Markets, Semiconductors, And Oil Prices

and we will bring you Phil Orlando. He's the chief equity market strategist and ahead of client portfolio management at Federated Hermes. And what an insane weekend, Phil Um. You know, do you have to look at at the playbook, rip it up, throw it away, right up a new one when you see this kind of volatility and commodities, well, for for sure. First of all, Matt, thank you very much for having me back on um. You know, we

we had this longer term view going back. I guess a year and a half ago that oil at thirty or thirty five dollars a barrel was low and was probably gonna work higher. But we we've just seen a forty five percent increase in two weeks, going from ninety dollars a barrel to a hundred and thirty dollars a barrel, you know earlier today, I mean that's insane, um and um. The implication on inflation data, I think it is something

that that we're sort of focused on. So we're going to get an update on the consumer price index later this week. So the consumer price index in January was up seven and a half percent. That's a forty year high.

That number is expected to go to seven point nine percent in February, but none of that is going to reflect this forty five percent spike we just saw an energy So as bad as the inflation data is today and as bad as it's going to be when we see this update a couple of days, you know, March April, those numbers are going higher because we don't have an

answer to what's going on right now. I'm wondering if Phil, you know, if you look at the year ahead, how ad kind of get for the everyday consumer feeling these price increases. I'm looking at a note from David Kelly over at JP Morgan, and he says, if oil prices stay at a barrel for the rest of the year, gasoline will average close to four twenty for the year,

adding more than a thousand dollars. Sweet goodness. But you know, Phil, I'm wondering, you know, if you are just kind of the everyday person in the US, how is this impacting you. It's impacting you significantly. My wife and I put gas in the car yesterday and it dawned on us that that and we bought, you know, at a cheap gas station. Place of gas has gone up fifty cents in the New York area in the last week or two. Um. You look at and Dr Kelly, I think is one

of the most brilliant economists in the game today. So I'm not going to disagree with anything that David said. But we've done some analysis on this too, and every one penny change at the pump impacts consumers spending by about one point two billion dollars. Well, we've just doubled the price of gasoline over the last year or so. We've gone from two dollars eleven cents, we're now up to what you say, four dollars and twenty cents. That that's going to take a significant amount of firepower out

of the consumer. We've already seen confidence levels go down to eleven year lows with the Michigan Sentiment. We've already seen the savings rate come down to an eight year low of six six point four percent. UM, that's going to start to have a deletarious impact in our view on UH, consumption, economic growth and and UH. And I'm not sure that we can fully appreciate right now because this thing is sort of exploding right in front of us.

But you know, we took our GDP estimate for the first quarter down at our macro policy meeting last week. I'm sure a lot of other firms are doing the same thing. Um, you've got to reflect the fact that we have done a poor job managing the situation. Energy prices are up, inflations up, and that's can impact economic rowth well. And of course there's a war, right UM,

that that changes everything. We had some incredible tail winds though. UM. Matt Winkler came out with a column today talking about, Yes, UM, consumers outlook is poor, but CEOs outlook is incredibly strong. The Business Roundtable had their quarterly Economic Outlook Index at an all time high at the end of last year. If you look at the first quarter earning season, three hundred companies in the SMP five hundred say they're gonna hire more people this year than at any point during

the past three decades. UM, So capex plans are off the charts. I mean, corporate America is still so strong. Does this, um, you know, volatility due to war reflect or or give you some kind of buying opportunity. So, met you said something very interesting, which was that the CEO meeting was was was held at the end of last year. And if you look at the job's data we've seen and we just got an update on Friday,

the labor market is very strong. You know, we've been averaging what five six seven hundred thousand highers a month over the last six months or so. So the labor markets not the problem. Manufacturing is very strong. UM. We're we've got inventory or stocking going on. Uh. There there's a significant deficit that manufacturers are trying to fill that

part of the market strong. What what we were talking about a few minutes ago was the consumer that UM, putting food on the table, putting gas in your car, heating your home uh is costing a lot more today than it was a year ago. And and that's going to begin to have a negative impact on the consumer. And if you look at you know, economic growth, corporate earnings growth. UM. The peak of the cycle was the

second quarter a year ago. We're we're not going into a recession tomorrow, but but we are back on a you know, a significant glide path to something that's a lot slower. All right, Phil, great to get some time with you. Thanks so much for joining us. Really appreciate your insight. Phil Orlando is the chief equity market strategist and the head of client portfolio Management at Federated Hermes Um.

We do see Hinnali stocks that have bounced backed, or we did see stocks that bounced back to some extent in Europe. Um, they're now back down in the red. The CAT is now off one percent, the Dacks is down one and a half percent. Here in the US, we're seeing the indexes fall further. Maybe as we heard Phil talk um, he seemed a little bit not constructive, and maybe that's why the DOWN now is down four hundred thirty points, the SMP off one point four percent.

We're gonna talk to pre Amisser right now, Managing director, Global head of Rate Strategy over TV Securities. Pre Um, really looking forward to getting your take. What is this rising price of oil, you know, the the insane amount of I guess uncertainty caused by the war in Ukraine. Mean for your outlook, sure, thanks for having me, Matt. So you know we're in a stack flationary shock. We're living through the shock right now. Plus as you said, uncertainty.

So the market prices in the risk that this could get worse and prices could continue to rise. I don't think an overall Russia embargo of the oil is priced in. So I do think if there's an announcement that the US or globally or or US and you are putting forth the s embargo, I think you're going to see for the rise and commodity prices. And so the the rates market is really struggling right now with pricing in higher inflation, but as the stagflation aspect of it as well,

and which is why real rates are declining. At the same time, you have the FED that signal that inflation was high before the war and therefore they're going to start lift off. So it's all about I think the you know, next week's psyche is Priceton and the market percent price for it. We've taken fifty basis points off, but it's really what's after that. Do you think that the FED will start to raise more slowly given all of these very serious concerns that are out there about

the direction of inflation here. Yeah, So I think there was a big debate before the war within FED officials then in the macro community. Should the FED start with a bang and then they have to do less later on, or do they go gradual? And you could tell every FED official was in one camp or the other at the margin the war. Absolutely, we should push more FED

officials into the gradual camp. I think chare powerless in that camp, and so we do think that they start with but I think they're likely to continue to raise in consecutive twenty five basis point increments till year end. We have them going five more times after March to get close to the one seventy five WI range, which is where you're in the realm of neutral. I didn't going above neutral, which I don't think the FED wants to communicate. That would be really negative because you've got

the consumer reeling under higher prices plus restrictive policy. But right now we're just moving off to Z and so you know, circulation is never fun. But if the economy has momentum, which it does this wage inflation, we think the consumer will be able to handle gradual piece of rate increases as well as of course higher prices. You know, I'm looking at the f R A O I A spread that sounds wonky, but what really it is, Yes, and the reason I'm looking at it is is an

airport in Germany on the show. Alright, alright, you learn something new every day. But the thing is, if you look at it, it is really blown out. And what it means normally is that there are some stresses underneath the financial system that the average person isn't necessarily seeing that much. I'm wondering what it says to you and overall financial stability. Yeah, you know this. And then when you say fray, I actually do think of library right away, not the airport. So it is a big deal for

the rates market. And the last week the frau way or the library Ois spread is indicating into bank funding issues, and you know that that does tighten financial conditions. This was the only topic we were talking about last week. Of course, now it's shifted to oil, which is also

tightening conditions. But what's happening is I think the market's nervous that does the war result in the lack of availability of funding, in which case, now you've got a funding you've already credit issues, and now do you have a funding crisis. I would actually now I'm a little less worried about the funding side. There's a lot of

money in the system. Banks have excess reserves, um you know, money market funds have not seen massive increases on the prime side, which is what we had going into the COVID crisis. We just lived through the COVID sort of deleveraging EPI, so I don't think there has been more leverage built up. So is the cost of funding going up? Absolutely,

and that's what that library spread is showing you. But we've got um, you know, liquority in the system, and we've got center bank facilities and they're not getting tapped. So right now, the way things stand, I think there is higher cost, but it's still not systemic enough where the FED needs to step in or where we have

to get concerned that somebody doesn't get funding. I think the need for funding is lower, but credit risk is absolutely getting repriced higher, and that should show up in wider front end as well, as you know longer dated credit spread, we only have thirty seconds, so ask a gigantic question. Um, we were looking at the librar or spread last week because of his old and pos are and then on I think people kind of dismissed that alarmist warning that we got from him on last weekend.

But then he had a great podcast with Joe Wisenhal and Tracy Alloway talking about the dollar as a world reserve currency. Is that going to change range due to this war? So if we're talking long term, would um, you know, people outside the US want an alternative show, but is there an alternative? I have to say, like the liquidity, the size, the rule of law, certain things that work for the dollars a reserve currency, I would

struggle to find an alternative. So you know it's a desire there, yes, but I don't know if the dollar will be replaced anytime soon. It's the same question you can make with swift and the the reason the dollar works that everyone uses it, so there's that network effect. So I'm a little less concerned that, you know, lack of alternatives will mean that that the dollar actually stays

a reserve acid. It's a question we're asking renewed now that Visa, MasterCard, and MX have all um stopped their business in Russia and now everyone on that side of the Iron curtain, if I can use that phrases, looking for UM is looking for a solution again. Pretty great. Talking to your preamisra There, managing director and the global head of rate strategy at TV Securities. Everett Milman joins US chief market analystic Gainesville Coins to talk about commodities,

and I guess we'll start specifically, Everett with gold. We saw it run up past two thousand dollars for a little while today. UM, if Russian bullion is effectively banned new gold out of Russia's band, how important is that? How important is their production? Well, they are um one of the major holders of gold, and they certainly make

up some large proportion of global demands. But the main impact of that move that I would be looking for is banning Russian gold from you know, London and access to Western trade really does push them into the arms of Shanghai. And there are a few other global exchange exchanges where Russia could theoretically get its gold to market.

So in some sense, in the short term, yes, it it is a negative for Russian gold, but ultimately, in the long run it may change some of the kind of alliances and um, the trade of gold in the east to west. We may see Russia really turned more to Beijing into Shanghai for its goal. By the way, how how important is gold as a reserve currency store

of wealth? As we see you know, central banks around the world telling a large autonomous nation you can no longer have access to the dollars that we were holding for you, you know, effectively hitting the green back as a world reserve currency pretty hard, right. UM. I think it is still crucial, although gold is often overlooked because it is seen as his barbarous relic that we no longer directly back our money with gold, of course, UM. But as you said, central banks around the world hold

many many tons of gold. UM. And we've been seeing that on the COMEX, in the l B m A that there have been outflows. There's been quite a bit of gold kind of taken out of the over the counter trading markets. UM. And that implies that oftentimes there are large sovereign buyers behind those moves. So given that, UM, not just Russia, but anyone who's willing to do business with Russia could be cut off from Western finance and

from Western banking. That does perhaps highlight gold role in the future that it is UM still a zero risk asset that has the same characteristics as a reserve currency, even though UM I don't believe any of this directly threatens the dollar status. All right, Everett, thanks so much for joining us every moment in their chief market analyst at Gainesville Coins. Hopefully get spent a little bit more time with you later. I'm looking at the SMP right now,

Seale breaking it down by industry group. You gotta look at sp X L one or L two or L three. It's kind of a pain. You don't do that with the toxics D but I'll look at it level one. I'm trying to see how chips have done. I guess you've got to break it down to infotech. I suppose I could just look at the Socks Index, right is that the Philly Socks Index to see UM how chips have done in terms of semiconductors. Or I could look at the eye shares e t F to see how

they've done year to date. Because we've been talking about the supply chain problem and chip shortage for so long, UM, but the industry has lost a lot of market cap since two began. Let's bring in Lincoln Clark to talk about what's going on and why. He's a partner of KPMG, but he's also the global leader of their semiconductor practice. Lincoln, thanks so much for joining us. UM. How is the

semi conductor industry faring right now? There's such as we all have discovered, such a crucial part of the manufacturing process for almost everything that we buy in you is UM, but they haven't been rallying this year. Good morning, Matt, thank you for making some time. And uh yeah, the semi conductor industry, you're right if you you were talking about the socks tracker, they're certainly some market cap has

been taken out of it. But we undertook a survey of semiconductor executives in the fourth quarter so October November last year, looking out to two, and the confidence that is at an all time high. UM. You know, we're focused on not just revenue growth, but capex, head count, R and D and profitability. So notwithstanding the market cap changes that you're referring to, their the executives themselves are

very very positive this. This is a great point and I don't know if you've seen it, Yeah, but Matt Winkler, or Editor in Chief emeritus, wrote an opinion piece this morning about um C suite confidence. Basically, then the CEOs of companies, not just in semi inductors, but across the SMP five D are really optimistic for future growth, really optimistic for profits, adding more employees than they have at any time over the last decade. UM is the semiconductor

industry ramping up um the same way. I mean, we've seen so many Capex reports in terms of investment. Are they hiring people? Are they bringing production back home? Well, the we've been doing this confidence index for seventeen years with the Global Semi Conductor Alliance, and the confidence that they exhibited in twenty two was the highest it's been.

If you think about the drivers that are behind the semi conductor, as you mentioned, it's become very visible to everybody that semi conductors are in pretty much everything that might impact our work life, personal life. But the drivers of that. You know a lot of businesses are going from work from home to now a hybrid of work from office and home. That's gonna you know, drive demand for relooking at the office, infrastructure, cloud and digitization continues.

And then you know automotive, which has become i think very visible and industrial. You know, they still have a desperately seeking semi conductor's mentality, I think. And then you have your you know, wireless vi G and gaming that continues. Profitability I think is going to be a little bit

more stressed this year. As um Our survey would say that, you know, thirty four percent of our executives think their revenue is growing to grow over but you know, nearly seventy say that they think the profitability might only grow in the sort of want to ten percent. So some of the costs of production, logistics, transportation, you know, that's playing through a little bit on profitability. But top line, very very confident, high growth. I mean, how does this

global geopolitical story really play into things here? It just sounds like a lot of these executives are speaking, um, you know, before Russia's invasion of Ukraine. Yeah, its Sonali, thank you. I mean, the you know, the pandemic and some of the geopolitical um pieces of the semiconductor industry had you been going on for a period of time. So I think executives have had that in the back

of the mind as the setting strategy. Clearly, the you know, the situation of the last two or two and off weeks or so here just creates and continues to create more uncertainty, just just going to exacerbate the supply chain issues that the semiconductor and many industry other industries to be fair or going to face. Having said that, Lincoln, how important is how important are Russia and Ukraine to semiconductor production? I mean, um, do they supply you know, wafers, silicon,

anything that you need. Russia doesn't have any substantial or Ukraine any substantial leading edge wafer capacity. Um. You know there are some core elements though that you know, filter into semic production and you've probably seen some just qushing around palladium for example. But said, yes, that's reacting a little bit. Um, So if if a semi conductor company, you know, I had that supplier in that neighborhood as a you know the first source, obviously you know the

second and said sources. But I think we'll be driving a lot of proteoma activity right now. Lincoln, great to get some time with you. Thanks so much for joining us on such an important issue. Lincoln Clark is a partner at KPMG. He is also KPMG's global leader of the Semiconductor practice. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with Apple Podcasts

or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller, vree on Fall Sweeney I'm on Twitter at pt Sweeney. Before the podcast, you can always catch us worldwide at Bloomberg Radio.