well doneand haven’t seen much consumer shift to private label brands. When asked about reports of consumer weakness in recent months, Procter & Gamble’s CEO said:
We don’t typically see the dynamics that some people are describing… If you look at a couple of the dynamics, take private label share for example, they typically increase in times of great consumer stress, but that’s not what we’re seeing… Is unit growth declining? We don’t typically see that.
Colgate did cut prices in some parts of North America during the quarter, but sales volumes recovered. The CEO is as follows:
We’re seeing tremendous progress in terms of volume. Particularly encouraging is the improvement in household penetration we’re seeing… market share is roughly flat in value but up significantly in terms of volume.
Kenvue, the maker of products such as Band-Aids and Tylenol, notes that “consumers are willing to pay a premium for brands that are backed by science.”
Large residential projects delayedHome Depot noted that many home improvement projects are financed with debt, and that interest rates are very low. Home Depot CEO:
Higher interest rates and a bigger macroeconomy[pressures]. . . result[ed] Spending on home improvement projects has decreased…We believe the sales outlook for the year should be more cautious…We continue to see a decline in participation in large discretionary projects, where customers typically use financing to fund the projects.
Likewise, Pool Corporation said the demand for new swimming pools WeakBut homeowners haven’t stopped projects entirely, just big ones. Sherwin-Williams said paint demand remains steady.
Discrimination is a theme. American consumers are spending, but impulse buying is no longer there. This is consistent with low unemployment, the exhaustion of excess savings during the pandemic, and a certain degree of shock from a sharp change in the price level (although prices are no longer rising rapidly). But the situation is clearly not a stage where the country slides into recession. The more likely result is more intense competition for consumer goods companies and some degree of margin compression.
(Armstrong and Wright)
A good book
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