The semiconductor cycle is turning and, with it perhaps, the short, sharp period of durables inflation experienced globally over the last two years. Shortages in the semiconductor industry will soon give way to a glut, due to a significant expansion in capacity post-pandemic. Intel and Nvidia have both warned of rockier months ahead. Micron’s profit warning last Friday, due to waning demand for chips used in computers and smartphones, added a sting in the tail to the fall in semiconductor stocks.
Chinese demand for goods has fallen off a cliff. Gartner has now forecast that PC shipments will decline 9.5% y/y in 2022. Manufacturers are now cutting prices: the NBS PMI for producer prices signals a sharp deceleration in the y/y growth rate of the official Chinese PPI. This will spill over to manufacturers globally, at a time when supply chain pressures are already diminishing.
The impending deflationary impulse, combined with elevated short-term price pressures, supports the view for imminent yield curve inversion. Bond investors have begun to get ahead of the curve on longer-dated Treasuries, with the 10-year yield falling to 2.79% (as of 5pm UK time). But to fight the short end might be unwise at this juncture. The Fed is willing to pay whatever price it takes to lower inflation expectations amongst consumers.
Europe is highly exposed to the current energy crisis: the bailout of energy companies has only just begun. The share of euro-denominated corporate bonds trading at distressed levels jumped in June. The surge in electricity and gas prices for winter should continue to push the euro and sterling lower. The euro is quickly headed for parity against the dollar.
