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【TEJ Dictionary】When will the Fed stop hiking interest rates?

Inflation deteriorates day by day, consumers’ purchasing power has decreased sharply. With the Fed taking considerable actions, Tech Stocks have captured the spotlight of the stock market.

Fed hike rates

Preface

The entire world is currently on the edge of nerves. Turmoil of war, unstable politics, and global economy fluctuations all came into focus. Many countries are suffering from economic difficulties and severe situations of inflation, and the expectations of greater inflation also push the Fed to take action by hiking rates. At the end of July, the Fed agreed to lift the rate by 0.75 percentage points, which made the interest rate fall in the interval of 2.25% and 2.5%.

Under those circumstances, the supply chain has decreased due to the decline of purchasing power. While each industry is currently facing different supply changes, the technology industry and tech stocks caught the most attention. Why tech? You will realize after reading this article.

Highlights
📍 Why tech stocks?
📍 How are things in the states?
📍 How are things in Taiwan?

Why Tech Stocks?

Tech stock has always been a popular category in the stock market. It even turned into one of the best performing concept stocks in the past 2 years as a result of the pandemic. However, the relation between tech stocks and rate hike is quite obvious. Despite that rate hike could alleviate the pressure from inflation in the short-term, doing it excessively would raise recession, unemployment, etc. In this situation, technology products could only be sacrificed because of their dispensable property. Furthermore, rate hike increases the incentive for consumers to save money instead of holding stocks. This means that not only tech stock, but nearly all sorts of stocks would drop when the Fed lifts interest rates.

Which is to say, rate hike is tech stock’s biggest threat. On the other hand, once the Fed pauses or stops the rate lifting, the tech stocks would possibly face a rebound. With the Fed taking considerable actions recently, many investors are keeping an eye on how the tech stock would go.

How are things in the states?

All technology companies have faced great obstructions after the Fed announced to lift interest rates. Meta, parent company of Facebook, had a decrease in sales revenue and gloomy performance in its Q2 financial report. This made investors pessimistic towards the upcoming financial report of Apple and Amazon. Even though the US stock market had surged as expected, the financial reports released by technology companies like Meta and Qualcomm suppressed NASDAQ in the after-hour trading, which is mainly composed of tech stocks.

Although Jerome Powell, the president of the Fed, and the youngsters of FOMC support the continuous rate hike, Powell indicated that recent expenditures and production index have started to weaken. In order to make the supply catch up with the demand side and prevent the US from stepping into a greater recession, the pace of rate hike should be slowed down at a certain point. It would be a better policy under the premise of effectively combating inflation. By the end of July, the PCE index in the US, which was followed closely by the Fed, had risen to 6.8% (the base point of rate hike is 2%).

US PCE index and annual CPI growth
▲ Comparison between US PCE index and CPI annual growth

While Big Techs like Microsoft seemed to be doomed to undergo deficits, they all ended up having performances that went beyond expectations. Knowing that the Fed was prepared to slow down the pace of rate hikes, the USD index went weak. Tech stocks started to make renounds, Microsoft, Meta, and Tesla were all having a 6% growth.

Qualcomm’s Q3 financial report showed that it had a 37% growth in annual sales revenue and a 54% growth in earnings per share, which reached to 10.9 billion USD and 2.96 USD respectively. Both performances went beyond market expectations. Apple had also made a profit from its 2% growth in sales revenue, which was previously in a doubtful situation. Those technology companies eventually pulled off in the circulation of inflation and rate lifting. However, this doesn’t mean that the difficulty is completely overcome. Despite the fact that Qualcomm had an outstanding performance in Q3, the economic expectation obstacles and the decrease in mobile demand make it tougher for it than Apple, which has the new Iphone 14 on the way.

On the other hand, not every technology company had made it during this inflationary period. Intel, once being the highest market value wafer company in the US, not only was surpassed by Texas Instruments, AMD, and NVIDIA, but released a disappointing 2022 Q2 financial report. Its sales revenue had fallen by 17% to 15.3 billion USD, and its EPS had also decreased to 0.29 USD. Those numbers were way lower than analysts’ expectations. The Custom Compute Group was the one taking the most serious blow, decreased in the percentage of 25%. This shows how the decrease in economic participation under inflation affects the technology industry.

How are things in Taiwan?

Generally speaking, the most direct threat that might be posed to Taiwan due to the rate hike is the outflow of funds from international businesses. The spread would also cause pressure of NTD depreciation. This automatically lowers the incentive of Taiwanese companies to invest, which would cause an overall decrease in the Taiwan stock market. That is why it is inevitable that Taiwan follows the rate lifting action of the Fed. As for how to set the extent of increasing interest rates is the issue for Taiwan Central Bank.

In fact, Taiwan did follow to lift 0.125% in interest rate when the Fed raised 0.75% back in June. This action had been criticized for the lack of increasing levels. We can tell that Taiwan was in a bad condition of inflation by the breakthrough of 3% in consecutive 4 months. Even though the number seemed to be more moderate in comparison to the US, experts pointed out that the weighting factors in CPI formula are different in different countries. This could result in misunderstandings on inflation. For example, house price fluctuation is taken as a part of rent, which is included in the CPI formula. While in Taiwan, the housing factor is not calculated as a part of CPI index. Adding that the housing price has soared in the past 2 years, this would possibly cause the underestimation of inflation.

Taiwan CPI annual growth rate
▲ Taiwan CPI annual growth rate

Currently, the inflation condition doesn’t seem to slow down. Many technology companies considered that it would take 2–3 seasons to clear inventory. The offload of goods and stock level are what the companies should focus on. Compared to the US, the technology industry in Taiwan is mostly composed of electronic hardware equipment, which shows better flexibility when stock prices fall. If the US tech stocks could continue to grow under the inflationary period, there are great chances that Taiwan tech stocks could show unexpected performances.

Where to get more info?

Click Taiwan Finance Database → TEJ Profile → Macroeconomics to obtain more economy indexes to analyze according to your investing needs.

TEJ Database : Macroeconomics
▲ TEJ Database

If you have questions about this article, or you want to get further access to the TEJ Database, feel free to leave a comment or email us.

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TEJ 台灣經濟新報

TEJ 台灣經濟新報

TEJ 為台灣本土第一大財經資訊公司,成立於 1990 年,專門提供金融市場基本分析所需資訊,以及信用風險、法遵科技、資產評價、量化分析及 ESG 等解決方案及顧問服務。鑒於財務金融領域日趨多元與複雜,TEJ 結合實務與學術界的精英人才,致力於開發機器學習ML、人工智慧AI及自然語言處理NLP等新技術,持續提供創新服務