Micron loses its memory
Stocks fell yesterday dragged down by semiconductor shares after Micron lowered guidance on soft demand just a day after Nvidia broke similar news. The yield curve remains firmly inverted leaving investors wondering what’s next for the economy.
Peaked interest. Today will be the day that we will learn if inflation has indeed peaked. If you have been paying attention, you would note that economists have been calling for peak inflation for the better part of the past year…and we know how those predictions played out. Last June, inflation at +5.4% was high by historic standards. Indeed, it was high by Fed standards as well. The Fed would prefer that inflation sit around +2.0%. But, by last June even though we were still very much in a pandemic, things seemed to be returning to normal with stimulus checks and reopening madness long in the rearview mirror. Inflation appeared to plateau and dip ever slightly last August. Economists were proud that their predictions were playing out, as they so often don’t, and the Fed was hopeful that inflation was proving to be transient, as it predicted. You may also recall during that timeframe that the Fed was planning on keeping rates near zero for the foreseeable future.
Well, it didn’t take too long for those economists and Fed officials to realize that their predictions were, um…wrong as wrong can be. Inflation posted a white-hot bump in October bringing it above +6%. The voices calling for Fed action grew louder adding pressure on the policymakers to act. And act, they did, initially by acknowledging that rates probably needed to be raised. This happened in November of last year. It was that admission combined with another white-hot jump in CPI that caused rate expectations and bond yields to jump. Those higher yields prompted a selloff in growth and tech shares that lasted almost 7 months during which the growth-heavy Nasdaq composite index lost over -30% before bottoming out in June.
Though the Fed began to jawbone the market with threats of inflation fighting rate hikes, many members continued to speak of peak inflation and hope that inflation would recede because of base effect, which would cause the year-over-year inflation rate to go down when the base rate (from a year earlier) experienced a big jump, as it did, starting in February of 2021. Though the Fed had shifted into Hawk Mode, it was still very much intent on utilizing the thoughtful, careful +25 basis-point hiking increments which it had utilized since the 1980s.
Then came Russia’s invasion of Ukraine and with it sanctions on Russian commodities along with blockades of Ukrainian commodities. This affected raw material costs to spike in energy, grains, industrial metals, and certain unique chemicals/materials. These jumps added to what is called supply-push effect in which producers raise prices to cover higher input costs. In more simple terms, it bumped up inflation higher. So much for peak inflation.
The Fed found itself being reactive rather than what people would prefer, proactive. The Fed would do what it hadn’t done for decades. It would follow its first +25 basis-point hike with three more oversized hikes of +50, +75, and +75 bringing Fed Funds to where they sit today at +2.50%, a rate that many believe is the neutral rate. It is neither stimulative nor restrictive. Of course, we know that rates will go higher. Indeed, they must in order to bring inflation back into check. In fact, the market has already factored in a Fed Funds rate of 3.5% by the end of the year. The US is in a technical recession, but the labor market is strong. The Fed is in a situation where it must be careful, but the strong labor market gives it some more runway to fight inflation. Regardless, much can happen in the remaining three months beyond the Fed’s next policy meeting in September. Futures are now predicting a good chance of another +75 basis-point hike. Beyond that the Fed could still surprise on the upside by slowing down its hiking pace… assuming the labor market weakens, the economy weakens further, or…inflation finally peaks, as economists are predicting today. All eyes will be on that release this morning at 8:30 AM Wall Street time.
YESTERDAY’S MARKETS
Stocks fell yesterday, dragged down by semiconductors and tech after memory supplier Micron lowered its forward guidance on soft demand. The S&P500 fell by -0.42%, the Dow Jones Industrial Average slid by -0.18%, the Nasdaq Composite Index dropped by -1.19%, and the Russell 2000 Index gave up -1.46%. Bonds fell and 10-year Treasury Note yields gained +2 basis points to 2.77%. Cryptos fell by -4.61% and Bitcoin lost -3.85%. Yesterday’s biggest losers included Lam Research (-7.88%), Applied Materials (-7.58%), and ON Semiconductor (-6.33%), all semiconductor companies.
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