Aiera Investor Event Recap — Week of June 14, 2021
Tags: Earnings, Bitcoin, Labor, Economy, Oracle

Aiera Investor Event Recap — Week of June 14, 2021 Aiera Follow Jun 17 · 13 min read

The financials sector is preparing for Fed action on rates, Fed addresses inflation, supply chain pressures remain in focus, and online spending holds steady while stores recover.

Financials Preparing for Fed Action on Rates

I do think we’d like to see rates a bit higher. I suspect — and my economics was my college degree, but I’m not an economist. My sense is we’re seeing really transitory impacts of the economy, obviously, in travel and autos and some food stuffs and things of that nature and supply kinks. So I think we’ll be sitting here a year from now, notwithstanding the volatility of the Fed messaging about a different regime in terms of the tapering — taper tantrum. But I think long term, this will be looked at more transitory as we look at our overall portfolio and the impact of demographics and technology and other broader, broader, longer-term macro thematic schemes. - James Charles Zelter, Co-President, Managing Partner, CIO of Credit & Director, Apollo Global Management (APO) | Morgan Stanley US Financials, Payments & Commercial Real Estate Conference, June 15th, 2021 Yes. So we do expect rates to stay low for the long because the Fed has told us that. But you see there are — if you look at our balance sheet, we have like $500 billion of cash. And we’ve actually been effectively stockpiling more and more cash, waiting for opportunities to invest at higher rates. So our balance sheet is positioned to benefit from rising rates, both the short end and the long run and long rates. And that really depends on decisions we make over the next 6 to 9 months. But I do expect you’re going to see higher rates and more inflation, and we’re prepared for that. - Jamie Dimon, CEO, JP Morgan Chase (JPM) | Morgan Stanley US Financials, Payments & Commercial Real Estate Conference, June 14th, 2021 As things start to recover and you start seeing inflation and economies opening up, I think you’re likely to see a much higher — somewhat higher 10 than where we are today, notwithstanding the fact that the Fed wants to stay lower for longer, I suspect, as they finance their balance sheet and cover the stimulus. - David Jackson Turner, Senior EVP & CFO, Regions Financial Corporation (RF) | Morgan Stanley US Financials, Payments & Commercial Real Estate Conference, June 15th, 2021 Now what you’re starting to see is that as the Fed begins to even potentially talk or talk about tapering, depending on how you want to characterize it, you’re starting to see a slight widening of mortgage spreads. Not a lot yet, maybe 10 basis over the last couple of weeks or so, but — and that’s — so that’s going to have an impact as well on that spread. And so — and I think that will start to have a bigger impact over time is that messaging and leads up to more tapering in the mortgage market. - Michael P. Santomassimo, CFO, Wells Fargo (WFC) | June 15th, 2021

Fed Chairman Jay Powell Speaks at News Conference Wednesday — Fed Leaves Rates Unchanged & Maintains Asset Purchases

Today, the Federal Open Market Committee kept interest rates near zero, and maintained our asset purchases. These measures, along with our strong guidance on interest rates and on our balance sheet will ensure that monetary policy will continue to deliver powerful support to the economy until the recovery is completed. Widespread vaccinations along with unprecedented fiscal policy actions are also providing strong support to the recovery, indicators of economic activity and employment have continued to strengthen, and Real GDP this year appears to be on track to post its fastest rate of increase in decades. Much of this rapid growth, reflects the continued bounce back in activity from depressed levels. The sectors most adversely affected by the pandemic remain weak, but have shown Improvement. - Fed Chairman Jay Powell | News Conference, June 16th, 2021

FOMC Economic Outlook Has Improved, But with Caveats in Labor Markets

Forecasts from FOMC Participants for economic growth this year have been revised up since our March summary of economic projections. Even so, the recovery is incomplete and risks to the economic outlook remain. As with overall economic activity, conditions in the labor market have continued to improve, although the pace of improvement has been uneven. Employment Rose 419,000 per month on average in April and May, with the Leisure and Hospitality sector continuing to post notable gains. Employment in this sector and the economy as a whole remains well below pre pandemic levels. The unemployment rate remained elevated in May at 5.8%, and this figure understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year. - Fed Chairman Jay Powell | News Conference, June 16th, 2021

Fed Acknowledges “Notable” Inflation, But Views it as Largely Transitory

Inflation has increased notably in recent months, the 12-month change in PCE prices was 3.6% in April and will likely remain elevated in coming months before moderating. Part of the increase reflects the very low readings from early in the pandemic falling out of the calculation, as well as the pass-through of past increases in oil price to consumer energy prices. Beyond these effects, we are also seeing upward pressure on prices from the rebound in spending as the economy continues to reopen, particularly as supply bottlenecks have limited how quickly production in some sectors can respond in the near-term. These bottleneck effects have been larger than anticipated and FOMC Participants have revised up their projections for inflation notably for this year. As these transitory supply effects abate, inflation is expected to drop back toward our longer-run goal, and the median inflation projection falls from 3.4% this year, to 2.1% next year, and 2.2% in 2023. - Fed Chairman Jay Powell | News Conference, June 16th, 2021

Faster Than Expected Recovery Points to More Hawkish Rate Outlook

With regard to interest rates, we continue to expect that it will be appropriate to maintain the current zero to one-quarter percent target range for the federal funds rate until labor market conditions have reached levels consistent with the committee’s assessment of maximum employment, and inflation has risen to 2%, and is on track to moderately exceed 2% for some time. As is evident in the SEP, many participants forecast that these favorable economic conditions will be met somewhat sooner than previously projected. The median projection for the appropriate level of the federal funds rate now lies above the effective lower bound in 2023. Of course, these projections do not represent a committee decision or plan and no one knows with any certainty where the economy will be a couple of years from now. More important than any forecast is the fact that whenever lift off comes, policy will remain highly accommodative. Reaching the conditions for liftoff, will mainly signal that the recovery is strong and no longer requires holding rates near zero. - Fed Chairman Jay Powell | News Conference, June 16th, 2021

Meanwhile, Inflation and Supply Chain Pressures Remain in-Focus

And you’re right, Steve. We’re seeing what I suspect all our peers are talking about. The conference is a fairly significant run-up in cost inputs, both on the transportation and the commodity side. And what I’d tell you, Steve, is I’ve been in this business a long time, this is one of the more challenging environments we’re operating in is what we’re seeing right now. And it’s not just the fact that commodity costs are inflating, but it’s the pace of that inflation. We’ve seen a tremendous ramp-up that really started at the beginning of this calendar year. Our view is that this is not transitory. And so we’re planning as if we’re going to be operating in this environment for the better part of our fiscal year ’22, which for us starts next month. And if you think about the backdrop that’s created as you look at a low interest rate environment, you look at the latest GDP forecast has the U.S. growing somewhere high single digits, low double digits. That hasn’t happened for decades. - Kevin Jacobsen, CFO, Clorox (CLX) | Deutsche Bank DbAccess Global Consumer Conference, June 9th, 2021 Beyond capacity challenges, we continue to face raw material price increases due to supply and demand trends and supply chain disruptions. Input materials, such as foam, steel and plywood, are up 2x to 4x their pre-pandemic prices. While we have taken several rounds of pricing in new written — on new written orders, as costs have continued to escalate, our significant backlog results in taking several quarters for pricing actions to flow through to delivered sales and our financials. And as we continue to monitor costs, and we’ll take further actions when necessary, we’ve taken additional pricing just last week. - Melinda D. Whittington, President, CEO & Director, La-Z-Boy Incorporated (LZB) | 4Q21 Earnings Call, June 16th, 2021 Well, obviously, there’s commodity price inflation across many categories. And so we pretty actively: One, monitor that, but pretty actively manage it and push back where appropriate. I think between the finance and merchandise team, we’ve got our arms around it. And our objective here is to make sure that if we — first and foremost, push back on that price increase that is not warranted. If we do have to take the price increase, work in a fashion that we kind of share some of that with our supplier and then furthermore make sure that we price ourselves within our assortment in that category to make sure that we can make that margin up with — if it’s not SKU by SKU, certainly within the product group. And so we’ve largely been able to work through and plan our way through that. - David M. Denton, Executive VP, CFO & Principal Financial Officer, Lowe’s Companies (LOW) | Oppenheimer Consumer Growth And E-Commerce Conference, June 16th, 2021 But likely, I would say the low inventory environment is probably going to be here in — well into 2022 if the demand stays high. We expect that the semiconductor challenges are going to continue into the second half. I would say that the third quarter is probably a little bit more of an impact than we were expecting it to be a couple of months ago. But what I would say is, as we’ve seen from both our first quarter results as well as our second quarter results, the team’s ability to manage through the short term time and again has really borne itself out. So I’m actually comfortable with where we are right now as we’re thinking about the second half of the year even if there might be some continued supply challenges and our ability to work through a lot of them. So we do expect the second half in terms of chip availability to be slightly better. But there are some fundamental pressures in the second half that I think are unique versus the run rate that we’ve seen in the first half that starts probably with commodity inflation. - Paul Jacobson — CFO, General Motors (GM) | Deutsche Bank Global Auto Industry Conference, June 16th, 2021 First off, you are correct. It’s not as big of an issue for us, thankfully. But as we kind of look at some of the key proteins and down the list, chicken beef and dairy, probably seeing the biggest inflation taking to the top, not a surprise. We feel like as we get towards the end of the year and from the balance of the year, actually, we’ve estimated about a 6% to 8% increase in food costs is what we’re seeing right now, at least. - Scott Bowman, CFO, Dave & Busters (PLAY) | 1Q21 Earnings Call, June 10th, 2021 I’ll defer again to the actuaries, but going to the question around social inflation: That phenomenon, broadly defined, existed well before the pandemic. And as Dan indicated, there’s no obvious indication that — once things return to whatever the new normal is, that, that will abate. I think, on a more tactical basis, I — as — I’m not a trained economist, but I will take — here in the U.S. I’ll take the Federal Reserve at their word that they’re willing to let the economy run hot, so I think in the short term we’ll certainly see elevated inflation. The question is, with the expansion of the money supply, the disequilibrium in labor markets, et cetera, how much of that is permanent? And that’s the question that we’ll all be monitoring. We saw the CPI results this morning. Whether that proves transitory or not is the question. I, for one, am probably more concerned than perhaps others about the longer-term inflation trend, but therein lies the question. - Robert William Paiano, Executive VP & Chief Risk Officer, The Hartford Financial Services Group (HIG) | S&P Global Inc Annual Insurance Conference — Emerging Risks (Panel Discussion), June 10th, 2021

Paul Tudor Jones Offers Outlook On Economy, Reiterates Bitcoin Optimism

If they say, ‘We’re on path, things are good,’ then I would just go all in on the inflation trades. I’d probably buy commodities, buy crypto, buy gold. If they course correct, if they say, ‘We’ve got incoming data, we’ve accomplished our mission or we’re on the way very rapidly to accomplishing our mission on employment,’ then you’re going to get a taper tantrum. You’re going to get a sell-off in fixed income. You’re going to get a correction in stocks. That doesn’t necessarily mean it’s over. - Paul Tudor Jones | CNBC Interview, June 14th, 2021 The only thing I know for certain, I want 5% in gold, 5% in bitcoin, 5% in cash, 5% in commodities. At this point in time, I don’t know what I want to do with the other 80% until I see what the Fed is going to do. - Paul Tudor Jones | CNBC Interview, June 14th, 2021

Banks Eager for New SCB Framework After COVID Pause

Betsy Lynn Graseck, MD, Morgan Stanley, Research Division: So you get your answer from the Fed next Thursday, and it’s a different world under the SCB, right? You basically have the ability to take these actions with a Board meeting? James Gorman, Chairman & CEO, Morgan Stanely (MS): Absolutely, and it’s what, again, something I’ve argued for years. Let’s not play this game of the mulligan and you can only bring it down, you cannot bring it up. Tell us what our capital position is. And if we’re short, we’ll raise capital. If we’re long, we’ll put it to use in the business or we’ll give it back to the owners. It’s not complicated. Why would you sit with excess capital inside the institution just because, waiting for what? By definition, the Fed models say, you have enough capital for severely adverse — not for a normal scenario, a severely adverse scenario over 9 quarters. Great. And you’ve still got excess above that? Wow. And that’s sort of my attitude around the capital. This is trading your — like your grown-ups, you know what you’re doing. You’re running a prudent business, get on with it, run it the way you should. - Morgan Stanley US Financials, Payments & Commercial Real Estate Conference, June 14th, 2021 We were able to start doing buybacks earlier this year. We certainly took advantage of that in the first quarter at the — and did buybacks to the capacity we were allowed to do so. We’re able to do that again in the second quarter. We’re out taking advantage of that capacity as well this quarter. As I look about the go-forward, as you mentioned, the stress capital buffer will be an important factor. We’ll see what comes out of the most recent CCAR analysis. But assuming that that’s consistent, we’ll be operating in a way that is aligned with the CET1 target that we’ve set for ourselves, so the 11.5%. As of the last quarter, we were at 11.8%. So there’s capacity there, obviously. And we would operate in accordance with that going forward. I would point out that, over time, it would be my intention to continue to take a look at the CET1 target we have of 11.5% and look for opportunities to bring that down/operate inside of a range. The ability to return capital is obviously driven by the income we generate, the utilization of the DTA. And our objective would be to put capital to work where we can generate returns that make good sense and anything that was excess to return it to shareholders. - Mark Mason, CFO, Citigroup Inc. © | Morgan Stanley US Financials, Payments & Commercial Real Estate Conference, June 15th, 2021 And so part of the way we think about our capital management isn’t just how much capital we’re going to retain, but the amount of business activity we’re doing with our clients that’s reflected on the denominator, and that’s reflective of the growth that we’ve had in the business. And so it’s another way to think about capital, not just share buybacks, dividends, but it gets back to how do you invest in the business in growth in a way that actually reflects your capital levels. - Jason Jerrome Tyler, CFO, Northern Trust Corporation (NTRS) | Morgan Stanley US Financials, Payments & Commercial Real Estate Conference, June 16th, 2021 And we are looking at it, using the term long term, and that’s the right way to think about it. So we will continue, we’re at [9.9%]. We articulated a range of 8.5% to 9%, 9% sort of where we do an operating under. And we would continue to expect to migrate to that level over time. And as you said, SCB gives you a lot of flexibility in how you distribute capital and the timing that you distributed. - Andrew Cecere, CEO, US Bancorp (USB) | Morgan Stanley US Financials, Payments & Commercial Real Estate Conference, June 16th, 2021

American Express Sees Sustained Online Spending Activity Despite In-Store Recovery

And of course, the other aspect that we have watched very closely is that within goods and services, what you saw is there is a tremendous spurt in growth in digital and online purchases, well above the long run trend of steady growth in those kind of digital and online purchases that you had seen for years. But spending at physical retailers has come back. We have not seen online spending go down. So we think that bodes really well for not just us, frankly, but for the industry because I think that long-running trend with both consumers and businesses, towards ever less use of cash and checks, we think has seen a step function change, and I don’t think we’re going to go back on that. - Jeffrey Campbell, CFO, American Express (AXP) | Morgan Stanley US Financials, Payments & Commercial Real Estate Conference, June 16th, 2021

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