The warning first appeared in the latest Beige Book of all places.
Readers will recall that three weeks ago, when parsing the Boston Fed section of the Fed report, we found two very troubling references to the current state of semiconductor industry. The first one, while not critical was more of an amusing anecdote why the US labor market has been persistently "strong" as most high frequency indicators have been rolling over. This is what the Beige Book said about the labor market in the context of the semi sector:
A semiconductor manufacturer facing big declines in demand from China put a hiring freeze in place, but they were reluctant to institute layoffs since it takes three to six months to train new workers.
It was the second Boston Fed reference to the semi sector that was far more critical: this is what the Boston Fed said regarding anecdotal reference to manufacturing and related services.
Two [firms] reported substantial drops in sales and two reported significant weakness. The two firms that reported serious issues were a semiconductor manufacturer and a furniture builder.... The semiconductor firm sells mostly to the auto industry and said that a 40 percent drop in new orders from China was the biggest fall in sales since the collapse of Lehman in 2008. Two other firms, both with heavy exposure to semiconductors, said that the market had slowed significantly since earlier in 2018 - Link.
Since then one semiconductor company after another has issued warnings about the state of the industry, even as the Philadelphia Semiconductor Index has, paradoxically, hit all time highs as traders bets on imminent sector recovery sparked by China's latest kitchen-sinking of various stimulus measures.
But for at least one company, that "imminent" moment can not come soon enough, because moments ago, Infineon, Europe's semiconductor giant, threw in the towel on the rosy future, and slashed its 2019 revenue guidance " in view of continued global economic uncertainties and weaker end-market demand."
The company now sees full year revenue at €8 billion plus or minus 2%, which implies growth of roughly 5% at mid-point vs 2018 revenue of €7.6 billion, which means Infineon just cut its prior guidance of 9% almost in half.
What is perhaps scarier is that for the current quarter, the company said segment results should come in as expected, which means all the weakness is back-end loaded, to coincide with what the rate market increasingly sees as a recession in the back half of 2019.
Discussing the weakness, the company said that the growth rate of the Automotive and Industrial Power Control divisions should come in above group average (unless, of course, the weakness in the auto sector persists), whereas the Power Management & Multimarket division is expected to grow slightly less. For the Digital Security Solutions division revenue is still assumed to decline by a mid-single digit percent rate compared to previous year.
But the real reason for the guidance cut was simple:
“A number of endmarkets continue to be sluggish,” Infineon said in a statement Wednesday. “In particular, the trend of declining vehicle sales in China has accelerated in February, causing dealer inventories to increase sharply.”
For good measure, the company also cut its profit margin guidance, and now it expects margin to be 16% versus 17.5% before, explaining that "business indicators point to a slower demand recovery than expected thus far", something which all those algos bidding up the SOX may want to look into.
The Infineon news sent its sending shares tumbling by as much as 8.6%, the biggest intraday drop since Nov. 12.