Tag Archives: #semiconductors

Far From Dead

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Tomorrow we’ll hear from the Fed
With pundits not sure where they’ll tread
Some call for a hike
So, Warsh can out psych
Inflation that seems far from dead

But others claim hikes he will thwart
Awaiting the task force report
With oil retreating, 
Though some call it fleeting,
The hawks he will likely abort

The one thing we cannot forget
Is all of the outstanding debt
A hike may create
A weaker growth rate
An outcome he’ll surely regret

Let us turn out attention to the FOMC meeting which begins today and culminates in tomorrow’s policy statement and then the press conference that ensues.  On the whole, I would say that Chairman Warsh has already achieved a key objective, market uncertainty about the outcome.  A point I have been making for a very long time is that uncertainty is what creates an anti-fragile market as positioning is inevitably reduced, and more importantly, so is leverage.  And this is true in every market.  While there may have been value in forward guidance at the onset of the GFC such that the Fed wanted to calm markets down, that time is long past.  

Interestingly, perhaps the one individual who is unhappiest is Nick Timiraos at the WSJ, the former Fed whisperer.  He exhibited great power in the market because he was seen as former Chairman Powell’s mouthpiece when Powell wanted to convey information without being directly attributed.  However, it appears that there will be no Fed whisperer in a Warsh Fed, although I suspect even if there is someone, it will not be Powell’s man to whom Warsh turns.  So Timiraos is on the outs anyway.  But you can tell how unhappy he is by the tone of his recent articles like the one last night trying to insinuate that Warsh will not get his way.

At the same time, Bloomberg has an article this morning explaining how Citadel Securities’ chief economist is expecting a hike.  In my opinion, this is how it should be.  Wall Street economists and analysts make enough money that they should be able to do the work themselves and have their own opinions, not merely regurgitate what they hear from the Fed speakers.  (After all, I make no money and have opinions!)

Reiterating my view quickly, I do not see a hike for the following reasons:

  1. Recent data releases point to cooling inflation offering a respite on concerns of runaway prices
  2. Delaying any action until the task forces complete their work and help reset the way the Fed approaches things feels like the goal
  3. The Federal government cannot afford a rate hike as they migrate more and more issuance to the short end of the curve that will directly be impacted.

The counter view basically revolves around the idea that Warsh can ‘earn’ market credibility by hiking now, whether or not it is a policy error.  I don’t think he is concerned about losing credibility at this stage and has set the table, via the task forces, to show he means business when it comes to changing the Fed.  We all find out tomorrow.

As traders await all the news
On earnings, it seems there are views
That AI is losing
Its luster and cruising
Toward outcomes where stocks sing the blues

In my discussion about parabolic markets yesterday, I mentioned the Korean KOSPI index but after last night’s price action, I think a picture is in order.  This from wolfstreet.com.

As I explained, parabolic moves do not end in a range, they fall like the chart above with pullbacks greater than 50% the norm.  This implies that the KOSPI is not done yet, and given the KOSPI is basically two stocks, Samsung and SK Hynix, both of which are major semiconductor manufacturers, it doesn’t speak well to the semiconductor space in the US either.  Tomorrow, we hear from MSFT and META and then Thursday we get AAPL and AMZN earnings reports.  My take is much is riding on these earnings reports as any indication that growth is starting to slip will feed into my discussion yesterday regarding the second derivative and how that is the driver.  In fact, we saw the announcement yesterday by Nvidia that they were guaranteeing $250 billion of debt for OpenAI to build a new datacenter in Ohio.  At cycle ends, the pace of activity tends to increase as the players want to get things done before the collapse.  I fear that is what we are watching.

Ok, let’s look at markets.  As I’ve already touched on the KOSPI, which fell -10.8% last night, it is not surprising that most of the rest of Asia had a rough go as well.  Tokyo (-4.0%), Taiwan (-4.65%) and China (-2.8%) were the biggest losers overnight although HK (+0.4%) managed to eke out some gains.  In fact, looking across the region, away from the big three mentioned above, it was a more mixed picture.  Indonesia (-0.9%) is having its own problems as the central bank governor resigned and there have been numerous scandals and other cabinet resignations lately undermining both the rupiah (-0.1% and back to multidecade lows) and the stock market there.

As to Europe, given they have no tech sector and the tech sector is the area under the most pressure, I guess we should not be surprised that bourses there are modestly higher this morning, mostly up around +0.3% across the board.  A very pleasant experience compared to the gyrations seen elsewhere.  And US futures at this hour (7:10) are mixed with NASDAQ (-1.1%) suffering while the DJIA (+0.5%) is fine and the SPX is caught in the middle, basically unchanged.

In the bond market, yields continue to edge lower, with Treasuries (-3bps) leading the way and European sovereign yields all lower between -1bp and -2bps. UK gilts (-3bps) are also performing well as the market awaits the BOE’s policy decision on Thursday.  Then JGB yields (-2bps) have slipped in concert as the market awaits the BOJ decision Friday.  At this point, consensus across the board is for no movement, although there has been a discussion regarding the BOJ with some analysts believing a hike is possible.

Turning to commodities, oil (-1.6%) is not the center of attention today for once, and is pushing back toward $80/bbl.  The ongoing decline appears to be based on comments that diplomacy is once again being tried to resolve the Iran situation and the Strait of Hormuz.  Perhaps more surprisingly the metals markets are also falling this morning (Au -1.3%, Ag -2.2%, Cu -1.1%) as their inverse relationship with oil is being tested.  

Finally, the dollar is ever so slightly firmer this morning, but mostly on the order of 0.1% or 0.2%.  AUD (-0.4%) is the worst performer in either G10 or EMG blocs as central bank comments led to a reduction in the probability of a rate hike there next month.  One other thing to note is USDJPY, where, as I type, the market is trading at 163.92, a scant 8 pips from the next big, round number at 164.00, a level almost touched last Thursday (163.99 was the high) but when it trades, it will almost certainly be hailed as an important milestone regarding potential intervention.  I don’t agree with that assessment.

Source: tradingeconomics.com

Again, a key feature of BOJ intervention has been an effort to address a volatile market, but as you can see below, while the direction of travel has been consistent, the only volatility has come from BOJ interventions.  Everything else is a slow, steady deterioration of the yen.

Source: tradingeconomics.com

On the data front, there is plenty upcoming this week in addition to the Fed, including PCE on Thursday.

TodayGoods Trade Balance-$100.0B
 Case-Shiller Home Prices1.3%
 Consumer Confidence92.3
WednesdayFOMC Decision3.75% (unchanged)
ThursdayBOE Rate Decision3.75% (unchanged)
 Initial Claims200K
 Continuing Claims1800K
 Q2 GDP2.1%
 Personal Income0.3%
 Personal Spending0.3%
 PCE-0.1% (3.7% Y/Y)
 Core PCE0.2% (3.3% Y/Y)
FridayBOJ Rate Decision1.0% (unchanged)
 Employment Cost Index0.8%
 Chicago PMI56.0
 Michigan Sentiment 54.0

Source: tradingeconomics.com

Obviously, the FOMC meeting will be the big story along with the earnings data, although I imagine that the PCE data may garner some interest for now, at least until we learn what measures of inflation the Fed is going to use going forward.  My fear is the equity market can crack, for now, and that will drive overall trading activity.  As to the dollar, I see no reason for a large move in either direction until we see new policies.

Good luck

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Much Hotter

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This weekend both wars got much hotter
Iran attacked ships on the water
Ukraine sent its drones
Across three time zones
And struck inside Vlad’s magna mater

Thus, oil has risen a bit
While gold and stocks both trade like sh*t
And soon, CPI
Will prove or deny
That views at the Fed are now split

By now, of course, you know that there has been more military activity in the Strait of Hormuz with the IRGC attacking commercial ships and the US retaliating with significant strikes of military sites along the Strait.  From what I can see, there are factions within the IRGC that do not want to end the conflict and whatever government exists within Iran has no control over them.  As such, it is no surprise that the price of oil (+3.5%) has risen, but even in this scenario, it is well off its overnight highs.

Source: tradingeconomics.com

At this point, I believe the trading community will need far greater proof that there is a shortage of oil before responding with significantly higher prices.  Of course, one way that could come about is if Ukraine continues its success with attacks on Russian oil infrastructure as there has been an uptick in that activity with several refineries having been hit in the past several days and Russia imposing an export ban on diesel.  Net, things in the oil space remain precarious, but for all the analysts who continue to promulgate the idea that the end is nigh, markets continue to disagree.  As always, I vote with markets here.

And, not surprisingly, other markets have responded in a similar fashion to their recent trends with higher oil prices leading to pressure on both stocks and bonds, as well as precious metals while the dollar finds some support.  The thing is, my take is the strength of these correlations has been waning somewhat.  Frankly, and remarkably, it appears as though an increase in military activity in the Strait of Hormuz has become somewhat normalized to traders and they are looking for other, fresher signals as to their next move.

What might those other signals be?  Well, much was made of SK Hynix’s IPO in the US on Friday, which many pundits are now calling the top as the stock fell sharply in Korea overnight, down -15.4% dragging the KOSPI down -9.0% and tech stocks, in general much lower.  Of course, the KOSPI had risen dramatically over the past year, as you can see below, and is still higher by more than 100%  in the past year despite the recent decline of more than 25% since its peak on June 22.

Source: finance.yahoo.com

The problem with calling the top in stocks is that the earnings data, which starts in earnest this week, has been pretty good so far.  If companies continue to earn real profits, investors will continue to purchase stocks.

So, where else can we turn for new information?  Tomorrow brings the latest CPI report (exp 3.8% headline, 2.9% core), and you know that will be heavily scrutinized as the punditry tries to determine the FOMC’s reaction function and if it has changed with the new Chairman.  At this point, I do believe the Fed’s reaction function has changed, and more importantly, I don’t think anybody knows what it will be like, the Fed included.  The previous Fed whisperer, Nick Timiraos at the WSJ put out an article overnight discussing the idea that Chairman Warsh needs to decide whether to undo the most recent rate cuts.  However, there is no evidence that Warsh speaks to Timiraos and based on everything Warsh has said, he is not likely to tip his hand.  Chairman Warsh does testify to Congress this week, but I expect he will deflect all questions about the future path of monetary policy, and let’s face it, with the likes of Maxine Waters on the House committee, they won’t understand anything he says anyway.

And really, those are the only things that I think matter for now, so let’s review the overnight activity in markets.  As mentioned above, stocks are generally under pressure, but not universally so.  For instance, in Asia, Tokyo (-1.9%), China (-1.8%) and the aforementioned South Korea all had rough sessions, but HK, Taiwan, India and Australia were all basically flat on the day.  The big surprise is Taiwan as given the semiconductor weakness; I would have thought that market would have been significantly impacted.  But I guess not.  Meanwhile, European investors appear to be completely focused on tomorrow’s France-Spain World Cup semifinal as equity indices there are virtually unchanged this morning.  As to US futures, at this hour (7:30) NASDAQ futures are weaker by -1.2%, but the other markets are little changed.

Bond yields are higher this morning, but not hugely so.  Treasury yields have edged up by 1bp, and European sovereign yields are higher by 2bps across the board with UK Gilts (+4bps) the real laggard there.  Overnight, JGB yields backed up 4bps as well, but that story has more to do with the GPIF than anything else.

Remember Friday?
Japan was bringing home yen
They were just kidding

Think back to Friday.  Japanese FinMin Katayama mentioned that the GPIF and other Japanese pension funds ought to consider investing more money in Japan and less abroad.  That got tongues wagging about a major policy change coming that would serve to support the yen, and the JGB market while undermining Treasuries as the idea was the GPIF would sell their US Treasuries and buy JGBs instead.  Well, it turns out that is not actually the case.  The GPIF reevaluates its policy annually but has expressed no urgency to change things now despite the FinMin’s comments, at least according to Reuters.  The upshot is that JGBs sold off as did the yen (-0.3%) as per the below chart.

Source: tradingeconomics.com

Perhaps more surprisingly, though, the dollar is mixed on the day, not higher across the board as might have been expected given the uptick in oil and military activity.  So, we have seen weakness in GBP (-0.1%), AUD (-0.2%) and INR (-0.5%) while EUR (+0.1%), NZD (+0.2%), NOK (+0.3%) and KRW (+0.4%) have all had decent sessions.  Net, the DXY is essentially unchanged this morning.

Finally, and quickly, both gold (-1.5%) and silver (-2.0%) are under pressure with the higher oil price although copper (+0.6%) continues to find support and remains well above $6.00/lb.

In addition to the CPI data, it is a pretty busy week as follows:

TuesdayNFIB Small Biz Optimism95.6
 CPI-0.1% (3.8% y/Y)
 -ex food & energy0.2% (2.9% Y/Y)
 Warsh Testimony 
WednesdayPPI-0.1% (6.2% Y/Y)
 -ex food & energy0.3% (5.2% Y/Y)
 Empire State Mfg8.9
 Warsh Testimony 
 Fed’s Beige Book 
ThursdayInitial Claims218K
 Continuing Claims1811K
 Retail Sales0.2%
 -ex Autos-0.1%
 Philly Fed13.5
FridayHousing Starts1.30M
 Building Permits1.40M
 IP0.2%
 Capacity Utilization76.2%
 Michigan Sentiment51.5

Source: tradingeconomics.com

We also hear from 9 other Fed speakers (it almost seems like they didn’t get the memo about reducing communication) but with Warsh on the stand both Tuesday and Wednesday, I don’t think the others will matter that much.  Of course, it will be interesting to hear the other speeches if CPI comes in softer than expected as it may put a crimp in the hawks’ views.

In the end, not that much has really changed I would argue.  The war is an exogenous variable, and the market has learned to largely ignore it.  The Fed is still too uncertain in its new construction for many views to have changed, but I think the one thing we can conclude is that the old models of their reaction function are no longer viable.  My take is the beauty of the task forces for Chairman Warsh is they won’t report for at least 3 months, and probably more like 6 months, so until they report, absent a massive spike in measured inflation, the Fed is not going to do anything.  The Fed funds futures market is now pricing a one-third probability of a hike at the end of this month and certainty of one and 50% probability of two by the end of the year.  I would fade those trades.

Good luck

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