Aurelia Butler

The US chip sector is experiencing both feast and famine. This week the US signed $52bn of subsidies into law. It is a transformative level of support designed to help the expansion of domestic chip manufacturing. The timing, however, is unfortunate. Around the world, demand for chips is collapsing. With inflation in the US at 8.5 per cent it makes sense that spending on PCs and other personal tech is down. The knock-on effect has been reported by Intel and Nvidia. But Idaho-based Micron Technology has also pointed to weaker demand in cloud computing and cars. These two areas were expected to hold up better than consumer tech. Before inflation rose, the chip sector was already dealing with the end of the coronavirus pandemic sales boom and the aftermath of a production increase that could lead to overcapacity. Inventory is being run down. Sales of the chips that power computers, cars and other electronics are unlikely to recover this year. Global sales rose 13 per cent in the second quarter of the year, according to the Semiconductor Industry Association. But within that period, sales in June were down 2 per cent on the previous year. Overall, they are expected to rise just 7 per cent this year, down from 26 per cent in 2021, according to Gartner. The Philadelphia semiconductor index, which comprises the 30 largest US companies involved in the design, manufacture and sale of semiconductors, is down 25 per cent this year. That is twice as large as the decline in the broader S&P 500. Yet valuations remain elevated. Micron, for example, is valued at over 10 times forecast 2023 earnings — a 12-month high. The saving grace is that investment from the US government will not create oversupply. Projects will take years, perhaps decades, to come to fruition. It will take three or four years for production to start at Intel’s Ohio chip plant. Micron’s $40bn investment will be spread over 10 years. The chip cycle is typically around three to five years. With luck, the next upswing will coincide with a renaissance in US manufacturing. More

NEW YORK (Reuters) – Softer than expected U.S. inflation data buoyed investors’ faith that twin rebounds in stocks and bonds will persist in a year of deep losses for both asset classes. Bear markets in both have maximized losses in portfolios this year as rate hikes from the Federal Reserve sapped appetite for risk, and some investors have met recent rebounds in stocks and bonds with skepticism. The S&P 500 is now up about 15% from its mid-June lows, though still down 12% year-to-date, while the Nasdaq is up more than 20% from its lows. Ten-year Treasury yields, which move inversely to prices, have fallen about 70 basis points from their June peak.The Consumer Price Index was unchanged last month after advancing 1.3% in June, the Labor Department said on Wednesday.While obstacles remain for further market gains, investors said the softer-than-expected CPI number will likely moderate expectations for how aggressively the Federal Reserve will need to raise interest rates this year to tame inflation, boosting the attractiveness of both asset classes. “The number is a huge relief because anything that keeps the Fed from doing more damage is a positive for all of us,” said Bryce Doty, senior portfolio manager at Sit Investment Associates.Doty said he was increasing his exposure to longer-dated bonds in his portfolio, betting that yields are unlikely to revisit the highs they have seen this year. GRAPHIC: Twin declines, https://fingfx.thomsonreuters.com/gfx/mkt/znvnerxzkpl/Pasted%20image%201660152737214.png Renewed optimism was apparent in Wednesday’s reaction to the number, which showed the largest month-on-month deceleration of price increases since 1973.The S&P 500 shot higher by 2.1% while yields on the benchmark 10 year Treasury fell as low as 2.67%, before bouncing back to 2.79%. Fed funds futures now show only about a 43% probability of a 75 basis point rate hike at the Fed’s September meeting, down from 63%, before Wednesday’s inflation data, according to Refinitiv data. [FEDWATCH]The Cboe Volatility Index, known as Wall Street’s fear gauge because it reflects investor demand for downside protection in stocks, fell to its lowest level in nearly four months.”One month doesn’t necessarily make a trend but we are certainly encouraged that inflation is moving in the right direction,” said Jack Ablin, chief investment officer at Chicago-based Cresset Capital.The 60/40 Target (NYSE:TGT) Allocation Fund, which follows a standard portfolio technique of keeping 60% of its assets in equities and 40% in fixed income, through Tuesday has rebounded by about 7% from its lows after its worst first half performance since it launched in 2006. Further declines in bond yields and expectations of a less hawkish Fed stand to buoy a rally in many of the growth and technology shares that were badly hit earlier this year. Higher interest rates typically hurt tech and growth stocks as their valuations rely more heavily on future cash flows.In addition to a surge in the tech-heavy Nasdaq, many of the so-called meme stocks favored by retail investors since last year staged impressive rebounds. Retail investors bought a net $6.9 billion worth of stocks in the past week, up from a 2022 low of $4.2 billion of net buys in the week leading up to June 24, according to data from Vanda (NASDAQ:VNDA) Research.STILL CAUTIOUS Plenty of investors remain hesitant to jump on board the rallies in either stocks or bonds. Three previous rebounds in the S&P 500 have wilted this year, the index crumbling to new lows. Big swings in Treasury markets, meanwhile, have wrongfooted investors.”Our view is that we’re going to need … clear and convincing evidence that inflation is on a slowing path, before the Fed probably loses religion as it relates to fighting inflation,” said Jonathan Duensing, head of fixed income at Amundi US.The firm believes 10-year yields will stay in a range between 2.75% and 3.5% in coming months. They were recently at 2.77%.Some Fed officials have already offered a counterpoint to expectations of a dovish pivot from the central bank.Minneapolis Federal Reserve Bank President Neel Kashkari on Wednesday said he is sticking to his view that the U.S. central bank will need to raise its policy rate another 1.5 percentage points this year and more in 2023, even if that causes a recession.Investors will see one more inflation report and another payrolls number before the Fed meets in September. Producer Price Index data, expected on Thursday, may offer further clues on inflation.Still, others think there may be more upside, at least for the short term. Michael Purves, chief executive of Tallbacken Capital, said the S&P 500 could mount a rally to 4,400 – some 5% above current levels – buoyed by stable earnings and recent positive economic data.”This recommendation does not suggest we think we are out of the woods,” he wrote on Wednesday. However, “for the near future, we think risk/reward is heavily in favor of the equity bulls.” More

US stocks rallied on Wednesday, with the tech-heavy Nasdaq Composite index closing more than a fifth above lows hit earlier this year, after fresh data showed inflation steadying in the world’s largest economy.Consumer prices in the US rose 8.5 per cent year on year in July, a slower increase than in June and below economists’ forecasts of 8.7 per cent. The data published on Wednesday also showed that on a month-on-month basis, there was no increase in inflation in July compared with the 1.3 per cent monthly rise in June.The figures added further fuel to a two-month recovery in financial markets, as traders bet the Federal Reserve might be led to temper its aggressive interest rate rises aimed at subduing soaring prices. The Nasdaq Composite, which includes big technology companies such as Apple and Microsoft, rose 2.9 per cent on Wednesday, bringing its gains to 20.7 per cent from lows reached in June. The fast-growing businesses in the index were hard hit this year as investors slashed their global growth forecasts and yields on Treasury bonds surged.The blue-chip S&P 500 stock index advanced 2.1 per cent, closing above 4,200 for the first time since early May. The benchmark has climbed 14.8 per cent from its nadir in 2022, although US stocks in aggregate are still worth about $8.6tn less than when the year started.Measures of volatility, which have been elevated since Russia’s invasion of Ukraine and increased odds of a US recession began to rattle investors, also declined. The Vix index of expected stock market volatility fell below its long-running average of 20 for the first time since April.“Inflation has been expected to peak over the summer for some time, so it was reassuring for markets that there are clear signs that this looks to be happening,” said Oliver Blackbourn, portfolio manager at Janus Henderson Investors.Prices on two-year US Treasury notes, which are particularly sensitive to changes in the Fed’s interest rate policy, rallied following the inflation report as well. The advance pushed the yield on the note down 0.05 percentage points to 3.22 per cent. The yield on the benchmark 10-year Treasury, which moves with inflation and growth expectations, rose 0.01 percentage points to 2.79 per cent.The US dollar, a haven for investors in times of uncertainty, also fell back in reaction to the data, dropping 1.1 per cent against a basket of six currencies.The US inflation benchmark had hit9.1 per cent in June — the highest level in 40 years — prompting the Fed to deliver back-to-back supersized interest rate increases of 0.75 percentage points over the summer.Still, the inflation data show that prices remain well above the US central bank’s 2 per cent target. “While peak inflation is welcome news, it’s probably not enough to allow the Fed to ease off its tightening or to put recession fears to bed,” said Mike Bell, global market strategist at JPMorgan Asset Management.Core inflation, a measure of price growth that strips out volatile categories including energy and food, also came in below expectations, staying at the 5.9 per cent level it hit in June and well below a peak in March of 6.5 per cent.

“I think this might be a new bull market as opposed to a bear market rally. The Fed will pivot eventually, the rate of increases will have to slow,” said Patrick Spencer, vice-chair of equities at Baird. However, others warned that inflation remains high. “It’s nice to see a report come in cooler, but we’ll leave the champagne bottles closed for now,” said Brian Nick, chief investment officer at Nuveen. In Europe, the Stoxx 600 index closed up 0.9 per cent and Germany’s Dax index gained 1.2 per cent after losses in the previous session.Declines in tech stocks dragged down indices in Asia, which closed before the publication of the CPI data. Hong Kong’s Hang Seng closed down 2 per cent, China’s CSI 300 benchmark of Shanghai and Shenzhen-listed stocks fell 1.1 per cent and Japan’s Topix closed down 0.2 per cent. More

WASHINGTON (Reuters) – The main revenue source in the U.S. Senate’s newly passed tax, climate and drugs bill is a novel 15% corporate minimum tax aimed at stopping large, profitable companies from gaming the Internal Revenue Service code to slash their tax bills to zero.The nonpartisan Joint Committee on Taxation estimates that the new tax will add around $222 billion to U.S. government coffers over the next 10 years, down from a previous projection of $313 billion after last-minute changes to the bill. It will apply to companies with more than $1 billion in “book income,” the profits they report to shareholders before the effects of tax deductions and credits.Here are some key details on how it would work:What is the corporate minimum tax?A wealth of deductions, credits and loopholes in the federal tax code has allowed some companies to report no income or negative income to the IRS while reporting strong profits to shareholders. Democratic President Joe Biden has repeatedly singled out Amazon.com Inc (NASDAQ:AMZN) for paying little to no federal income tax despite billions of dollars in profits. If enacted, the tax will serve as a corporate version of the Alternative Minimum Tax for individuals, which prevents the wealthiest Americans from zeroing out their tax bills with investment losses and other deductions and credits.The tax would likely apply to around 150 of the world’s largest companies, according to a Joint Committee on Taxation analysis. These include large pharmaceutical companies and major corporations like Amazon, Apple Inc (NASDAQ:AAPL), Exxon Mobil Corp (NYSE:XOM) and Nike Inc (NYSE:NKE), according to several think tanks that support the new tax. Amazon declined to comment on a potential tax increase. Apple, Exxon Mobil and Nike did not respond to requests for comment.Companies that meet this threshold must calculate their taxes under both the 21% income tax regime and the 15% corporate minimum tax regime — and pay the higher bill.The tax would take effect next year and affect companies that earned an average of $1 billion in book income for three consecutive years. It would also apply to foreign companies that earn $100 million of book income in the United States. What are the exceptions for companies?Some regular corporate income tax credits and deductions are still allowed under the minimum tax, including credits for foreign taxes paid. The carrying forward of prior-year losses to offset future income is also permitted, but only 80% can be applied to reducing taxable income. Credits for research and development expenses are also allowed, with 75% of the value applied to reducing corporate minimum tax. At the urging of Democratic Senator Kyrsten Sinema, lawmakers added a provision to preserve deductions on capital investments such as machinery, vehicles and buildings. The exception would allow companies to more quickly offset these expenses against tax bills.Under another last-minute change to the legislation urged by Sinema, companies controlled by private equity firms are not subject to the corporate minimum tax if they make less than $1 billion of book income, even if that investment firm’s combined portfolio of companies exceeds the threshold. Some private equity firms may be able to shift assets among companies in their portfolios so that each earns less than the $1 billion threshold to avoid the minimum tax. Book income is calculated based on the income companies report to shareholders, and the new tax may give companies an incentive to lower the book income they report, law firm Baker Hostetler said in a recent note. They pointed to a nonpartisan Congressional Research Service report showing evidence of how past efforts to levy taxes based on book income compelled corporate taxpayers to manage their earnings and adjust book income to reduce taxes.Large companies also could try to lobby the nongovernmental Financial Accounting Standards Board for favorable changes to the rules for calculating book income. More

(Reuters) – New York City could introduce a traffic congestion charge of up to $23 a day late next year, which a study released on Wednesday projected would reduce the number of cars entering Manhattan by 15% to 20%.The city wants to charge a daily variable toll for vehicles entering or remaining within the central business district, defined as between 60th Street in midtown Manhattan and Battery Park on Manhattan’s southern tip. New York, which has the most congested U.S. traffic, would become the first major U.S. city to follow London, which began a similar charge in 2003.New York lawmakers approved the plan in 2019, and it was originally projected to start in 2021. But the federal government under President Donald Trump did not take any action.The Federal Highway Administration (FHWA), which must approve the move, said on Wednesday it approved the required environmental assessment. The agency will review public comments submitted by Sept. 9.It did not give a timeline for its decision, but the Metropolitan Transportation Authority (MTA) said the fee could come into effect up to 10 months after approval is granted. That period would be for system design and implementation.”Congestion pricing is good for the environment, good for public transit and good for New York and the region,” MTA CEO Janno Lieber said.Passenger vehicle drivers could pay $9 to $23 to enter at peak times, while overnight tolls could be as little as $5. Drivers could apply existing bridge and tunnel tolls to congestion charges.The environmental assessment released Wednesday found the charge would cut traffic, improve air quality, make buses more reliable and increase transit use by 1-2%. The toll would generate $1-$1.5 billion a year and support $15 billion in debt financing for mass transit improvement. Riders Alliance, a transit advocacy group, endorsed the move and said congestion pricing “cannot happen soon enough.” More

WASHINGTON (Reuters) -The U.S. Securities and Exchange Commission (SEC) on Wednesday proposed a rule to improve the quality of disclosures it receives from large hedge funds about their investment strategies and leverage. The rule, which was proposed in conjunction with the Commodity Futures Trading Commission (CFTC), is part of a broader regulatory effort to increase transparency of private funds amid worries the industry is a growing source of systemic risk.The proposal confirmed a Reuters report on Tuesday.It would expand reporting requirements for advisers and large hedge funds with a net asset value of at least $500 million when filing so-called Form PF with the SEC.Introduced following the 2007-2009 global financial crisis, Form PF is the primary method used by private funds to disclose confidentially to the SEC purchases and sales of securities.The new rule would require funds to provide more details on their investment strategy and exposure, including borrowing and financing arrangements, open positions and certain large positions. It would also require large hedge funds to report their cryptocurrency exposure, the SEC’s Democratic chair, Gary Gensler, said.”We’ve tried to take a measured approach, but add to the detail in the context of systemic risk,” he told reporters.The securities regulator – consisting of five voting members including Gensler – voted 3-2 to propose the measure, which is subject to public consultation before it can be adopted.SECTOR SCRUTINYThe proposal follows a January draft rule to improve other Form PF disclosures. Regulators grew concerned over risk in the private fund industry after hedge fund de-leveraging contributed to turmoil in the U.S. Treasuries market in March 2020. Hedge funds also played a role in last year’s meme stock saga involving GameStop Corp (NYSE:GME) and other companies. Critics argue that while the sector ballooned following the 2007-2009 financial crisis, regulatory scrutiny of private funds – which are heavy users of borrowed financing – has not kept up.The International Organization of Securities Commissions, which comprises regulators across the world, said in a January report that some private fund leverage is being hidden from view.SEC Commissioner Hester Peirce, a Republican, on Wednesday criticized the proposal, saying the information was unnecessary and that private fund investors – insurance companies, endowments, pension funds and high-net worth individuals – were capable of assessing their own risks.”Why we need the new information and what we plan to do with it are questions left to the reader’s imagination,” Peirce said in a statement prepared for the open meeting. Industry groups, including the Alternative Investment Management Association and the Managed Funds Association (MFA), said the proposed changes were onerous and could duplicate existing reports.”The SEC should focus on better utilizing (existing) information rather than imposing new burdens on fund managers,” the MFA’s chief executive, Bryan Corbett, said in a Wednesday statement. More