Wall Street Breakfast: Powell Gets Aggressive

Wall Street Breakfast: The Conflict Goes Hypersonic

Powell gets aggressive

A bond sell-off is intensifying after yesterday’s comments from Jerome Powell, who said the Fed was ready to act even more aggressively to fight inflation. The 10-year Treasury yield has climbed 20 basis points to 2.32% since the remarks, leading to the worst month for the asset class since 2016. Meanwhile, the 2-year Treasury yield rose above 2 %, jumping almost 24 basis points in the past 24 hours to 2.19%, as the yield curve races towards an inversion (or one of the best indicators of a coming recession). Stocks are holding on despite the latest comments – closing in positive territory yesterday – while futures linked to the big averages are up a further 0.4% this morning.

Quote: “If we determine that we need to tighten beyond the common measures of neutral (i.e. an interest rate that neither hinders nor fuels economic growth) and into a more restrictive position, we will do so. we’ll do,” Jerome Powell said during a speech at the National Association. for business economics. He even went so far as to say that the central bank is ready to raise interest rates by 50 basis points at the next policy meeting. Consumer prices deteriorated in February as CPI growth rose 7.9%, the biggest 12-month increase since January 1982.

What happened to the transient? “In my view, an important part of the explanation is that forecasters have vastly underestimated the severity and persistence of supply-side frictions, which when combined with strong demand, particularly for durable goods, produced surprisingly high inflation,” Powell told the conference. . However, he is somewhat optimistic that central bankers will be able to engineer a so-called soft landing, in which the rate is high enough to keep the economy from overheating, but not so high as to trigger a recession. “While some have argued that history stacks the odds of doing just that,” there were three episodes — in 1965, 1984, and 1994 — when the Fed “significantly” hiked rates without a slowdown. “I hasten to add that no one expects a soft landing to be simple in today’s environment – very little is simple in today’s environment.”

Analyst Comment: “Investors are taking Powell’s transparency as one more step to saying ‘he’s just preparing us for the worst’, while the bond market is saying, ‘no, no, he’s telling you he’s going to do at least seven [rate hikes]and you’re not listening,” said Shannon Saccocia, chief investment officer at Boston Private. senior equity strategist at Federated Hermes “What scares the market is when you have very fast moves, like what we have now.” (8 comments)

Direct consumer

Nike Stock (NKE) increased by 5.5% in after-hours trading on Monday as the sneaker giant posted a series of impressive results. Revenue climbed 5% year-on-year to $10.9 billion in the holiday quarter (beating estimates of $10.6 billion), while adjusted EPS came in at $0.87 (beating expectations of $0.72). In terms of guidance, the company expects revenue for FY22 to grow mid-single digits over the prior year, although details will be provided next quarter given “several new dynamics creating higher levels of volatility”.

By the numbers: Lower revenue in Greater China (-5%) was more than offset by gains in Asia Pacific and Latin America (+11%), North America (+9%) and Europe, in the Middle East and Africa (+7%) . Footwear sales rose 2% to $6.7 billion, while apparel sales rose 9% to $3.2 billion. Nike Direct sales increased 15% in the quarter to $4.6 billion and 17% on a currency-neutral basis.

“Fueled by deep consumer relationships, compelling product innovation and an expanding digital advantage, we have the right playbook to navigate volatility and create value through our relentless drive to serve the future of sport. “said CEO John Donahoe.

Growth potential: Given the strong results, Nike was quick to signal that its direct-to-consumer model was working. The strategy was rolled out in 2017, but has recently seen Nike move away from even Foot Locker (FL) and DSW (DBI) in favor of its own apps, websites and stores. “Market demand continues to significantly exceed the supply of available inventory, with a healthy pull market across all of our geographies,” Chief Financial Officer Matt Friend added in an investor-noted statement. (27 comments)

Accident investigation

Locating parts of the plane’s wreckage, investigators are working to recover the so-called black boxes from China Eastern Flight MU5735 (NYSE:CEA), which crashed in a mountainous area near the city ​​of Wuzhou with 132 people on board. The plane was a Boeing (NYSE:BA) 737-800 Next Generation, often referred to as the 737NG, which preceded the 737-MAX involved in the two high-profile crashes in 2018/19 that led to the global grounding of the entire MAX fleet. . According to aviation consultancy Cirium, the 737NG is known as one of the safest airliners in the world, with 11 fatal accidents out of more than 7,000 planes delivered since 1997.

Instantaneous: A reported video of the accident, published by a Chinese media The paper, shows an aircraft that was intact when it descended, but too distant to display markings that would identify it as an East China aircraft. However, radar tracking shows the aircraft descending steeply in a nearly vertical course – which would match the video – with the aircraft disappearing from flight tracking at 2:22 p.m. local time. After a 45-second dive from the sky, the aircraft actually climbed from 7,425 feet to 8,600 feet in about 10 seconds, but resumed its dive immediately afterwards. The entire incident lasted one minute and 35 seconds, with the plane plummeting at over 500 feet per second.

The crash is China’s first commercial plane crash in more than a decade, and a remarkable event for a country with a strong aviation safety record. As a result, Cowen analysts believe it seems less likely, though not impossible, that the cause is a manufacturing or design issue. The plane was seven years old and has been in commercial service since 2015, meaning maintenance issues, pilot error or sabotage are likely to be the cause of the accident.

His (really) bad timing: The 737NG crash comes as Boeing seeks to restart 737 MAX deliveries to China after a three-year shutdown. “A significant delay would likely affect 2022 deliveries and cash flow, as well as production plans, with implications for suppliers like Spirit AeroSystems (NYSE:SPR),” said JP Morgan analyst Seth Seifman. Spirit assembles nearly 70% of the 737 MAX chassis and shares of the tier-one aerostructure builder slipped 3.5% Monday (Boeing fell by the same amount). (5 comments)

SEC Environmental Program

The Securities and Exchange Commission has unveiled a new proposal that would require US-listed companies to disclose climate-related risks and greenhouse gas emissions. Companies would not only have to disclose Scope 1 and 2 emissions, or emissions that are generated in the normal course of their business, but they would also cover Scope 3. These are emissions that are “actual or likely” to result from the use of products. by customers, however, some feel that the category does not have a clear definition.

Bigger picture: The proposal, approved by a 3-to-1 margin, is open for public comment, but will likely be finalized in 2022. If approved and passed, companies with a market cap of more than $700 million would have the cooling off period. most aggressive transition, with expectations to file climate-related data with the SEC in fiscal year 2023.

“I really think the SEC has a role to play here when that amount of demand and need from investors is there,” SEC Chairman Gary Gensler said. Others believe the agency is overstepping its mandate, such as former President Jay Clayton. “Taking an activist new approach to climate policy — an area well outside the authority, jurisdiction and expertise of the SEC — will rightly lead to legal challenges,” he said. “Setting climate policy is the job of lawmakers, not the SEC.”

Thought bubble: From an investor perspective, many companies like Exxon (XOM) and Chevron (CVX) are already disclosing Scope 3 emissions, and few investors will be surprised to see energy companies underperform on climate metrics. These points could suggest that the new reporting requirements are unlikely to have a significant impact on stock prices in the future. (98 comments)