Trends We’re Tracking: Inflation Reduction Act of 2022, Oil Cuts, and Semiconductors
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The IRA is already supercharging U.S. investment
Three full months have yet to pass since the Democrats’ landmark Inflation Reduction Act of 2022 was signed into law, but the wide-ranging bill’s energy and climate provisions – the United States’ largest ever investment in the clean energy transition – are already pushing the private sector to make massive investments stateside that otherwise may have been made abroad. Beyond the historic nature and scale of the tax credits, grants, and standards, the law is another milestone on the path towards deglobalization and reshoring of supply chains that will have implications for growth and investment over the long term. Read more about our thoughts here.
Big tech sell-off
Big Technology companies announced third quarter earnings this month, with reports coming in weaker than expected as companies faced rising costs and weakening revenues. Furthermore, management teams indicated weaker forward guidance for the upcoming fourth quarter. As a result, shareholders moved quickly to liquidate positions within the five largest tech companies: Apple, Amazon, Meta, Alphabet, and Microsoft. In aggregate, these companies saw a decrease in equity valuation in the amount of $950 billion. Meta has had the weakest performance with the stock selling off 74 percent from its all-time highs. Over the third quarter Meta’s profit margins deteriorated on the back of weakening advertising revenue and increased expense from the company’s continued development of artificial intelligence and the metaverse.1
The surprising two-million-barrel daily output cut by OPEC+
On October 5, OPEC+ surprised the world by announcing a cut of two million barrels of oil a day in November, doubling the one million barrels a day reduction expected by the market. Crude oil prices jumped following the announcement with WTI price rising above $90 a barrel before moderating. For the month of October, the price of WTI rose 8.9 percent, its first monthly gain since May. The surprising cut angered the Biden administration, as the latter had been trying very hard to convince OPEC+ to increase oil cut to help contain global inflation problem.2,3
As OPEC+ has been struggling to meet its output target, the actual output cut is expected to be approximately half of the announced cut, or about one million barrels per day. That is why the oil price gain has been relatively modest since the announcement. However, the surprising cut exacerbated the mistrust between OPEC+ and U.S., making oil price increasingly a tool for geopolitical struggle and thus making it even more volatile.
U.S., China Tech cold war poised to turn into a full-blown chip war
Semiconductor chips are the ‘brains’ powering modern electronics, playing a very vital role in a country’s advancements in a wide range of areas, including communication, clean energy, healthcare, and military systems. While companies in the U.S. dominate chip research and design, the assembly and testing part of this incredibly complex manufacturing process is largely outsourced. Supply chain disruptions and the rising tensions with China have prompted the U.S. to take control of the situation through supportive policies and trade restrictions.4,5
The Semiconductors and Science Act of 2022 (CHIPS Act), signed into law in August, directs around $250-280 billion in spending over the span of the next 10 years, with a long-term aim of building and bolstering domestic chip manufacturing and R&D capacity. The technology cold war with China, which started with the 2019 ban on U.S. component exports to Chinese tech giants like Huawei, is turning into a full-fledged chip war with the latest announcement in early October of additional restrictions on companies in the U.S. and allies selling advanced semiconductor chips to China.6
Considering China’s insatiable hunger for advanced chips, the new restrictions comes at a time when their aggression in the Taiwan Strait is at escalated levels. Given the fact that around 90 percent of high-end advanced chip manufacturing happens in Taiwan, supply shocks have the potential to result in prolonged technological slowdowns and market meltdowns.
Trouble in the housing market
The cost of housing, whether rent or a mortgage, has gone up precipitously since 2012. From that point, in the U.S., home prices rose by almost 60 percent until 2019. Since the pandemic prices have gone up another 30 percent. Renters have felt the crunch as well. It now takes the average hourly earner slightly over 64 days to pay one month’s rent, up from about 54 days in 2015. It now seems that these trends are facing larger headwinds as interest rates continue to climb. Home sales fell by 20 percent year-over-year in August, signaling weaker demand. Demand for rentals in previously hot markets (Las Vegas and Phoenix) has slowed as well, applications have fallen, and listings are staying up much longer. Rents did increase nationally in September by 7.5 percent, but this is down from an 18 percent increase at the beginning of the year.7,8
1. “Brutal week for Big Tech with nearly $800bn wiped off valuations,” Financial Times, https://www.ft.com/content/3abf8c31-95bb-47ea-a461-351a5fbfaa4d
2. Jack Farchy, Annmarie Hordern, and Ben Bartenstein, “Saudi Arabia Enrages Biden and Aids Putin with Oil Output Cut,” Bloomberg News, October 5, 2022, https://www.bloomberg.com/news/articles/2022-10-05/saudi-arabia-enrages-biden-and-aids-putin-with-oil-output-cut
3. Javier Blas, “Saudi-Russian Oil Axis Snubs Biden with Cuts,” Bloomberg Opinion, October 5, 2022, https://www.bloomberg.com/opinion/articles/2022-10-05/the-saudi-russian-oil-axis-snubs-biden-with-oil-production-cuts
4. Arthur Herman, “The Chip War with China is Just Getting Started,” Forbes.com, October 17, 2022, https://www.forbes.com/sites/arthurherman/2022/10/17/the-chip-war-with-china-is-just-getting-started/?sh=75d6cc286a08
5. Thomas Black, “Chips Act Won’t Work Without Every Part of the Chip,” Bloomberg Opinion, October 28, 2022, https://www.bloomberg.com/opinion/articles/2022-10-28/chips-act-won-t-work-without-every-part-of-the-chip?
6. “The CHIPS and Science Act: Here’s What’s In It,” McKinsey.com, October 4, 2022, https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-chips-and-science-act-heres-whats-in-it
7. “Housing markets face a brutal squeeze,” The Economist, October 20, 2022,https://www.google.com/economist.com%2Ffinance-and-economics%2F2022%2F10%2F20%2Fhousing-markets-face-a-brutal-squeeze&usg=AOvVaw3lUG__bJFuI5qpAYWOsUko
8. Prashant Gopal and Paulina Cachero, “Renters Hit Breaking Point in Sudden Reversal for Landlords,” Bloomberg UK, October 24, 2022, https://www.bloomberg.com/news/articles/2022-10-24/will-rents-fall-inflation-has-tenants-hitting-their-breaking-point
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