The Latest Fed Decision… And Starbucks Gets Roasted 5/1/24

0:02Live from the Nasdaq market site in the heart of New York City's Times Square. This is Fast a sign that the volatility is not behind us. Plus, sinking Starbucks, the stock falling nearly 18 % at the lows of the day. The CEO getting to a very testy exchange with Kramer this morning. Is there any reason to still be bullish on this stock? We'll talk with one analyst who's holding on to their buy rating. And later, Pfizer shares catch a bid after earnings. New York Community Bank surprises investors with a clear path to profitability. And big moves from Qualcomm and Zillow in the after hours for breaking down all the results.

0:46I'm Melissa Lee coming to you live from Studio B at the Nasdaq on the desk tonight. Tim Seymour, Karen Beiner, and Steve Grasso, and Michael Cantopoulos, Director of Fixed Income at Richard Bernstein Advisors. Welcome, Michael. And we start off with that boomerang action in stocks after the Fed news conference. The S &P initially soaring more than a percent, but pulling back sharply in the last hour of trading to close in the red. The Nasdaq had been up nearly two percent at the highs, also finished lower. Rates, meantime, also ricocheting with the two-year falling more than 10 basis points at the lows as Chair Powell seemed to take a rate hike mostly off the table, but yields climbing off those levels for more on what came out of the central bank.

1:23CNBC's Steve Leisman joins us now. What was your overall take in terms of hawkish, dovish? A little bit more hawkish than expected, Melissa. I think maybe the market maybe dodged a bullet. The Fed, you know, they kept rates unchanged from a quarter to five and a half. That was expected. But it was silent about what impact stalled inflation progress would have on policy. The statement did note that stalled progress, but markets, I think they dodged that bullet with no explicit mention in the statement of a change to policy because of those hotter inflation readings. And then more importantly, Powell, for his part at the press conference, said it was possible there could be no rate cuts this year.

1:56So that's on the hawkish side. But also said, as you just said, Melissa, rate hikes were, quote, unlikely. And so he still expects inflation to come down with rates where they are. My expectation is that we will, over the course of this year, see inflation move back down. That's my forecast. I think my confidence in that is lower than it was because of the data that we've seen. And the Fed surprised markets with a more aggressive reduction in the balance sheet runoff than expected. The Fed had been reducing its treasury holdings by$60 billion a month. But next month, that's going down to$25 billion a month.

2:32The mortgage-backed security numbers remaining unchanged. That provides a little relief for a Treasury market. That's really been awash in new supply since the Fed will be, runoff will be reduced. But at least it in part counters overall monetary policy designed to keep financial conditions tight, Melissa. I thought that was a great question that you asked in terms of the reduction of the balance sheet and what that would mean in terms of the policy efforts that the Fed was doing. And he seemed to sort of dismiss it that it was never meant to be, you know, providing accommodation to the economy, basically.

3:00Do you buy that, though? Well, the Fed and I think some of the smarter guys and folks I've talked to in the markets, Melissa, have this idea that quantitative easing has a profound effect when you're buying treasuries, but the effect is less when you're selling them or letting them run off. And I think that's proven to be true so far. We'll see. But I think what we're seeing here is concern about liquidity in markets and not having the kind of hiccup we had in 2019. That seems to be an overriding concern with the idea that they're not really, at least they believe, they're not giving up very much in the inflation fight from reducing this runoff.

3:41By the way, it is still running off. Steve, it's Karen. First of all, great job last night. Steve's band played at the Council for economic education event. He was fantastic. As he is. So that was really good. But so I was surprised by the magnitude of the markets reaction, both up and down. Was it just euphoria? Was it seemingly not as bad as we thought it could have been? And what sort of changed the tone? Yeah. So maybe it's not really very humble to quote myself, but I said that there was only downside risk today. I said this earlier before for the markets, depending upon how aggressively They have already priced the downside risk.

4:18The market really did has a bit of a sell off. Yields have come up quite a bit. So I think there was a little bit of relief out there, Karen. Overall, I'm not sure about what happened at the end of the day that Melissa was talking about. But but I think there's a little bit of relief. It could have been worse. And I actually think the question I asked Powell about his essentially his confidence in inflation coming down is really sort of what you might call the money quote here. He is still confident in the progress that the rate is set at a restrictive enough level to bring inflation down over time.

4:50And what you need to do, I think, is reset your clock. But I don't think you have to reset essentially the time zone that you're in. Right. By which I mean the cuts will happen and happen over time, but just over a longer horizon than previously believed. OK. I mean, that's everything, though, to the markets, isn't it, Tim? I mean, if we have to reset, if we're still in the I don't know about this time zone. Well, yeah, it's not a great metaphor, Melissa, but it's not great. I mean, to say, although to say, yeah, it's coming. I just can't tell you when. I mean, I understand that's what the Fed's prerogative is and that's what they need to do at this point.

5:27But for markets, it's not that's not very comforting. Well, I would think that the guy that's quoting himself would actually not tell us it was a bad metaphor. But, you know, Steve, I guess my question ultimately is what did Powell tell us about the economy? I understand the statement is, you know, word for word. And, you know, but the equity market cares a lot more about that. Yes, we pushed out some rate cuts, as we're all saying, whether it's mid 25, you get your third cut or whether it happens maybe at the end of the you know. I mean, I actually think the equity market doesn't want to see that by the end of the year.

5:57What do we hear about the economy? Because stagflation is the word of the week. And I understand what you think. Tim, just forget that word. This is not stagflation. I'm just saying it's somebody's word. One guy's word, and really, it is so inappropriate for the situation we're facing now. Tim, weren't we in Russia together, Tim? Yes, we were. What was inflation in Russia? I think it ran in three or four digits. Sometimes it ran in three digits. This is like the 80s, right? We were younger men. In the 90s. What was inflation? When we had stagflation in this country, what was inflation? It was 10%.

6:34We are talking about the difference between 2 % and 3 % inflation. That's the first thing. We're talking about unemployment that's running below 4%. We're talking about growth. Forget the GDP overall number at 1-6. Growth, real final domestic purchase at 3%. We have decent growth. We have low unemployment. And we have inflation that's running above target, but certainly not inflation that's out of control in a way that makes you worry about stagflation. Is the economy cooling? That's the hope. That's what we all wanted, Tim. What is a soft landing? A soft landing is a reduction in the growth level.

7:08maybe a slight rise to the unemployment level, and the ability of the Fed to cut interest rates in response to that. You cannot go from, I don't know what the right word is, from things are a little bit softer to the world is coming apart. And by the way, when you think about stagflation, you're skipping over a major step. The expected response to cooler growth is lower prices. What do you think Starbucks is going to do now that it has the kind of numbers that it had? Is Starbucks going to raise prices further, or is there a possibility Starbucks eases back on its prices? That's what happens in response.

7:44If you don't get that response, Tim, then you have to worry about this idea of stagflation and something being wrong in the price mechanism, something being wrong in the response to the economy. I'm sorry to go on a tirade here. No, no, look, I mean, first of all, we're going to have— I should calm down, I know. We're going to have a great Starbucks segment later in the show, and I think we should have you back. And obviously, somehow you I did hit a nerve with the third person reference not having the good metaphor. But don't kill the messenger. I don't think there's stagflation. I hear you loud.

8:13You're absolutely right. The economy is not even close also to falling off a cliff, let alone the inflation side of it. I agree. They said inflate. They said the economy was was was still growing at a solid pace. And and Powell did look through that weaker Q1 GDP number. They said job gains are still strong and we'll wait to see on Friday. but that is at least the expectation. And overall, you've had decent consumer spending. Look, some of the data has been a little weaker of late, and that's something I think to think about. But what I expect in response to weaker data is weaker price pressure.

8:47Period. End of story. Steve, always great to get your analysis. Thank you. Yeah, you got me going here, Melissa. Steve Leisman, you're not in your head when Steve said stagflation has no place in this conversation. But investors love to jump to the worst case scenario. Is that the I mean, that is the worst case scenario. Is that in the purview? I mean, is that sort of out there? No, absolutely not. I 100 % agree with Steve. Certainly not over the next 12 to 18 months, let's call it maybe three, five, seven, 10 years down the line. Right. When our debt problem becomes such a huge issue and inflation might still be elevated for a lot of demographic type reasons, maybe then you have a stagflationary environment.

9:29But that's quite some time. So what are we facing right now, in your view? Well, I still think we're in reacceleration. You know, back in March, I said the market would have to price in a hike. I think everybody gave me odd looks when I said that on the panel. And, you know, sure enough, we came into today expecting that a 30 percent chance of a hike this year or no cuts. I still think we got to go back to that point where the market starts to price in hikes because the economy is strong and inflation continues to surprise to the upside. Yeah, I think it was a probably one of his best press conferences.

9:58I think he sort of went out on a couple of different things. But you have QT, that's ending. Right. So that's QE in effect. And then you have this sort of I don't want to say it's a Fed put, but maybe it's a Fed put, because if things get worse, he's going to be there. And then what does stagflation have? High unemployment. We don't have high unemployment. So we're very early on that call. All in all, I think the markets usually do the reverse of their first move, and that's what they did this time. So May meeting obviously came and went, and there was no cut, Steve. And that was your fault. Steve got his cut.

10:37Hold on. He got his cut in the tapering. Maybe. In the tapering. Possibly. I'm letting Steve back in. He was talking about tapering all along. But anyway. It was what? You were very, you know, aggressively saying they're going to taper. Yeah. And plus, I don't like consensus, too. Right. When when oil was 125, I thought it was going to 65. Right. It seemed like a crazy move. I don't know how much they're going to be able to cut, but I know he has to cut in an election year. Whether it's political or not. No way. All right. Decision and we can continue this debate here. Let's bring in Tom Michaud, the CEO of KBW, a steeple company.

11:13Tom, great to see you. Good evening. Where do you think we are in the economy? I mean, do you think the Fed is doing the right thing at this point? So what we see through the banking industry's lens is that loan growth was slower than expected in the quarter, and higher interest rates are starting to bite. You can see it in real estate. And so our view is that we see a little bit of a slowdown through the banks and through that lens. But credit quality has been very stable. I guess that's where I'd love to go with this because it's earnings season. And actually, by the way, today was the day when banks really outperformed.

11:45And I know there's some New York Community Bank news that shot that up. But regional banks, independent of that, were very strong. And yet what we've heard from restaurants, what we've even heard from Visa, but certainly, you know, we're going to have a conversation about the consumer. That lower end consumer is cracking. And it feels like if you listen to the company, it's cracking pretty hard. Thoughts? What do you see? Well, first of all, a lot of that exposure is not in the banking industry. You know, since Dodd-Frank was passed, the whole idea was de-risk the banking industry. So they've been pushed out of a lot of that underwriting.

12:15So I would say that's a lot of that's in private credit and then the non-bank lenders. Is it cracking or is it normalizing? Well, it's normalizing, number one, is it's normalizing. Exactly. Remember, we just had the 100-year pandemic and a really historic response. So when you look at the numbers, the percentage changes a lot, but it's coming off a zero. We're still away from what's a normal credit expense. And I think that's actually been the surprise, how well unemployment's held in there, number one. And number two, credit's been generally pretty good for the banking industry. At what point, though, do you start getting concerned that the data points we're seeing about the consumer comes to bite the banking industry?

12:53Eventually, the two shall meet, won't they? I think cycles have not been repealed. I mean, it's inevitable. I don't think it's tomorrow and we don't see anything on the horizon. And the other thing, too, is that when you look at a lot of the banks that do have exposure to the commercial real estate that folks worry about, Their reserves are over 10 percent to those loans right now. Global financial crisis losses to the banks were a little bit lower than that. So the banks have already built a fortress of protection for like the big city mortgage credits. Are you as confident, though, in private credit and the reserves that they have against commercial real estate?

13:32I think private. This will be the first cycle that private credit's gone through. So we're going to there'll be winners and losers. I think there's no question about it. And also, too, one thing that will never be repealed is if you grow really fast at something, when you take credit risk, you're a little bit more at risk. And there's been a lot of fast growth in many of those markets. So how do you think about the divergence between the strength of the big money center banks and the fear of the regional banks? Is it too far apart? How do you think this plays out? That's a great question because so we have the Keefe Bank Index, which is the BKX, which are the biggest 24, than the KRX, which is the Keefe Regional Bank Index, there's about a 17 % difference in year-to-date performance, which is just about as wide as I've seen it.

14:20And it's because the flight path for earnings is so different. We feel much stronger about buying large-cap bank stocks. And there are a couple of stories that we're really pretty fired up about, whereas the regional banks are going to have more headwinds because higher for longer might be a little bit more problematic, and they tend to have more commercial real estate exposure. We're not worried about their balance sheets, but there might be some more risk to their earnings estimates. Is there any scenario where you would choose the smaller cap names, the regional names? Because you just touched on where I was going to go.

14:53If rates are going to stay high for long, then you have a trillion dollars of resets in commercial real estate this year, followed by a half a trillion, half a trillion. So we all know the staggering of it. If rates are staying high, is there a scenario where you even waste time with the region? Well, there are some really good names, like East West Bank is one of our favorites. This company with all that we know in our model right now is a high teens ROE earner. And that's kind of in a tricky environment. They're a very profitable company. So let's say they're about seventy five billion dollars in assets.

15:26So that's a name, for example, that that we like. But the regional banks don't have the big cities. Think three-story office park, medical folks in the building, probably fully leased, much different than downtown San Francisco. And then also a lot of those loans have independent guarantees from individuals. Believe me, those folks don't like to walk from their credits. Great to see you. Thanks for coming by. Great to be with you. Tom Misho, CEO of PBW. Karen, in particular, Tim had mentioned your community, but you're in this still, right? Yes, yes. Right. No, I just think it is an option now that has life and volatility.

16:07And when you have that and they put in a great management team, I thought, I don't know if you listened to the call, Tom, but, oh, I didn't want to. Too late. Sorry. Too late. Anyway, there was a lot to like about that. Okay. Now to an earnings alert here. Qualcomm shares rising 4.5 % after posting better than expected earnings in revenue. The Chipmakers Conference call just kicking off a few minutes ago. Christina Parks-Nevelis joins us to break down the results. Hey, Christina. Hi. Well, we know Qualcomm's biggest source of revenue comes from handsets, and sales are up 1%, adding to that smartphone recovery narrative.

16:37Management's on the earnings call right now pointing to premium-tier sales. They also said they are not seeing signs of weakness in the Android Chinese premium market, so that helped the better-than-expected results and upbeat outlook. The company's auto business, although it's smaller, is up 35 % year-over-year, while other chip makers like Texas Instruments, OnSemi, have all warned of EV weakness. So there was concern going into this report. We can see Qualcomm was able to beat that. On export controls, interestingly, Qualcomm confirming that they have continued to sell products to Huawei under current licenses that they have, but, quote, do not expect to receive product revenues from Huawei beyond the current calendar year.

17:14So you could potentially hear more about the competition between both companies going forward. Expect management also to talk about plans to release this AI chip for laptops starting this summer. but we know that won't impact forecasts for a while. But it seems like the focus right now is just on this premium tier market. That's what they're talking about on the earnings call. Christina, thanks. Thank you. Christina, parts neveless. There are still real concerns after Skyworks yesterday, Tim, particularly when it came to potential Android weakness, which they dispelled. They did, and they certainly said in the higher end, which is where they live.

17:45It's been an interesting ride for Qualcomm, which has had a pretty good run. It's up almost 15 % year-to-date. It's pulled back a little bit into these numbers. Valuation isn't terribly demanding. It certainly exists in the more boring part, you could say, really of the semiconductor world. But it's a place where I think ultimately there are those waiting to hear how they're going to begin to bolt on some of this AI exposure. So these are these are numbers that are reassuring. You're right. We've had kind of a mixed landscape. Overall, the group also is a fascinating day because semis really were leading the downside.

18:15They were down, you know, over three and a half percent at one point each day. They rallied up to flat on the Fed. And it's like what we talked about with that cha-cha-cha Fed move. They've closed back down. So really interesting to see where the leadership is going to come from. Fifty percent of their revenues are from handsets. Sixty percent of revenues are from China. So those are two headwinds. So Christina started off saying the recovery of the handset market. So that's the read through to Apple, if we can make that read through. But there's a lot of headwinds concerned with this name, even though it's up four percent after hours.

18:44All right. Coming up, more after hours action to bring new shares of Zillow, DoorDash and MGM all on the move. We're bringing the details out of the quarters next. Plus, coffee gone cold. Shares of Starbucks notching their worst day since 2020. What the CEO had to say about the coffee chain's quarter and if you should drop the drip from your portfolio. Don't go anywhere. More Fast Money in two. This is Fast Money with Melissa Lee right here on CNBC.

19:19Welcome back to Fast Money, two pharma giants topping the tape today, though for different reasons. Pfizer up six percent after beating earnings expectations on the top of the bottom lines. The company also hiking its full year profit outlook, helping shares have their best day since November 2021. Johnson & Johnson also up today. That's after the company announced that it plans to pay six and a half billion dollars to settle almost all of the lawsuits claiming It's talc-based product, cause ovarian cancer. That is going to be put up for a vote, so not finalized yet. The stock is up nearly 5 percent, its best day since last July.

19:53These are two stocks that have been beleaguered for different reasons. Are we going to look back on this day and say there has been a change in sentiment, Tim, for your Pfizer slash your J &J team? Yeah, I own them both. I own both of these beleaguered names, and that's a very polite. But, you know, and I haven't really felt that beleaguered in J &J. And in fact, I've owned it for, I don't know, six months ish. And my view is the talc overhang, which we if in fact you get the 75 percent acceptability vote on this, which is probably not expected till towards the end of the summer. I think it removes a huge overhang for the stock.

20:26Now, it doesn't necessarily change the kind of element of their pharma business. Their med tech business, though, showed a very strong core. Remember, we just got numbers from J &J. Those numbers were solid. And I think you're waiting for clarity. This was something that I think is very important. And of the two announcements today, it was great to see Pfizer not really take themselves down, which is what they do every time they report. But I like the J &J news more. I just think about we'll get to it. But this medical loss ratio issue that we're seeing again and again has to be good news for the for the J &Js of the world.

20:58Yes, it is. Yeah. You're seeing higher utilization. So there are more devices being bought, et cetera, et cetera. Yeah. They said that on their earnings call. Where do you stand on some of these? Both charts look similar. Obviously, I owned Pfizer for a long time. I don't own it any longer. I think once you got through the pandemic, it became, as we all know on the desk, a vaccine story. You don't have to be an anti-vaxxer to see that vaccine rates have gone down drastically after we've gotten a couple of years away from the pandemic. So they have to come up with enough. Even though they're a great company, they have a lot of other things.

21:29It was vaccine for them that really moved the needle. Now they have to come up with something to replace it. And neither J &J or Pfizer are playing in that obesity area. And that's what's hot right now. All right. Coming up, earnings season rolls on. And we've got a lot more action to bring you in shares of Zillow, DoorDash, and MGM. The results that have those names moving ahead. And speaking of earnings, shares of Starbucks getting roasted after last night's report. We will filter. There's so many, many funds. And you do them well. Yeah, so many. We'll roll through the results with a bullish analyst and see if there could be a cappuccino comeback in store.

22:04You're watching Fast Money Live from the Nasdaq in Times Square back right after this.

22:15Welcome back to Fast Money. Stocks losing steam late in the day after an initial post-Fed surge. The Dow, which had been up more than 530 points, closing with just a 90-point gain. The S &P and Nasdaq both losing three-tenths of a percent. Shares of CVS dropping nearly 17 percent after reporting results this morning, notching its worst day since 2009 and its fourth worst day ever. The pharmacy chain missing on the top and the bottom line and slashing its profit outlook as higher medical costs weigh on the insurance space. And more after hours action to bring you shares of DoorDash dropping after an earnings miss.