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My view on what's going on in the financial markets and the global economy, and a few other things that might interest me from time to time.

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BIPs, RIPs and CHIPs

Three things to start your (holiday-shortened) week

“Bips”: With the debt ceiling issue close to being sorted, attention will begin to refocus on the next FOMC meeting set for June 13-14, with a rate decision to be announced on June 14. Whereas a few weeks back investors seemed to believe with high confidence that the Fed would not increase the Fed Funds rate further, the odds are now 64.2% that the Fed will in fact serve up a further increase in the key rate of 25bps (“bips”) according to the CME FedWatch Tool. The catalyst has been a string of hotter-than-expected inflation data for April, most importantly core PCE released late last week. The Bureau of Economic Analysis reported that core PCE increased 0.4% MoM and 4.7% YoY for April, both increases over March PCE data (BEA release here). Importantly at the upcoming FOMC meeting, we will also get a revised set of Economic Projections from the Fed. This week, it is worth keeping an eye on important employment data that will be released including the JOLTS report (Weds), initial jobless claims (Thurs) and May unemployment data (Friday, consensus 3.5%).

Rips: The focus today is likely to be on whether or not US equities will rip with a debt ceiling agreement now agreed although not yet approved by Congress. Personally (and this might be why you read by gibberish), I don’t think a reaction like this is justified because this was always going to get resolved. Even if you don’t believe that, equities have been heading only one direction – higher – throughout this recurring drama. Am I too jaded in my views? Perhaps – US equity futures are higher this morning, so we might see 4,300 on the S&P 500 index before we see 4,100 again (Friday close 4,205).

Chips: Nvidia ($NVDA) got a lot of attention last week with its blow-out 1Q24 earnings (ended April 30), at least vis-a-vis analysts’ consensus expectations which were so far off it is almost laughable. The AI “feel good” quickly spread into other chip designers and manufactures. Do you know what Nvidia really does though? They design chips, but manufacture none, relying on one of the world’s three principal semiconductor foundries (in this case principally Taiwan-based #TSMC) to handle manufacturing. I am mentioning this because I just finished reading a book “Chip War” by Chris Miller, recommended to me by a reader of EMC. This book was extremely enlightening as to how the global inter-connected supply chain for semiconductor chips really works. Rather than paraphrase, here’s an excerpt from the book’s / author’s website in turn taken from a review in The New Yorker which sums up the book:

Silicon chips undergird all of modern digital technology, yet only a handful of companies are capable of producing them or the nanometre-scale precision instruments required for their manufacture—making the industry “a triumph of efficiency,” Miller writes, but also creating “a staggering vulnerability.” This history traces the chips’ development, from their invention, in America, in the nineteen-fifties, to the establishment of a global supply chain concentrated in East Asia. Today, nearly all advanced processor chips are produced in Taiwan, and Miller mounts a convincing argument that shifting control of the industry could dramatically reshape the world’s economic and political orders.” – The New Yorker

The Technology ETF SPDR is 26% invested in semiconductors, and the Semiconductor ETF SPDR offers a pure play in this sector, highly watched but (lest we forget) cyclical.


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