?? Clouds over $Trillion Nvidia? ?? Also: US Hawkish Pause? No UK Pause. Stimulating China; Activating Toyota; AMD's AI Push ?? Absolutely Fabless

• US large-cap S&P 500 closed 0.69% UP ▲
• Tech-heavy Nasdaq Composite closed 0.83% UP ▲
• Pan European STOXX Europe 600 closed 0.63% UP ▲
• HK/China's Hang Seng Index closed 0.6% UP ▲
• Japan's broad TOPIX closed 1.16% UP ▲

?? Focus

• Clouds over $Trillion Nvidia?

?? In the Markets

• US Hawkish Pause ahead? No UK Pause. Stimulating China; Activating Toyota
• AMD's AI Push

?? MoneyFitt EXPLAINS

• ?? Absolutely Fabless

?? Focus

Clouds over $Trillion Nvidia?

Chipmaker and AI winner Nvidia rose 3.9% and finally managed to stay above the $1 trillion market capitalisation (share price X number of shares) level into the close. Having briefly crossed the mark during the day on May 30th, it joins a very small band of US giants who've been valued above $1tn: Apple, Amazon, Microsoft, Alphabet, Facebook, now Meta, and Tesla. (The Nvidia price actually halved in 2022 on fears about slower spending on data centres, having previously rallied as a pandemic play. Locked down? Play computer games and punt crypto!)?

Even Jensen Huang's signature leather jacket is digital

- Image credit: Nvidia

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.....? Nvidia is the first semiconductor?? company to hit a $1tn valuation as the prime play on Wall Street in the latest frenzy over artificial intelligence sparked, of course, by OpenAI's ChatGPT. In April, Nvidia debuted its powerful new H100 Tensor Core GPU, and last month it launched two new supercomputers, one using its H100 GPUs and the other using its own CPUs and no GPUs at all, showing growing dominance in the high-performance computing market.?

.....? The company started making niche graphics processing chips mostly for computer gaming enthusiasts, but those GPUs turned out to also have characteristics used to power AI applications, including ChatGPT. The actual business models using AI are still being developed, but as of now, Nvidia's chips are the shovels the AI gold miners need while they figure it out. The big question is whether Nvidia's supply can keep up with demand. It's the only game in town!?

.....? Or is it? There is competition brewing out there, not simply for the AI chips themselves (like AMD - see below), but with the whole idea of even having chips. The model of dedicated hardware with internal AI chips is challenged by cloud-based AI services where providers like Google, Microsoft (with AMD), and Amazon are designing their own chips while also buying loads of Nvidia's. Meta is as well, while its open-source AI language model LLaMA is also proving popular with developers. (Even Apple and Tesla are designing their own AI chips.) Dedicated AI hardware is designed specifically for neural network deep learning projects, with faster processing and lower latency (the time it takes for a computer to respond to a command), but it can be expensive and needs specialised expertise. Cloud-based AI services allow cost-effective and scalable access to AI capabilities without all that, though possibly with some performance and latency trade-off.

And as a pure design chipmaker, Nvidia is "fabless"?? (i.e. doesn't actually have its own factory), so it has to use specialist chipmaking "foundries"?? such as TSMC, which Nvidia CEO Jensen Huang called "the best foundry in the world," but noted his company is "not married to any one foundry."

CPU vs GPU - a mini-explainer

- A CPU (Central Processing Unit), the “brain” of a computer, is designed to perform many very complex general-purpose computing tasks using just a few processing cores that can handle a few threads at a time (serial processing.)

- A GPU (Graphics Processing Unit) is designed to do repetitive, parallel processing tasks incredibly quickly with thousands of smaller, more efficient processing cores, like rendering 3-D graphics and video processing (... and crypto mining.)

- GPUs are increasingly being used in IoT (Internet of Things) and AI (Artificial Intelligence). In IoT, GPUs are used for edge computing, which involves processing data locally on IoT devices such as real-time image recognition and natural language processing, and in AI, for super-fast training of deep neural networks.

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?? In the Markets

US Hawkish Pause ahead? Stocks on Wall Street stocks hit another 14-month high on Tuesday on US May inflation easing to its lowest in over two years, leading traders to increase their bets that the Federal Reserve, the US central bank, will finally pause its inflation-battling interest rate hike campaign on Wednesday, after 10 consecutive hikes since March 2022. With a reduced likelihood of interest rate hikes, the US Dollar dipped against other currencies.?

.....? Headline US consumer prices eased to a 4% increase from a year earlier (a slower annual pace than April's 4.9%) and were up just 0.1% from the month before. But “core” prices, stripping out volatile food and energy components, rose faster at 5.3% compared to May 2022, and compared to end-April prices, end-May prices were 0.4% higher. This is still too high for the Fed, which is targeting 2% inflation, so while the Fed may pause, it may turn out to be a "hawkish pause" before hiking again if core inflation doesn't follow the headline numbers lower. Core prices were boosted by strong used car prices in May, which have since eased, and there are solid signs that post-lockdown recreational Revenge Spending on hotels, airline tickets and fancy dinners ("Experiences!") is finally reversing, so there's still hope!?

Revenge Spending on Experiences

- Image credit: Archer / FX via Tenor

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No UK pause: Strong UK jobs numbers added pressure on the Bank of England, the UK's central bank, to keep raising interest rates. Faster-than-expected wage growth (average earnings) is of particular concern, reaching fresh yearly highs (6.5%) and pointing to a rate hike in June and potentially August.?

.....? Megan Greene, who will join the Bank of England’s rate-setting Monetary Policy Committee in July, told the Treasury Committee of the House of Commons that the tight labour market was still putting pressure on inflation and that “There are second-round effects that seem to be seeping in,” echoing comments from the BoE governor a month ago about the wage-price spiral (every central banker's nightmare) when he also said interest rates would be hiked as far “as necessary” to get inflation back to its 2% target.

Stimulating China: On Tuesday, China's central bank, the People's Bank of China, cut interest rates (the 7-day reverse repurchase rate, to be precise) by 0.10% to 1.9%, the first reduction since August 2022. This led traders to bet that the PBOC will reduce its one-year loan rate today, with banks lowering their lending rates shortly after. This comes a week after bank deposit rates were pushed down. Meanwhile, the National Development and Reform Commission released 22 new measures to lower costs for firms, while pushing banks to make more medium- and long-term loans to the manufacturing sector.

.....? And in a further sign of China's rapid slowdown (see MFM), new bank loans were lower than expected, and foreign currency savings declined to a nearly three-year low. Shanghai's Finest was expecting new lending of 1.6 trillion yuan, but it only managed 1.36 trillion.?

Activating Toyota: The world's top car maker has become a lightning rod for both shareholder return activists as well as green investors for its sluggish rollout of electric vehicles. That pressure is now extending to the independence of its board, with several major US pension funds voting against new Chairman (and grandson of the founder) Akio Toyoda at its annual shareholder meeting later today. (See last week's MFM on activist funds in Japan.) Interestingly, this comes as many companies in Japan face more pressure from investors, especially on ESG (environmental, social and governance) issues.

.....? Shareholders in Japan have historically exhibited a high level of respect and deference towards management (often referred to as "shareholder passivity,") which can lead to a lack of active engagement and questioning of management decisions, resulting in less pressure on management to deliver higher returns. This extended to traditional corporate governance structures characterised by interlocking relationships between companies, banks, and other stakeholders, known as "keiretsu." Hopes are high for shareholder activism to boost returns, but it’s for the long haul. Luckily that’s what investing is all about!

A breakthrough in Japanese corporate governance

- Image credit: Tenor

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AMD's AI Push: Like fellow semiconductor chipmaker?? Nvidia, Advanced Micro Devices (AMD) is led by a Taiwanese-American chief executive. On Tuesday, it announced that companies like Meta have been ordering high volumes of its new Bergamo CPU for high-performance computing, which it recently started shipping. The Bergamo chip is different from the company's "MI" series of AI chips but in the same data centre business. AMD will soon launch the new MI300X GPU "super chip",? which is designed for large language models and other cutting-edge AI models and will compete head-to-head with Nvidia's new H100 (see above.) Nvidia currently dominates the AI chip space with 80-95% market share, partly driven by years of providing software tools to AI developers, which helps it anticipate their needs, but AMD just announced its own powerful AI chip software stack called ROCm.

"There's no question that AI will be the key driver of silicon consumption for the foreseeable future, but the largest opportunity is in the data centre... [while AI is AMD’s] largest and most strategic long-term growth opportunity.” -- Lisa Su, AMD's CEO

.....?? For decades, AMD was the cheaper and weaker rival to all-powerful Intel in the CPU space. It was the bargain option. But after jettisoning its own chip manufacturing operations?? as Global Foundries (GFS), it caught up with and overtook its old archrival. AMD entered the GPU market in 2006 when it bought ATI Technologies for $5.4 billion, and its GPU market share has been growing steadily in recent years, now at over 20% of the market for graphics cards (not the same as total GPUs.) In early May (see MFM), Bloomberg reported that Microsoft is working with AMD on new AI processors. Right now, Nvidia seems to be in an impregnable position, but AMD does have a history of doing the unthinkable. Could we someday see the same in GPUs and AI chips? Could mighty Nvidia really be the new Goliath to AMD’s David??

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MoneyFitt EXPLAINS?

?? Semiconductor Companies…Fabless and Foundries

Semiconductors are the basic building blocks of an ever-widening range of electronic products, far beyond just computers and electronic items. The word's often used interchangeably with "microchips" or just "chips."

Chipmakers generally focus on one of two major product groups

1) memory chips (DRAM etc, not storage - e.g. Samsung, Micron) and?

2) logic microprocessors (CPUs and GPUs - e.g. Intel, AMD, Nvidia)?

But there is another distinction: Whether or not they have their own factory (foundry, fabrication plant, or "fab") or not ("fabless", where they just do the design, such as Qualcomm, Broadcom, Nvidia... and Apple.)

A fabless semiconductor design house needs its chips built by a contract manufacturer or foundry, which invests enormous sums in its plant, equipment and, as importantly, people and processes. TSMC is by far the largest, most advanced and most profitable foundry in the world.

(Semiconductor equipment makers are quite separate - e.g. ASML, AMAT, Tokyo Electron, which supply the advanced equipment that both integrated players and foundries rely on.)