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3 Things Under the Radar This Week

Investing.com - Here’s a look at three things that were under the radar this past week.

1. Chips May Dip

Semiconductor stocks continue to flirt with record highs, boasting gains of more than 40% since their December slump as investors bet on a turnaround in the second half of the year. But new findings showing a sharp decline in chip sales suggest the near-term optimism may be misplaced.

Worldwide sales of semiconductors totaled $96.8 billion during the first quarter of 2019, a 15.5% plunge over the fourth quarter and a 13% drop year on year, according to a report published by the Semiconductor Industry Association (SIA) on Monday.

IC Insights, a market research firm, offered up a more dour assessment, estimating that the real first-quarter revenue decline was 17.1%, calling it the largest year-on-year drop since 2001 and the fourth largest since 1984. While the first quarter for chip sales is usually the weakest, with an average decline sequentially of 2.1% over the past 36 years, according to IC, the drop this year was much larger than the average.

The outlook is hardly encouraging, with the research firm estimating the sector will suffer a double-digit sales decline for the year.

But in the face of dwindling sales, proponents of semis point to industry bellwether Texas Instruments (NASDAQ:TXN) outlook on a recovery and the rebound in China's economy as a source of hope.

"China was a big cloud, and Qualcomm’s kissing and making up with Apple (NASDAQ:AAPL) actually turned out to be Intel’s loss, so some of this is very idiosyncratic,” Chantico Global CEO Gina Sanchez said on CNBC. "It’s a really mixed bag, but there’s an expectation that these semis will recover in the second half or, if you listen to Texas Instruments, the first half of next year."

Others are less constructive on the sector, arguing that consensus expectations for sales improvement in the second half of 2019 are overly bullish.

The firm's internal checks "provided a more cautious view into any recovery given uncertainty in bookings in China and Europe, greater excess inventory than previously realized, and a return of semi pricing pressure," Longbow Research said.

The fundamentals tend to support the more somber view as several factors, including falling memory pricing, slowing purchases by cloud infrastructure customers and headwinds in China, have conspired to knock the earnings outlook for major chipmakers.

In April, chipmaking giant Taiwan Semiconductor (NYSE:TSM) delivered a cautious outlook, warning that near-term sales would slide the most in 10 years as global smartphone markets continue to slow. Intel (NASDAQ:INTC), in late April, slashed its revenue guidance, predicting its data-center segment, which provides the chips that power almost all computer servers, will post a revenue decline in 2019, its first drop in a decade.

With semi stocks seemingly punching above their weight, the quarters to come will determine whether cracks appearing in semis are merely dents, or the start of a structural decline that may see the rally go up in smoke.

2. Is the Fed Trimming Down on Inflation?

Investors will be very familiar with what financial journalists invariably describe as the Federal Reserve’s favorite inflation: core personal consumption expenditures, which excludes food and energy.

But all things fall out of fashion. Is the Fed now ready for a new favorite way to gauge price pressures?

At his post-rate-decision press conference, Fed Chief Jerome Powell mentioned the trimmed mean PCE inflation rate a couple of times (hat tip MarketWatch’s Steve Goldstein).

The trimmed mean PCE was devised by the Dallas Fed as an alternative measure of core inflation.

To calculate, the Dallas Fed looks at the price changes for each component that makes up personal consumption expenditures, looks at what fell and rose the most, and trims out a fraction of the extremes at both ends.

“The trimmed mean inflation rate is a proxy for the true core PCE inflation rate,” according to the Fed. “The resulting inflation measure has been shown to outperform the more conventional ‘excluding food and energy’ measure as a gauge of core inflation.”

It’s yet to be called the TMPCE, but that’s only a matter of time.

A look at the latest report on trimmed mean PCE from the Dallas Fed for March will dismay those hoping that inflation is sluggish enough for a rate cut, at least compared to other measures.

Looking at one-month inflation, the trimmed mean came in at 1.9%, with the PCE at 2.4% and the core PCE at 0.6%.

Further out, for six-month inflation the trimmed mean is at 2%, right at the Fed’s target, ahead of the PCE at 1.1% and the core PCE at 1.4%. And for 12 months, the trimmed mean is at 2% again, ahead of the PCE at 1.5% and the core PCE at 1.6%.

3. The Fed and the Plight of Prime-Age Men

As strong as Friday's jobs report was with its 3.6% unemployment rate, there is an area of concern, according to Diane Swonk, the chief economist at Grant Thornton, the big accounting firm.

That's the problem of men in prime working age -- 25 to 54 -- either forced to work part-time or getting laid off and dropping out of the work force altogether.

The number of men in that age range participating directly in the labor force range has fallen by about 500,000 since the turn of the century, she wrote on Friday.

"The reasons span a loss of male-dominated jobs, skills erosion, lack of training and investment, mass incarceration and, sadly, a sharp increase in opioid addiction," Swonk wrote.

You can see an example of the loss of male-dominated jobs in Lordstown, Ohio, where General Motors (NYSE:GM) shut down a plant that makes Chevrolet Cruze cars. The plant employed 4,500 just two years ago.

And, in fact, while the reported jobless rate is the lowest since 1969, a separate measure that takes into account all workers unemployed and people working part time for economic reasons stood at 7.3% in April for a third-straight month, according to the Labor Department. And that's still higher than the all-time low of 6.8% reached in November 2000.

Absent Congress and the White House actually agreeing on a plan, it falls to the Federal Reserve, Swonk says.

But the Fed has only an indirect tool, she conceded. That is to keep interest rates as low and steady as possible for as long as possible to pull these workers into the full-time work force.

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