2023.05.02 4,300 points to be the resistance

Kansas City Fed survey showed that Tenth District manufacturing activity declined moderately in April, while expectations for future activity remained positive. Price indexes increased versus last month but decreased from the previous year and are not expected to change significantly over the next six months. After seasonal adjustment, the composite index of manufacturing in the tenth district of the United States in April dropped from the previous value of 0 to minus 10, which was worse than market expectations of minus 2 and was the lowest since May 2020. All monthly indices declined except raw material prices, finished goods prices, average employee workweek and supplier delivery time indices. In Apr, the future composite index remained at the previous value of 3. Expectations for activity in six months remained similar to last month, except for a decrease in materials inventory and an uptick in supplier delivery time, which turned positive for the first time since October 2022.

Forecast from the U.S. Department of Commerce showed that the U.S. GDP grew at an annual rate of 1.1% in 1Q23, lower than the consensus estimate of 2%, while growth in 4Q22 was 2.6%. The U.S. dollar-denominated economy grew at an annualized rate of 5.1%, or US$327.9 bn, to US$26.47 tn in the first quarter. The initial value of the economic growth deflator rose by 4%, higher than the expectation of 3.7%. During the period, the initial value of the personal consumption expenditures (PCE) price index rose from 3.7% to 4.2% QoQ, much higher than market expectations of 0.5%; the core PCE price index rose from 4.4% to 4.9% QoQ, also higher than expectation of 4.7%. The market believes that the U.S. economy has grown more sluggishly than previously expected in the first quarter of the year, and high interest rates are expected to bring the economy into a slight recession. We estimate the U.S. stock market to have a higher chance of going down again in the short term. The S&P 500 index is expected to fluctuate between 4,000 points and 4,300 points.

In terms of industry, the confirmation of the terminal interest rate has further reduced the risk of the medium to longer term. The impact of the 5.5% terminal rate on the stock price has been largely priced in at the current stage. Investors can pay attention to technology stocks with better earnings results and growth potential.

Applied Materials (AMAT.US) reported revenue of US$6.74 bn, +7.46% YoY. The company expects strong demand to be driven by the automotive and industrial chip manufacturing equipment that it can still achieve a higher revenue in the next quarter.

The company started selling a new wafer fabrication equipment product this year, the Centura Sculpta patterning system, which helps customers to reduce photolithography time. The company has claimed that lithography technology is becoming increasingly complex and expensive, and the new method can simplify the wafer production process, reduce waste, and reduce the wafer production industry’s dependence on ASML. Mgmt expects shortages of certain types of semiconductors, especially those used in cars, factory equipment and smart, connected appliances, despite the overall slump in the chip industry. Sales of automotive chips and other mid-to-low-end chips are expected to continue to grow, and the Chinese market is expected to be its growth driver. It is recommended to buy at US$109.6, target at US$127.6, and stop loss at US$106.1.

Micron Technology (MU.US) released its financial report for the second quarter of FY23. The company’s revenue in the second quarter was US$3.693 bn, a YoY decrease of 52.6% and a QoQ decrease of 9.6%; Non-GAAP net profit was US$2.081 bn; revenue in the third quarter is expected to be in the range of US$3.5-3.9 bn; the data center business is expected to improve in the third quarter, and the inventory level is expected to be reduced by the end of the year.

According to mgmt, the company’s new factories in Idaho and New York will start construction as scheduled this year and next year respectively. In addition, customer inventories are improving, and it is expected that the storage market may have bottomed, with inventories peaking in 2Q23. Market believes that inventory levels will improve in the second half of the year. Despite that, based on Micron 3Q forecast, inventory consumption is not as fast as expected, and inventory impairment may have a greater impact on profits. However, given the demand for DRAM and NAND storage chips from the AI-based data center and cloud computing businesses are expected to accelerate, and the recovery of the PC and mobile phone markets in 2H23 are also likely to boost the company’s performance, it is recommended to buy at US$60.5, target at US$70.5, and stop loss at US$58.0.