The Consumer Price Index soars … light at the end of the tunnel for the semiconductor shortage … loads of negative investor sentiment is good … the world eases Covid restrictions
The latest inflation numbers came out red-hot today.
The January Consumer Price Index (CPI) showed that inflation surged 7.5% on a year-over-year basis. That’s more than the forecast of 7.2% and the largest gain since 1982.
Even if we strip out gas and groceries, the CPI increased 6%, compared with the estimate of 5.9%.
This has put pressure on the 10-year Treasury yield. As I write Thursday afternoon, it has popped, piercing 2% for the first time since August of 2019. It’s now at 2.03%
Given this, many investors are now asking the same question…
Instead of just a quarter-point raise, will the Fed bump rates a half-point next month? After all, Federal Reserve Chairman Jay Powell has indicated that he wouldn’t rule out the possibility of a half-point hike.
Let’s turn to legendary investor, Louis Navellier, and his Accelerated Profits Special Market Podcast from this morning:
There’s a lot of pressure on the Fed to raise rates, but it’s not going to do anything. Just so you know.
The Fed is still winding down their quantitative easing. But in the wake of today’s CPI, I would be in the camp that four rate increases are likely this year. Most of the big banks are [forecasting] five to seven.
So fascinating times.
As Louis has pointed out before, the Fed will have a difficult time raising rates too high, too fast. That’s because doing so would make the Fed’s own debt service, as well as that of U.S. consumers, too difficult to handle.
This means there’s a practical limit to how much the Fed can do without risking blowing a hole in the side of the economy.
We’re bound to hear from the Fed presidents in the coming days as they discuss this inflation data. We’ll keep you up to speed.
***What could help the inflation problem? Good news on the semiconductor front
Earlier this month in the Digest, we focused on the supply crunch in the semiconductor sector. Click here if you missed that issue.
In short, semiconductors are a crucial component of virtually all electrical/technology products. The problem is there’s been a global shortage in the wake of the Covid lockdowns.
But there’s light at the end of the tunnel.
From Fitch Ratings earlier this week:
Global semiconductor supply shortages could begin to ease in 2H22, despite pockets of near record low inventories throughout the supply chain, due to increased capacity and the potential for demand to moderate from currently high levels, says Fitch Ratings.
We’re already seeing pockets of normalization today.
For example, on Tuesday, Reuters reported on the semiconductor shortage relative to the Mexican auto market. It noted that the Mexican Automotive Industry Association (MAIA) said chip supply should reach pre-pandemic levels in the second half of 2022.
Meanwhile, the European Union is working to tackle the problem by investing in chip production.
From CNBC:
The European Commission, the executive arm of the EU, announced a new European Chips Act on Tuesday that will enable 15 billion euros ($17.11 billion) in additional public and private investments until 2030. This is on top of 30 billion euros of public investments that had previously been earmarked.
This comes after the House of Representatives passed its own bill a couple weeks ago. It would provide $52 billion in grants and subsidies for semiconductor manufacturers and $45 billion in grants and loans to support supply chain resilience and American manufacturing.
***All of this is pointing toward a multi-year bull market as manufacturers try to catch up with demand
From The Wall Street Journal:
Global chip sales rose 25% in 2021 from the prior year to a record $583.5 billion, according to research firm Gartner Inc…
Intel Corp. CEO Pat Gelsinger, after the company reported record sales for last year, said “2022 will only be better.”
It’s important to note that the semiconductor sector is characterized by boom/bust cycles. This happens when shortages lead to the creation of new chip factories, which eventually oversaturates the market. That leads to chip companies pulling back on production, which eventually leads to a new shortage. Rinse and repeat.
Today, manufacturers are ramping up supply to deal with shortages. However, analysts at Bain suggest the sector won’t hit overproduction levels until 2025.
In others words, the semiconductor trade is on for now.
***Meanwhile, negative investor sentiment suggests stocks are more likely to climb in the near future
It’s a peculiarity of investing…
When a majority of investors believe the same market narrative, the opposite often happens.
Today, the market weakness that began at the start of the year has left many investors rattled. They’ve pulled their money from the market and/or hedged their portfolios, expecting a worse market collapse.
Earlier this week, Jason Goepfert from Sundial Capital found that hedges on U.S. stocks have risen to the highest level in nearly two years.
But when the majority of investors are scared, stocks often climb. It’s when everyone is recklessly bullish that markets often plunge.
Goepfert has an equity-hedging index. He notes that it just climbed above 80% for the first time since April 2020.
Here he is with the significance of what that means:
This is only the 33rd week in 22 years that it’s been above that threshold.
After 27 of those weeks, the S&P 500 rallied during the next couple of months.
This is no guarantee that stocks will continue to enjoy an upswing, but it’s certainly a positive sign.
***The biggest impact on the market in the long-term is the health of the global economy, and the world-wide trend we’re seeing toward easing Covid restrictions is a huge positive
In recent days, several states including California, Delaware, Oregon, and New Jersey announced that indoor masking is no longer required, or such requirements are coming to an end.
Over in Europe, the Czech Republic has canceled a requirement for people to show proof of vaccination to attend public events, bars or restaurants or use certain services.
In Denmark, Prime Minister Mette Frederiksen announced that the country no longer considers COVID-19 to be a “socially critical disease” and would lift its restrictions.
Sweden has virtually declared the pandemic over, scrapping nearly all of its pandemic restrictions and ending Covid-19 testing.
Meanwhile, up in Canada, the trucker protest appears to be leading toward meaningful policy change.
From WION:
Truckers paralyzing the Canadian capital in anger at Covid rules showed no sign of backing down Tuesday, as several of the nation’s provinces announced it was time to roll back restrictions that count among the world’s toughest.
With authorities struggling to bring the protest movement to heel, Saskatchewan in the country’s west said Tuesday it was ready to lift all pandemic restrictions, with Quebec and Alberta also signaling plans to ease measures.
In the capital, Prime Minister Justin Trudeau — who a day earlier issued a stern warning the protests “had to stop” — appeared to shift tone, saying he understood “how frustrated everyone is” and that “the time is coming when we will be able to relax.”
Even Australia, which closed its borders to virtually all noncitizens, will reopen to fully-vaccinated tourists.
This widespread return to normalcy will be a tailwind for the global economy, helping increase the velocity of money and padding bottom lines everywhere.
One note…
The Canadian trucker protest is now blocking the Ambassador Bridge into the United States. This is a critical thoroughfare for trade. This longer this continues, the greater the risk it further disrupts supply chains.
From Canadian Governor, Tiff Macklem:
If there were to be prolonged blockages at key entry points into Canada that could start to have a measurable impact on economic activity.
We’ve already got a strained global supply chain. We don’t need this.
Echoing Louis, fascinating times.
We’ll keep you updated here in the Digest.
Have a good evening,
Jeff Remsburg
