By Matthew Gutierrez, Shawn O’Malley, and Weronika Pycek
⚡ Who wants to be an electrician?
Average earnings are rising for the profession to nearly $40 an hour. The U.S. Bureau of Labor says there’s an ongoing electrician shortage, and more electricians will be needed as we rely more on renewable energy. See our Chart of the Day for this visualized.
It remains a tight labor market where the number of job openings outnumbers the jobless by far.
-Matthew
Here’s the rundown:
Today, we'll discuss the three biggest stories in markets:
Inflation is falling, again
Intel’s involvement in a $10 billion IPO
Why Japan’s stock market is leading the way
All this, and more, in just 5 minutes to read.
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CHART OF THE DAY
IN THE NEWS
Whether or not it feels like it, inflation continues to cool off. The days of under-$5 lattes might still be behind us, but Tuesday's inflation report shows inflation has fallen for 11 straight months and is now the lowest it's been in about two years.
The consumer price index (CPI) increased only 0.1% for the month and 4% from a year ago.
Core CPI rose 0.4% and 5.3% year-over-year, excluding food and energy. Core inflation is a particular focus area for Fed officials because it helps them gauge the underlying sources of inflation that can be hardest to tame.
Housing costs, for example, still represent a major driver of inflation. Rent rose 0.5% in May over the month before, only a minor improvement from a 0.6% increase in April. Rent is still up 8.7% over last year, and costs for used cars and trucks are also proving difficult to bring down, as prices in both increased 4.4% in May.
Inflation is still well above the 2% target and about twice the rate before the onset of the pandemic in 2020.
Why it matters:
It's been nearly a year since inflation rose to its highest levels in 41 years. June 2022 CPI registered at 9.1% amid high food, housing, and gasoline prices. That was why the Fed kept raising rates aggressively throughout last year. But now, the numbers likely take pressure off the Federal Reserve to continue raising interest rates.
The Federal Reserve has raised its benchmark interest rate at a breakneck pace since March 2022, when U.S. stocks began their move toward the worst year since 2008.
The Fed's moves have brought baseline interest rates (the federal funds rate) to between 5% and 5.25%, the highest level in 16 years.
The goal? Steepen borrowing costs to hamper demand for lending and investments, including mortgages and auto loans. The idea is that with higher rates, demand for new houses and cars falls into better balance with supply.
One investment officer summed up the environment well for The Washington Post:
“The bigger question for inflation is: Where is it going? Where does it settle out? Are we just going to go back to this 1-to-2% inflation trend that we got so used to? Or is there something so structural that after the spike, after the comedown, are we going to settle at 3%?”
He added: “That plays into: How high do rates stay, and for how long?” With evidence of inflation continuing to cool, that remains the next question for the year’s second half.
💾 Intel in Talks for Anchor Role in Arm’s $10 Billion IPO (Bloomberg)
Intel, a global semiconductor chip manufacturing giant, is in discussions with Arm, the British chip designer backed by SoftBank Group, to become a strategic investor in one of this year’s largest initial public offerings (IPOs). To be clear, these “chips” aren’t the potato kind — they’re the microchips powering our modern world.
Arm, which designs these sorts of mind-numbingly complex chips, plans to secure a Nasdaq listing later this year, seeking to raise $10 billion.
The company’s designs have broad applicability, spanning a wide range of products, including Broadcom's networking chips, Apple's processors in iPhones and Macs, Qualcomm's chips for mobile phones, and Nvidia's system applications.
Having a well-known and reliable anchor investor, like Intel, in an IPO can boost momentum, especially in a challenging market for new listings and a volatile year in the industry.
Why it matters:
Both parties can benefit differently here. Teaming up with Intel could help Arm, as Intel’s involvement with the IPO spurs additional interest among other potential investors.
SoftBank founder, Masayoshi Son, hopes Arm's upcoming IPO becomes the largest listing ever made by a chip company, considering the company's valuation estimates range from $30 billion to $70 billion.
And Intel needs access to Arm’s cutting-edge designs to re-establish itself as a premier chip manufacturer if it hopes to compete with its largest rivals, based in East Asia, like Samsung or Taiwan Semiconductor Manufacturing Co. Two months ago, the two companies unveiled an agreement doing just that, with Intel now planning to manufacture certain chips for Arm.
While the initial manufacturing partnership is limited, the collaboration could potentially expand into chips for automobiles, data centers, and aerospace.
In departing from its exclusive focus on manufacturing its own designs for over 50 years, Intel is making a dramatic strategic shift to reclaim lost market share.
The geopolitical implications are clear, too: By expanding its outsourced chipmaking business, Intel’s helping reduce the overconcentration of key chip manufacturing in Taiwan, which sits at the center of growing U.S.-China tensions.
🇯🇵 Japan’s Stock Market Leads the Way (CNBC)
On Tuesday, Japan’s benchmark stock index, the Nikkei 225, surpassed its peak set 33 years ago after rising more than 28% year-to-date.
Several factors have revived Japanese stocks: Increasing inflation, improvements in corporate governance, and Warren Buffett’s endorsements (aka the ‘Buffett Effect’ we covered yesterday).
Inflation has supported Japanese markets while the rest of the world fights to slow price increases because Japan’s economy is the go-to example for stagnation, notoriously unable to generate enough inflation for stable economic growth.
But the country’s consumer price index rose at its fastest pace in 41 years in January at 4.3%. Still, Japan’s central bank has continued with monetary policies (low-interest rates) supporting inflation and stock prices.
For Japanese companies, the onset of moderate (by global standards) inflation enables corporate price hikes that may grow profit margins, hence investors’ excitement.
As we saw during the Covid-19 pandemic, companies often passed on price increases that expanded profit margins, using inflationary factors like “supply chain disruptions” as a justification.
For example, if a firm’s input costs rise by 4%, they might raise prices by 6% and actually boost profit margins (raising prices by more than cost increases). Consumers may be more willing to accept those price hikes as necessary with headlines about inflation dominating the news.
Why it matters:
Shifting inflationary expectations is a particularly big deal in Japan, where deflation — falling prices — has previously impacted shoppers’ and businesses’ decisions.
Artemis Investment Management’s head of global equities adds, “Deflation encourages people to postpone spending and companies to hold off investing. Modest inflation…turns the momentum the other way.”
Elevated inflation also erodes savings more quickly, potentially pushing Japanese households to take on greater risk and pursue higher returns by investing more in domestic stocks.
As mentioned, corporate governance changes also support the narrative for Japanese stocks, where companies’ management has made enemies with shareholders historically.
To address that impediment to investors, the Tokyo Exchange Group recently adjusted its rules, pressuring companies to “comply or explain” why their stocks are trading below a price-to-book ratio of one, which indicates poor use of capital.
This isn’t an uncommon issue: In March, the exchange said about half of its “prime” listings (companies with the largest market values) traded at price-to-book values of less than one. Such companies would now risk being delisted from the stock exchange as soon as 2026.
What steps could firms take to address this? Less cash hoarding and more share buybacks and dividends.
As another investor explained, the recent initiatives are a “game-changing moment, because it’s going to challenge a lot of companies…to improve profitability and support their share price.”
MORE HEADLINES
🚨 FTC files to block Microsoft from buying Activision Blizzard
⛳️ U.S. Senate opens investigation into the PGA Tour’s merger with LIV Golf
🚀 This company wants to bring drug manufacturing to space
TRIVIA ANSWER
See you next time!
That's it for today on We Study Markets!
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