US futures point to a somewhat weak open this morning following, with chip stocks under some pressure following Micron (MU) cutting its outlook for the back half of 2022.

This comes as they announced plans to spend $40 billion over the coming decade to build its US chip capacity. The second part of Micron's announcement is tied to the passage of the CHIPS Act, which President Biden is expected to sign at 10 am ET.

As a reminder, the bill provides $52.7 billion for American semiconductor research, development, manufacturing, and workforce development. This includes $39 billion in manufacturing incentives, including $2 billion for the legacy chips used in automobiles and defense systems, $13.2 billion in R&D and workforce development, and $500 million to provide for international information communications technology security and semiconductor supply chain activities.

It also provides a 25% investment tax credit for capital expenses for manufacturing of semiconductors and related equipment. It's not going to undo years of offshoring overnight, but it is a step in the right direction towards what we'll call silicon independence.

As the funds are released, we expect to learn of more chip building plans. As members likely suspect, we see Applied Materials (AMAT) being a major beneficiary of that multi-year domestic buildout.


Getting back to Micron's guidance cut, which it shared in an 8K filing with the SEC, it cites a combination of macroeconomic factors, supply chain constraints and a broadening of customer inventory adjustments leading to softer DRAM and NAND expectations since it reported its June 2022 quarterly results.

For the current quarter, it now sees its revenue at or below the low end of the $6.8-$7.6 billion revenue guidance it provided during its last earnings call. The company also shared it sees its shipments falling quarter over quarter in its November quarter with significant sequential declines in revenue and margins. While the company didn't divulge in which end markets it is seeing weakness, we know its key end markets are Data Center, PC & Graphics, and Mobile & Intelligent Edge.

On the heels of quarterly results from AMD (AMD) and Nvidia's (NVDA) pre-announcement yesterday, Micron is seeing pronounced weakness in its PC & graphics business and to a much lesser extent in its Data Center and Mobile & Intelligent Edge businesses. Yesterday, Nvidia shared its Data Center business grew 60% year over year in its July quarter, and this morning Global Foundries (GFS) raised its outlook for the current quarter, and its two largest end markets are smart mobile devices (49% of revenue) and communications infrastructure and data center (17% of revenue).

We are pointing the above out because not all chip companies are alike, making it incredibly important to understand the differences in their end market exposure and the tailwinds vs. headwinds those end markets are facing.

2Q 2022 Productivity and Unit Labor Cost

At 8:30 am ET, the 2Q 2022 preliminary figures for Unit Labor Costs were published, clocking in at a hotter than expected 10.8% compared to the 9.5% consensus. Even though the figure was down from the upwardly revised 12.7% for 1Q 2022, it points to wage inflation pressures remaining at elevated levels.

To this we can add the hotter than expected wage inflation data contained in the July Employment Report. And with this morning's July NFIB Small Business Optimism Index revealing that 49% of business owners having job openings they could not fill, odds are wage inflation will persist.

This data is likely to tip the scales toward a 75-basis point rate hike at the Fed's September monetary policy meeting. As we cautioned yesterday, however, we have back-to-back July inflation reports due tomorrow (CPI) and Thursday (PPI). Given the time stamp on those reports and what they may say about inflation pressures vs. recent months is likely to carry more weight than the 2Q 2022 data published today.

As we shared in last week's Roundup, we are likely to see the drop in gas prices lead headline CPI and PPI figures to move lower month over month in July, but other pressures such as food and wages are likely to keep the July data at elevated levels.

We continue to see the Fed on the warpath when it comes to inflation.