Chipping away at chip revenues

Stocks posted a mixed close yesterday, unable to hold on to early gains as investors await tomorrow's all-telling CPI report. Nvidia warns that a slowdown in gaming, due to economic headwinds, is the cause of its lowered revenue guidance – investors are wondering if the problem will affect the whole industry.

94 degrees… in the shade. Yesterday was another scorcher in the big city. If you were looking for some small bit of shade to get some comfort, you would have had to look hard – it was hot even in the shade. Similarly, you would have had to search hard yesterday for any bit of news to support the recent rally in stocks. Friday’s knock-out jobs number loomed high in the sky like the August sun. Of course, lots of new jobs and record unemployment is good…no, it’s great, but there is a hidden problem with it. If consumers are not worried about their jobs, they are less likely to pull back on spending, which is one of the key drivers of inflation. If you were poking around yesterday on that topic, you might have stumbled across a New York Fed report from its Center for Microeconomic Data. Imagine fitting that on a business card. In any case, the folks that do have that moniker on their business cards released results from their Survey of Consumer Expectations yesterday, and it had some interesting results. Before I drop those on you, let’s talk briefly about inflation.

The most common driver of inflation is referred to as demand-pull effect. That is when you and I consume…a lot. When things are going well, income is flowing, no fears are looming, and savings are burgeoning, consumers spend money, and that increased demand for goods and services drives prices higher. Another driver of inflation is the cost-push effect. This is the one that we were all recently introduced to, in the wake of the pandemic. That is when companies raise prices in response to rising input costs. Input costs can be commodity prices (like crude oil, metal, or lumber), service fees (like shipping), or even labor costs (wage hikes). Both of these drivers together are the culprits of the inflation we are witnessing today. However, there is another cause of inflation referred to as built-in inflation. That occurs when folks believe that inflation will remain high in the future. Because of this expectation, they demand higher wages. If companies are forced to pay higher wages…does that ring a bell yet…they will raise their prices (cost-push effect). This causes what is known as a wage-price spiral, and it is as worrisome as it sounds. In fact, it is what the Fed is most worried about. If you listen closely enough you can hear Fed officials concerned about inflation expectations, sticky inflation, and that dreaded spiral. You see, the Fed is confident that natural economic forces will ultimately bring prices back into harmony…of course with a little help from interest hikes. However, if high inflation expectations persist, or they become “sticky”, price normalization can take a far longer time. Well, that is where the good news comes in…if you can call it that.

According to the New York Fed’s press release, inflation expectations on one and three-year inflation “declined sharply” in July. Exactly how sharply? Glad you asked. One-year-ahead inflation fell from 6.8% to 6.2% and three-year-ahead inflation dropped from 3.6% to 3.2%. As you will see from the following chart, expectations are, indeed, declining, but they are still irregularly high, especially the near-term expectation. On a hot day even the slightest bit of shade helps.

WHAT’S SHAKIN’

Micron Technology (MU) shares are lower by -4.96% in the premarket after the company lowered its forward revenue forecast, stating that its current quarter revenues would come in at or below the low end of its estimate range, which is below analyst estimates. Micron cited tough conditions for memory chips in the current and upcoming quarters. Dividend yield: 0.75%. Potential average analyst target upside: +28.1%.

Occidental Petroleum Corp (OXY) shares are trading higher by +2.10% in the premarket after a regulatory filing revealed that Berkshire Hathaway (BRK/A, BRK/B) purchased an additional 6.7 million shares in OXY bringing its total ownership to around 188 million shares. Potential average analyst target upside: +21.3%.

YESTERDAY’S MARKETS

Stocks could not sustain an early rally and closed mixed as investors contemplate inflation, earnings, and rate hikes. The S&P500 slipped by -0.12%, the Dow Jones Industrial Average ticked up by +0.09%, the Nasdaq Composite Index fell by -0.10%, and the Russell 2000 Index jumped by +1.01%. Bonds climbed and 10-year Treasury Note yields fell by -6 basis points to 2.75%. Cryptos gained +6.0% and Bitcoin added +3.46%.

NXT UP

1. NFIB Small Business Optimism (July) came in at 89.9 this morning, up from 89.5 in June.
2. After the closing bell earnings: Roblox, Akamai, Sweetgreen, Coinbase Global, Bloom Energy, Plug Power, Riot Blockchain, and Wynn Resorts.