Semiconductors Bring Down Stocks Despite Solid Economic Reports

Semiconductors - Stocks Fall Slightly Despite Good Economic News

Semiconductors ended up bringing down stocks even in light of great economic reports. The stock market fell 0.16% on Friday which isn’t a big deal in itself. But surprised investors because retail sales and industrial production both beat estimates.

Regardless of what stocks say, I’m more bullish because of those reports. Investors are optimistic that the economy won’t fall into a recession soon. The reports caused the CNBC median estimate of GDP growth to increase from 1.7% to 1.9%. Nowcasts also improved as I will review later in this article.

Details Of The Action: Broadcom Craters

Semiconductors - It wasn’t a good day for stocks as the semiconductor industry brought the Nasdaq down 0.52%. Broadcom caused the chip industry to fall as its stock declined 5.2% on weak earnings. The firm stated it is taking a $2 billion sales hit because of the trade war.

This will be one of the first stocks to rally when there is a trade deal later this year. The firm actually beat EPS estimates by 5 cents as EPS was $5.21. Revenue of $5.52 billion missed estimates by $160 million.

Semiconductor solutions revenue was $4.18 billion which missed estimates by $90 million.

Broadcom’s CEO stated, “We currently see a broad-based slowdown in the demand environment, which we believe is driven by continued geopolitical uncertainties, as well as the effects of export restrictions on one of our largest customers. As a result, our customers are actively reducing their inventory levels, and we are taking a conservative stance for the rest of the year.”

This report is a negative signal for the global economy. It shows how the trade war is hurting actual businesses opposed to macro analysis. That shows how it effects the economy.

Utilities Hit A Record High

Semiconductors - Russell 2000 fell 0.87% and VIX oddly fell 3.41% to 15.48. It’s weird to see such a decline in the VIX on a down day for stocks.

CNN fear and greed index fell 1 point to 38 which is fear. Worst 2 sectors were tech and energy which fell 0.87% and 0.65%. Best sector was the utilities which rose 1.05%. That’s a new record high as the sector is up an astounding 16.92% year to date. So much for being a boring sector.

I was wrong to say the 10 year yield needed to fall below 2% for it to hit a record high as the 10 year yield is at 2.08%. That’s only 3 basis points off its 52 week low, but it’s not below 2%.

As you can see from the chart below, as of Thursday, almost 80% of the utilities stocks were above their 50 day moving averages. This sector almost can’t get much more overbought. The good economic reports are bad news for the long bond and the utilities sector.

Semiconductors - Industrial Production Beats Estimates

Headline May industrial production growth beat estimates and the April reading was revised higher. Monthly growth went from -0.5% to -0.4% in April. Growth was it 0.4% in May which doubled estimates.

Manufacturing growth of 0.2% met estimates and was above April’s reading of -0.5%.

As you can see from the chart below, yearly industrial production growth went from 0.9% to 2.1%. This is the rebound I expected after the last report came out. April’s reading was weak because of a calendar quirk.

Yearly manufacturing growth improved from -0.3% to 0.7%. If that’s the mini cycle trough, this slowdown is nowhere near as weak as the last one as growth troughed at -2% in November 2015.

Improvement in utilities was a big reason for the monthly improvement.

Semiconductors - Monthly growth was 2.1% which followed -3.1% growth in April. On a yearly basis, growth improved from -4.8% to 0.2%.

These readings can be volatile. I’m skeptical of utilities driving industrial production growth. But while it helped monthly growth, it was a drag on yearly growth. And it simply was less of a drag than in April.

Finally, the capacity to utilization rate rose from 77.9% to 78.1% which beat estimates for 78%. It’s still well below its cycle peak of 79.6% in November 2018.

ECRI Leading Index Falls

Semiconductors - June 7th update of the ECRI leading index showed yearly growth fell from -1.3% to -1.9%. I can’t see the growth rate falling much further in July. Comps are about to get much easier. I’m surprised the index’s growth rate fell because stocks rallied so sharply.

This index actually increased from 144 to 144.4. Investors project the index’s growth rate to bottom within the next couple weeks. Weak June readings imply early 2020 economic growth won’t be that strong.

Next week the June coincident index will come out. Investors expect growth to fall from the 2% rate in April. I’m interested to see if it bottoms above or below the 1% rate it bottomed at in 2016. Personally, I think the bottom will occur this summer.  

Semiconductors - Nowcast Updates

Because of the great economic reports, the Atlanta Fed GDP Nowcast growth rate improved from 1.4% to 2.1%. That’s much higher than the Blue Chip consensus which is at 1.7%.

Retail sales and industrial production reports caused the estimate for real personal consumption expenditures growth to improve from 3.2% to 3.9%. If that’s accurate, my bet that consumption growth in Q2 will be higher than it was in Q1 will be accurate.

St. Louis Fed Nowcast estimate is at 2.9%. If that growth rate is reached, the economic slowdown will have been limited to just Q1. I think it’s unlikely growth will be above 2.5%.

NY Fed Nowcast increased from its trough as it went from 1.01% to 1.36%. If growth comes in that low, fears of a recession will increase. Industrial production report increased the Nowcast by 0.21%.

Retail sales report improved it by 0.1%. Q3 Nowcast was also helped by this week’s data as it increased from 1.31% to 1.7%. I expect Q3 growth to be similar to Q2 growth.

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