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Market Insights

More uncertainty, more rate hikes

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Another action-packed week in markets and there’s no let up in the uncertainty. Neither is there much sign of central banks easing back from their aggressive hiking paths.

And yet, there are signs of cracking in the global economy, and signals at the company level too. Take Micron for example. We highlighted their earnings call as one to watch at the start of the week in More misery for Micron?

The results disappointed once again. In prepared remarks, Micron said that :

Our fiscal Q4 financial results were impacted by rapidly weakening consumer demand and significant customer inventory adjustments across all end markets. We are responding decisively to this weak environment by decreasing supply growth through significant cuts to fiscal 2023 capital expenditures (capex) and by reducing utilisation in our fabs

An unprecedented confluence of events has affected overall demand, including COVID-related lockdowns in China, the Ukraine war, the inflationary environment impacting consumer spending, and the macroeconomic environment influencing customers’ buying behaviour in multiple segments. In addition, inventory adjustments at customers across all end markets are also contributing to demand weakness.

Due to the sharp decline in near-term demand, we expect supply growth to be significantly above demand growth in calendar 2022, contributing to very high supplier inventories for both DRAM and NAND.

In layman’s terms, that means supply is massively out of balance with demand. Inventories are high, which means lower demand for Micron’s products while this readjusts, and they are cutting costs and production to facilitate this.

In the second half of 2023, Micron expects strong revenue growth. Despite the disappointment, the market response may hint that they are giving the chipmaker the benefit of the doubt:

Micron

Having fallen below the 51.41 low, can Micron’s share price recover the level and rally further?

Then there’s Apple. Just as Micron was warning about slower demand, Apple was increasing production, anticipating a scramble for their new iPhone 14. This week, that decision was apparently reversed and the shares traded lower…

Apple warns of production cuts, shares fall in pre market

Apple

There’s no getting away from a slowdown in global demand. It’s in earnings calls, data releases and economic commentary, but there are concerns that demand may be cooling rapidly. The sudden plunge in freight pricing and shipping activity is a signal that backs up the warnings from companies such as Micron.

Unfortunately, inflation remains stubbornly high. German inflation printed at 10%, the Netherlands an astronomical 17%(!), and across the pond the Fed’s favourite core PCE measure came in hot at 0.6% M/M, beating expectations of 0.5% and way above the 0.1% advance last month.

In response, the ECB heads are talking loudly about another 75bps hike at the next meeting, while Fed speakers are drilling home the message that they will not stop until inflation is under control.

Vice Chair Brainard said in a speech on Friday that “monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target. “For these reasons, we are committed to avoiding pulling back prematurely”.

Next week the focus is down under, as both Australia and New Zealand announce their interest rate decisions. Uncertainty is high, and markets are starting to seek guidance on where the pain point will be for policymakers.

For now, they’re giving no hints of slowing down…

Not investment advice. Past performance does not guarantee or predict future performance.

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Important notice

This page/website is not directed to EU clients and falls outside the European regulatory framework and is not in the scope of (among others) the Markets in Financial Instruments Directive (MiFID) II.
By continuing you acknowledge to view the content provided by Skilling (Seychelles) Limited, which is authorised and regulated by Seychelles Financial Supervisory Authority, and that your decision was made independently and at your exclusive initiative and no solicitation or recommendation has been made by Skilling or any other entity within the group.

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