Early Morning Finance Breakdown: April 18, 2025
Welcome to the Early Morning Finance Breakdown. It's April 18, 2025, 8:30 AM Taipei time. I'm Yu Ting-hao, and we're here to dissect international financial news and market shifts before the trading day begins. Today, we'll focus on two key areas: the US-China tech war and potential Federal Reserve independence interference.
US-China Tech War: NVIDIA, Apple, and TSMC
The Dilemma of TSMC's Major Clients
Despite TSMC's strong performance in its recent earnings call, concerns remain about its two largest customers. One faces the challenge of supply chain relocation from China, and the other faces chipset restrictions. 85% of iPhone production still relies on China. Can Apple move production to India in time for the iPhone 17 launch?
NVIDIA's Balancing Act
Following restrictions on NVIDIA's H20 chip, CEO Jensen Huang visited China, drawing criticism from some Republicans. While likely a conciliatory visit, it underscores the ongoing tech war. Will NVIDIA lose significant revenue from China and Singapore? These questions merit careful consideration.
Fed Independence Under Threat: Trump's Criticism of Powell
Trump's Interference with Federal Reserve Independence
Former President Trump is increasing his interference with the Federal Reserve's independence. Despite announcing progress in US-Japan trade talks, Trump criticized Fed Chair Powell's remarks about US inflation, especially tariff-related inflation. Trump is unhappy with Powell's slow pace and called for his replacement.
Trump's Policy Disagreements and Potential Actions
Trump has criticized the Fed's lack of action compared to the European Central Bank's seventh interest rate cut. He asserts his tariff policies are making people wealthier and prices lower. While White House officials haven't explicitly threatened dismissal, Trump's dissatisfaction is clear.
Concerns About Early Dismissal and Monetary Policy
Reports suggest Trump considered dismissing Powell before his term ends in 2026, potentially replacing him with a more dovish figure like Kevin Warsh. However, Warsh and others advised against this, warning it would compromise the central bank's independence. Although Trump is currently limited to verbal criticism, the risk of White House influence over the Fed after 2026 is significant. He has expressed his dissatisfaction with Powell's performance, stating that Powell is "too late".
US-China Trade War: Current State and Perspectives
China's Retaliation and Stalled Negotiations
Beijing has retaliated against US tariffs by restricting exports of rare earth minerals and magnets to various industries, including the military. Negotiations between the US and the EU have stalled.
Krugman's Analysis of Trump's Trade War
Nobel laureate Paul Krugman offers two perspectives on Trump's trade war.
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The "Grand Strategy" Theory: The Wall Street Journal proposes Trump is launching a global tariff war to encircle China.
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Krugman's Skepticism: Krugman doubts this strategy's effectiveness.
Challenges in Finding Alternatives and Shifting Supply Chains
Many US imports from China lack readily available alternative sources. Shifting iPhone production out of China in 90 days is unrealistic. Industrial inputs like auto parts are difficult to replace, while China has already found alternative sources for US exports like soybeans and natural gas.
Four Points Against the Grand Strategy Theory
Krugman challenges the "grand strategy" theory.
- Influence of Mnuchin: He suggests Treasury Secretary Mnuchin, who cannot influence Trump, is using The Wall Street Journal to shape policy by feeding ideas into Trump.
- Lack of Trust: Other nations don't fully trust the US and may not be willing to isolate China completely.
- Reluctance to Join: European governments may not risk their supply chains to join a US-led trade war.
- Domestic Repercussions: US public opinion might react negatively to the impacts of the trade war.
Trade Talk Reemergence
Despite continued tensions, Trump has recently indicated ongoing discussions with China on trade agreements. While reports of a Trump-Xi Jinping call are unconfirmed, Trump suggests a deal is still possible. The underlying issue is this policy uncertainty.
Finding Certainty in Uncertainty: Focusing on Hard Data
The Need for Definitive Information
Given the unpredictable policy landscape, it's crucial to focus on concrete data to filter uncertainty. Inflation figures, retail sales data, earnings reports, and corporate outlooks can provide clearer signals and potential investment opportunities.
TSMC's Performance and Outlook
Strong Q1 Results Despite Challenges
TSMC's Q1 financial performance was strong, unaffected by trade war impacts. Revenue reached NT$839.3 billion, a 40% year-over-year increase, exceeding expectations. Strong demand for N3 and N4 processes drove these results. Despite a Taiwan earthquake, gross profit margin was 58.8%, and operating profit margin was 48.5%, both above projections.
Optimistic Q2 Outlook and Inventory Buildup
The company forecasts Q2 revenue between NT$923 billion and NT$949 billion, an 11.5% quarterly increase and a 39% annual increase. Management acknowledges this robust growth is due to a global inventory buildup.
HPC Growth and Shifting Customer Landscape
High-Performance Computing (HPC) accounts for nearly 60% of TSMC's revenue and has experienced seven consecutive quarters of strong growth. Smartphone revenue is gradually declining. NVIDIA has become TSMC's largest customer, while Apple's contribution is decreasing.
US Factory Construction and Capacity
The Arizona factory is already in operation for initial production. 3nm production is set to begin. The new factories are said to generate approximately 30% of 2nm production.
AI Demand and Future Growth
AI-related demand is expected to continue growing, with 30% of N2 capacity in Arizona dedicated to Apple or NVIDIA. AI-accelerated revenue has nearly doubled. CoWoS capacity has also nearly doubled, although supply-demand could ease by 2026.
Rising Costs and Global Expansion
Employee training costs are increasing, particularly since 2020. TSMC is expanding globally:
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Arizona: The first factory is operational, a second is under construction, and plans for third and fourth factories are underway.
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Japan: The first factory is operational, and a second is under construction, producing 6nm chips.
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Germany: A factory is under construction, expected to be completed by 2028-2029, pending environmental approvals.
Taiwan remains the fastest for production growth.
No Joint Ventures and Market Share Implications
TSMC is not pursuing joint ventures or technology licensing, potentially decreasing Taiwan's global market share from 71% to 58% by 2030. Korea's share will decrease as well, while the U.S. is expected to increase from 11% to 22%. That capacity of 22% is really just TSMC, and they have to pay more to get it.
Concerns About Customer Demand and End Markets
While TSMC's performance is strong and market share remains high, concerns persist about customer demand due to end-market weakness, especially with Apple and NVIDIA.
Apple's Market Saturation and Chinese Market Decline
Apple faces challenges, as the product is at its peak sales level. iPhone sales have plateaued. US and EMEA revenue continues to grow. Chinese market iPhone revenue has reached peak and entered decline.
Impact of Tariffs and Competition in China
Tariffs could increase iPhone prices in the US, impacting sales. Revenue in China is shrinking due to increased competition from domestic brands.
NVIDIA's Reliance on China and H20 Restrictions
NVIDIA's H20 chip restrictions pose a significant threat, especially considering China is NVIDIA's second-largest market. The US market is the largest and Singapore is the second, many of which are resold back into China.
Tensions with the U.S.
NVIDIA's Jensen Huang recently visited Beijing and has met with AI leaders there, causing US lawmakers to be upset. This has brought about concern about being called in for a hearing.
Conflicting Views on China and Semiconductor Strategy
Views differ on whether to continue selling to China using downgraded chips or to completely cut them off to give China time to design their own product.
Tariffs and Trade Balance
Trump is worried that tariffs will make it harder to fix the trade deficit.
China Domestic Rise in Support
Domestic support for China-made semiconductors has been on the rise, increasing from 5% in 2018 to 26.6% in 2024.
Foreign Institutions Downgrade TSMC Target Price
Foreign institutions downgrade TSMC target price for stock. Despite this, ratings are generally to buy.
Foreign Investment in Taiwan Slows
Foreign investment in Taiwan has been slowing. While the stock is going up in price, they have been selling at the top. Current P/E ratios are approximately 17 and expected to be 12.
Focus on Earnings
While analysts want to take into account geopolitics, it is more important to understand earnings potential.
Internal Diversity at TSMC
The ratio of women to men continues to decline, from 50% in 2011 to the high 30's today.
Taiwan's Broader Industry and Real Estate
Production in the US
The production of computers and notebooks is generally being done in the US.
Manufacturing of Servers in Mexico
Manufacturing of servers is generally being done in Mexico. The profit margin is high in servers, so that makes it more economically viable.
Real Estate
The local real estate is showing signs of growth. This may be related to the seventh wave of central bank credit controls.
Market Recap and Investment Philosophy
Market Performance
The Dow Jones Industrial Average fell 527 points, or 1.33%, closing at 39,142. The S&P 500 rose 7 points, or 0.13%, closing at 5,282. The Nasdaq Index fell 20 points, or 0.13%, closing at 16,286. The Philadelphia Semiconductor Index (SOX) fell 24 points, or 0.64%, closing at 3,832.
Trump's Influence on the Market
As long as Trump doesn't speak, the market will be stable. The market will crash whenever he speaks.
Hard Data and Market Sentiment
The hard data in the market is quite good, but the sentiment is pessimistic. The initial unemployment claims are the same as they were in 2021.
Book Recommendation: "The Unforgettable Moneyball Money Management Technique"
Overview
This week's recommended book is "The Unforgettable Moneyball Money Management Technique" by Mikaela Aruoka, who created a website called "Budget Liberation" to teach financial literacy.
Wealth Leverage
It discusses the wealth leverage of investment attitude and that investment should be important, but not urgent. There is a need to dedicate time to important, but not urgent, events. This may include hiring personnel or managing finances.
Investment and Short-Term Thinking
The book emphasizes the importance of patience and long-term investment, distinguishing it from short-term gains. To be successful, you must put your time into activities that create the best return.
Wealth Building
If one has the energy to throw the rock into space, there will not be sufficient force to have it orbit. For that to happen, you need to escape the gravitational field.
Concluding Thoughts
To stand out, you need to offer an answer.
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