Powell Sees No Rate Hikes, More Treading Water for Rate Cuts
Plus another swarm of thematic signals!
Equity futures point to a rebound this morning following some see-saw action in US equity markets following the Fed Chair Powell’s post-policy meeting presser. During that press conference, Powell hit home that the Fed doesn’t see it as appropriate to cut rates until it has more confidence that inflation is sustainably approaching its 2% target. Much to the market’s relief, Powell reiterated the Fed’s policy is sufficiently restrictive, and that it does not see the need to hike rates any further. However, the road to rate cuts is likely to take longer than previously thought.
With a light economic calendar, investors will ponder that today ahead of tomorrow’s April Employment Report and back-to-back April Service PMI reports. Investors will be looking to see if the Services sector continues to carry the overall economy, if jobs, as well as wage gains, will continue to carry consumer spending, and if Service sector inflation pressures escalated during the month. Setting the stage, ADP’s Employment Change Report for April showed the jobs market continues to outperform expectations, but wage pressures remain in place. The message in contrasting yesterday’s two April Manufacturing PMI reports is that activity slowed during the month, but inflation pressures accelerated. Per ISM, the April Manufacturing PMI Price component continued the uptrend in the data we’ve seen so far this year, hitting the highest level since early 2022. The culprit? Raw material and energy prices. In the last few days, oil, copper, cocoa, and other commodity prices have softened but remain well above levels from earlier this year.
After today’s market close, Apple (AAPL) will report its quarterly results and shares its near-term outlook. Recent days have shown that in the case of AMD (AMD), Microsoft (MSFT), and Super Micro (SMCI), good earnings reports aren’t good enough. Sequentially down June quarter guidance from RF semiconductor companies Skyworks (SWKS)and Qorvo (QRVO) hit their shares but also added a note of caution about Apple’s near-term outlook for iPhone. Because Apple is the second largest component of the S&P 500 (5.85%) and the second largest in the Nasdaq Composite(11.1%), guidance for the current quarter that underwhelms market expectations is likely to weigh on the market as we close out a week that continues the market’s April move lower. To us, that supports holding our Market Hedge model as we close out the week.
As it relates to our AI and Digital Infrastructure & Connectivity models, South Korean chipmaker SK Hynix shared that its high-bandwidth memory (HBM) chips used for AI chipsets were sold out for this year and almost fully booked for the next year, amid demand for semiconductors required to develop AI services. This follows recent comments from Micron (MU) that its HBM chips were sold out for this year and the bulk of its supply for next year was already booked. And on the topic of HBM chips, earlier this week Samsung (SSNLF) noted that 2024 shipments of its HBM chips are anticipated to grow over three-fold.
And while Qualcomm (QCOM) reiterated its outlook for flat smartphone market sales this year, with 5G models climbing high-single to low-double digits, the company endorsed the coming AI-on-device upgrade cycle for PCs, smartphones, tablets, and other devices. We see this driving not only our AI model, but the ensuing acceleration of content creation and consumption should tax existing digital networks and infrastructure, driving incremental spending on both. The positions the companies found in our Digital Infrastructure & Connectivity model extremely well.
Model Musings
Aging Population/Consumer Inflation Fighters
“While inflation has afflicted Americans of every age, senior citizens are often in a more difficult predicament because many live off fixed incomes. Many depend heavily on Social Security – some 42% of elderly women and 37% of elderly men rely on the monthly payments for at least half their income, according to the Social Security Administration… Senior citizens typically get an annual cost-of-living adjustment that’s based on inflation. But many of them and their advocates have long complained that the increases don’t keep up with their rising expenses. They aren’t wrong: Inflation has eaten away at 36% of Social Security benefits’ buying power since 2000…” Read more here
Artificial Intelligence/Cloud Computing/Digital Infrastructure
“Demand for artificial intelligence bolstered sales growth in Amazon’s cloud computing division at the start of the year, the company said on Tuesday, as executives laid out plans to spend huge sums to support the fast-growing technology… Olsavsky said on Tuesday that Amazon expected its capital expenditures this year to increase “meaningfully” compared with $48.4bn in 2023, primarily to support growth in cloud and AI. Amazon invested $14.9bn in property and equipment during the latest quarter, which would be “the low” for the year, he said.” Read more here
Cybersecurity
“The US government is warning that pro-Russian hacktivists are seeking out and hacking into unsecured operational technology (OT) systems used to disrupt critical infrastructure operations.” Read more here
“Panda Restaurant Group, the parent company of Panda Express, Panda Inn, and Hibachi-San, disclosed a data breach after attackers compromised its corporate systems in March and stole the personal information of an undisclosed number of associates… Panda has yet to disclose the total number of individuals whose personal information was accessed or stolen in the incident.” Read more here
“Healthcare organisations across the globe are increasingly at risk from cyberattacks, according to a recent report by data security researcher Rubrik Zero Labs… The report noted that healthcare organisations manage 22% more data than the global average. Their data estates expanded by 27% in the past year, and sensitive records grew by 63%, well above the global average of 13%.” Read more here
Homebuilding & Materials
“With the majority of homeowners in the U.S. now holding a mortgage with a rate less than 6%, there’s little incentive for them to move. In fact, 40% of homeowners don’t believe they could afford to buy their own home if they were to buy it today, compared to when they bought it five to 10 years ago, according to a survey by Redfin." The median-priced $420,000 home at a 7.1% mortgage rate would require a monthly housing payment of $2,864, according to the brokerage, which is a record high.” Read more here
Luxury Buying Boom
“Estee Lauder lowered its annual organic sales estimate on persistent softness in mainland China's prestige beauty space, even as a demand rebound for its pricey items in the U.S. and Asia-Pacific markets drove a profit forecast raise.” Read more here
Safety & Security
“Some European NATO member countries are calling for the alliances's defense spending target to be raised to 3 percent of GDP from the current 2 percent, the EU's top defense official said Tuesday… The pressure to boost spending comes as Ukraine's defensive war against Russia drags into its third year.” Read more here
“Japan's defense-related budget for fiscal 2024 has expanded to 1.6% of gross domestic product, steadily approaching the 2% threshold in line with Western economies… Japan previously aimed to spend no more than 1% of its GDP on defense. Germany was once as cautious about stepping up spending but said in February that it would reach the NATO target of 2% -- a first since shortly after the end of the Cold War. The U.K. now aims to spend 2.5% of GDP on defense by 2030.” Read more here
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Consumer Inflation Fighters - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Cybersecurity - Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption or destruction of data.
Digital Infrastructure & Connectivity -The buildout and upgrading of our Networks, Data Storage Facilities, and Equipment.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Precision Ag & Agri Science – Companies that look to address shrinking arable land by helping maximize crop yields utilizing technology, science, or both.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The Strategies Behind Our Dividend Income Models
Monthly Dividend Model – Pretty much what the name says – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed below.