The US hits its lowest unemployment rate since the pandemic, our view on semiconductors, and more

The US market was choppy last week, in which the S&P 500 rose and fell and ultimately ended the week up by just 0.11%. The NASDAQ 100 also rose by 0.66%. The Australian market had a stronger performance, rising 1.32%.

Oil prices dropped slightly, with Brent oil costing US$104 a barrel. This was due to an announcement from the Biden administration who pledged to release more strategic oil reserves to ease supply pressures. Iron ore prices increased to US$160/tonne. Higher commodity prices puts upward pressure on the Australian dollar and is also a positive for the mining heavy ASX 200.

Consumer Confidence in the US came in slightly above expectations at 107.2, which points to higher consumer optimism about spending. This is despite the higher prices we are seeing in the economy, which points to the fact that there is a high level of employment giving people more discretionary income to spend.

Speaking of employment, weekly initial jobless claims came in at 202,000, which is above last week’s 50-year lows of 188,000. Job openings came in above expectations at 11.27 million for the month of February.

The US economy added 431,000 nonfarm payrolls for March, which helped bring the unemployment rate down to 3.6%. This beat expectations of 3.7% and is a further sign of how tight the labour market is. The largest gains were in leisure and hospitality which added 112,000 jobs. Professional and business services also made a big contribution, adding 102,000 jobs.

With the US having 2.1 million fewer jobs in February 2022 than it had in February 2020, the last month before the pandemic impacted the US economy, payrolls should reach pre-pandemic employment in the next four to five months if this trend is not disrupted.

Quarter-on-quarter GDP growth for the fourth quarter came in slightly below forecasts, but still remains very strong at 6.9% in the US.

Housing demand in Australia is still looking strong, with building approvals growing 43.5% from the previous month in February, well above expectations of just 10% growth. Consumer spending also looks to be in good stead in Australia. For the month of February, retail sales grew 1.8% from the prior month, which was above economists’ forecasts of 1%.

Semiconductor company Micron reported last week, announcing very positive results. They reported an earnings per share of US$2.14 and a revenue of US$7.53 billion. This beat analysts’ expectations of US$1.98 and US$7.53 billion, respectively. Micron also provided guidance that exceeded Wall Street’s expectations.

Although we don’t own Micron, we own a number of semiconductor companies so we are pleased to see tailwinds in the semiconductor industry continue. This is a space that we are quite bullish on for the long-term and despite its growth potential, the forward P/E for the semiconductor industry is trading in line with the S&P 500. We firmly believe that semiconductors have growth prospects above that of the median S&P 500 company so we deem it to be attractively valued.

Semiconductors (microchips) is the backbone of modern technology, turning an electric current into computer signals which is critical to operate a range of uses. We believe that key drivers of long-term growth will be the megatrends of greater internet use (e-commerce, streaming, video games), electric vehicles, blockchain, AI and robotics.

In the short to medium term, there is a shortage among all parts of the semiconductor supply chain. You may have experienced this with used car prices soaring and the waiting list for the newest iPhone taking a little longer. This ensures sustained excess and demand and gives pricing power to many companies in this industry.

Even companies which don’t directly make or design chips, but ones that create the machinery that help create the chips such as ASML Holdings (NYSE: ASML) are reporting significant backlogs. ASML, a Dutch company that specialises in lithography machines says demand for their machines is 40% higher than what they can produce. They sell these machines to the likes of chipmaking giants Taiwan Semiconductor and Samsung.

Looking ahead to this week, we will be keenly monitoring the RBA’s meeting this Tuesday. Although the board of governors will keep rates steady at 0.1%, we are expecting to see RBA Governor Phillip Lowe shed more light on what to expect of monetary policy in Australia for 2022.

With Lowe consistently focusing on the need to see sustained wage growth to confirm inflation, we are finally seeing wages rise in Australia. For the month of February, wages grew 2.3% on an annualised basis, which was the fastest growth in 3 years. However, this was outstripped by inflation, which actually saw workers see a 1.2% decrease in real wages.

However, with the Treasury forecasting the tightest labour market in half a century, last Tuesday’s budget papers expect wages to grow to a level where it will outstrip inflation, although these forecasts are always uncertain.

While we are on the topic of the RBA, we do note that Treasurer Josh Frydenberg appointed the RBA’s first female deputy Governor last week, following the shock departure of heir apparent to the RBA Governor position, Guy Debelle. The appointee Michele Bullock has been at the RBA since 1985 and is a widely respected economist, and is now seen as a leading contender to replace Phillip Lowe once he retires.

Also released this week will be the ISM non-manufacturing PMI which is forecasted to come in at 58.0. Anything above 50 is an expansion of economic activity which is a positive sign for the economy.

Interesting Finance Fact

In 1954, economist Armen Alchian was able to figure out what the secret fuel was for the newly developed hydrogen bomb just by looking at the share prices of chemical suppliers on the stock market.

He successfully identified lithium as the fusion fuel through publicly available financial data. However, the paper was confiscated and destroyed because it was seen as a threat to national security.

Have a great week,

Sam Waldron - Research Analyst

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