Stocks fell again today as the dollar continued its rally. The Dow and S&P tumbled while the Nasdaq Composite touched a new 2-year low. It was a rough morning session for bulls, marked by a semiconductor slump in response to new trade restrictions from the Biden administration.
The White House announced today that US semiconductor companies must apply for a license in order to sell certain advanced semiconductors to China. Moreover, foreign companies will need a special license as well to use American semiconductor manufacturing tools if these tools produce chips that are then sold to the Chinese.
The news took a sledgehammer to semiconductor stocks, which were already looking relatively beaten down over the last two trading sessions.
“These rules make clear that foreign government actions that prevent BIS from making compliance determinations will impact a company’s access to U.S. technology through addition to the Entity List,” said a release from the Biden administration.
Mao Ning, the Chinese Ministry of Foreign Affairs spokesperson, issued a response:
“The US has been abusing export control measures to wantonly block and hobble Chinese enterprises. Such practice runs counter to the principle of fair competition and international trade rules,” she said.
“It will not only harm Chinese companies’ legitimate rights and interests but also hurt the interests of US companies.”
Talk about kicking chipmaker stocks while they’re down. With forward earnings expectations already sinking for the semiconductor sector, today’s new restrictions will only make things worse.
There was thankfully no immediate retaliation from China, and Beijing has yet to issue any formal warnings. But it’s still not the kind of thing bulls want to see with volatility rocking equities.
Preventing stocks from sliding even further today was a closed bond market, which is set to reopen tomorrow. 10-year Treasury note futures pointed lower this morning, however, indicating that yields should jump again when trading resumes.
“There are a lot of market participants that really key off of what the Treasury yields are doing, and when they’re not open it’s hard to have that volume in the market,” said B. Riley Financial’s Art Hogan.
“We’re probably going to be in wait and see move until we open in full force tomorrow.”
Yields should swing wildly in the coming trading sessions as the market awaits several critical reports. The Fed minutes will be released this Wednesday, serving as an appetizer to Thursday morning’s Consumer Price Index (CPI).
Dow-polled economists anticipate a year-over-year (YoY) gain of 8.1% for September, down from August’s 8.3% increase. Energy costs are expected to slide, but the question remains whether core inflation (excluding energy and food) will remain stubbornly high.
“Headline inflation will probably come down to about 8%. But core inflation, what measures the drivers of inflation and how broad they are, is still going up,” said Allianz chief economic advisor Mohamed El-Erian.
El-Erian has been a vocal critic of the Fed over the last year, arguing that Fed Chairman Jerome Powell should have started hiking rates much sooner than he did. And though El-Erian’s batting average on economic crises has been less than stellar – he told investors not to worry about subprime housing back in 2007 – that doesn’t mean he’s wrong about what’s to come.
El-Erian says it’s too late for the Fed to remain hawkish with its monetary policy. Unless Powell & Co. capitulate soon, El-Erian argues that the US is headed for a very hard landing.
And he’s right. But if the Fed gives up, core inflation could erupt higher into 2023, making the Fed’s target rate of 2% seem utterly unobtainable. That’s why a crash now via aggressive rate hikes is the preferable path. As a result, a hot CPI number this Thursday would likely confirm that the Fed needs to stick to its guns, whacking stocks lower in the process.
