With inflation soaring to multiyear highs in several parts of the world, all eyes are on global supply chains to gauge whether or not relief is coming. As I’ll discuss, while supply chains are still strained, improvements in delivery times and declines in business costs, including shipping, suggest the peak of inflation is near.
In other words, the stage is set for an imminent peak and reversal in Treasury yields, especially since so much Fed tightening is also priced in at the current time.
Are global supply bottlenecks easing?
Looking at Markit’s latest batch of manufacturing PMI releases, it’s clear that global supply chains are still strained. But there are also some encouraging signs. Markit noted that global factory delivery times increased in January at the slowest pace since March, 2021, and said that “contributed to a mild deceleration in input cost inflation to a ten-month low.”
Another positive was the fact that Korea, Japan and Taiwan (all exporters of key manufacturing inputs such as semi-conductors), all experienced expansion in factory output and solid exports during that same month. Germany, another major exporter, saw factory output grow in January at the fastest pace in five months, with Markit attributing this to “easing in supply-side constraints.”
While global shipping costs remain elevated, they have come down quite a bit since October, also pointing to some easing in supply bottlenecks. The World Container freight rate per 40-foot box fell below US$10,000 last week, down 10 per cent from last September’s peak.
The decline in freight is even larger on key routes such as Shanghai to Los Angeles (down 16 per cent from peak) and Shanghai to New York (down 17 per cent from peak).
The lower freight costs no doubt reflect increased efficiency at U.S. ports. The two busiest container ports in America, namely Ports of Los Angeles and Long Beach, have seen significant decongestion since an agreement with unions allowed for 24/7 operations. Port backlogs, which peaked in November, are easing fast as evidenced by the lowest number of container vessels in port in a year.
Coming to America
On land, too, transportation costs seem to be coming down from record highs. The Dry Van trucking rate per mile, while still double where it was in February, 2020, is now at the lowest since mid-January.
The easing of supply bottlenecks is also apparent from the U.S. Institute of Supply Management’s data. According to the ISM, while U.S. manufacturing is still operating in a “supply chain-constrained environment … January was the third straight month with indications of improvements in labor resources and supplier delivery performance.” The ISM manufacturing’s backlog of orders index dropped from 62.8 to 56.4 in January, while the supplier deliveries index fell from 64.9 to 64.6 (both lowest since late 2020).
Those survey responses are consistent with hard data such as rising industrial production of consumer durable goods, including home electronics and autos (both heavily dependent on semi-conductors and hence supply chains).
In the services sector, too, there is some evidence of easing in bottlenecks, despite continuing problems with supply. The ISM services PMI backlog of orders index has fallen from 67.3 in October, to 65.9 in November, to 62.3 in December, and now to 57.4 in January (the lowest since April of last year). While the supplier deliveries index worsened/rose slightly from 63.9 to 65.7 in January, that’s still well below November’s print of 75.7.
Challenges ahead
Supply bottlenecks, while easing in recent weeks, are unlikely to entirely disappear this year. There are still reported shortages of labour and materials, particularly in the United States. (The truckers’ protests in Canada have ended but have reportedly set back production further at major automakers.) The COVID-19 situation also remains in flux and could spring more surprises – recall that China has a “zero COVID-19 policy” and has demonstrated it can impose sudden lockdowns of entire cities and ports to curb new infections.
Shipping rates, while declining recently, are likely to remain elevated because it will take some time to clear backlogs in crucial ports globally. Moreover, structural problems in the industry, such as slow capacity growth and concentrated market power among carriers, will not go away any time soon. Investment in infrastructure and digitalization in the industry, which incidentally will take time to unfold, will be crucial in bringing shipping rates back down to more sustainable levels.
And if the Russia-Ukraine spat devolves into a full-blown war, expect supply chains to be further strained. For example, the resulting higher energy prices will not only raise transportation costs but may also put vulnerable firms out of business. The White House has also warned that a war could disrupt access to key materials used to manufacture semi-conductors that are sourced in both Ukraine and Russia.
Bottom line
All told, while global supply chains remain strained, there seems to be some easing under way as evidenced by reduced congestion at ports, declining shipping costs and record exports in places such as Taiwan, South Korea and Vietnam.
In other words, barring additional curveballs from COVID-19 (and related unforeseen hits to supply), inflation is very likely close to peaking.
For investors, that translates into taking advantage of this most recent yield back-up by adding duration to the bond portfolio, with the understanding that we are now in the classic late-cycle “blow-off” phase.
David Rosenberg is founder of Rosenberg Research, and author of the daily economic report, Breakfast with Dave.
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David Rosenberg