Semiconductor Sell-Off Drags Tech Stocks Down 2% Amid Fed Warnings

In the late hours of the trading day, the U.S. stock market experienced a significant sell-off in the semiconductor sector, leading to a widespread decline in tech stocks. The Philadelphia Semiconductor Index dropped sharply by over 2%, with major players such as Broadcom, TSMC ADRs, and Micron Technology all seeing declines exceeding 2%. This downturn was not isolated to semiconductor stocks; other technology stocks also faced substantial losses, with Oracle experiencing a notable plunge.

Investors' confidence in buying U.S. tech stocks has been waning following warnings from Federal Reserve Chairman Powell about the risks of high valuations. Additionally, the increasing risk of a U.S. government shutdown has dampened market sentiment. The probability of a government shutdown by 2025 has risen to 76%, with a 63% chance of it occurring before October 1st. The U.S. government faces a potential shutdown if the Republican Party and the Democratic Party cannot reach an agreement, with the deadline set for October 1st at midnight. The current stalemate has led to heightened tensions, with the Office of Management and Budget (OMB) instructing federal agencies to prepare for potential layoffs, adding pressure on the Democratic Party as government funds are set to run out.

Meanwhile, the latest macroeconomic data has added uncertainty to the prospects of a Federal Reserve rate cut. The U.S. Bureau of Economic Analysis (BEA) reported that the second-quarter real GDP annualized quarter-on-quarter final value was 3.8%, higher than the expected 3.3%. The core personal consumption expenditure (PCE) price index for the second quarter was 2.6%, also higher than the expected 2.5%. This strong report indicates that inflationary pressures are more persistent than previously thought. The core PCE price index, which excludes food and energy, showed a higher-than-expected performance in the second quarter, with the index rising by 0.1 percentage points to 2.1% and the core PCE price index rising by 0.1 percentage points to 2.6%.

The strong economic data may limit the Federal Reserve's ability to cut rates in the future. Despite the recent 25 basis point rate cut and expectations of two more cuts this year, some Federal Reserve officials have expressed concerns about inflation. Persistent inflation could force the Federal Reserve to adopt a more cautious approach to monetary easing. Atlanta Federal Reserve President Bostic has expressed concern about inflation remaining above the Fed's 2% target, leading him to refrain from supporting another rate cut in October. The upcoming release of August PCE data is expected to show a year-on-year increase of nearly 3%.

In the labor market, the U.S. Department of Labor reported that the number of initial unemployment claims decreased by 14,000 to 218,000 for the week ending September 20th, the lowest level since July. This decrease indicates that while the labor market is cooling, the number of layoffs remains relatively low, suggesting that the U.S. job market remains healthy and that the risk of a downturn in employment has not increased significantly.