October 6, 2022

Freight Rates

If supply chain crunch is finally easing, why is inflation so high?

Fed supply chain pressure index headed in opposite direction of inflation

Greg Miller Follow on Twitter Sunday, October 2, 2022

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Remember back in 2021 when inflation was “transitory” and surging consumer prices were blamed on the supply chain crisis? The Fed and macro investors became intensely interested in chaos at the ports. The focus on bottlenecks spurred the Federal Reserve Bank of New York to create a new barometer called the Global Supply Chain Pressure Index (GSCPI) in January.

The implication was that if supply chain pressure reduced, inflation would ease. It hasn’t worked out that way.

The GSCPI (data here), which roughly tracked inflation trends in 2021, has fallen sharply in 2022. The monthly measure has plunged 66% from its peak, from 4.31 standard deviations above average in December to 1.47 standard deviations above average in August.

The monthly U.S. inflation measure (headline Consumer Price Index) has gone in the opposite direction over the same period, up 17%, from 7.04% (year-over-year increase) in December to 8.26% last month.

Other supply chain indicators also fall

It’s not just the GSCPI that’s unmoored from inflation.

Flexport created a measure of supply chain pressures called the Ocean Timeliness Indicator (OTI). The OTI measures the average number of days cargo takes from the time it leaves a factory in Asia to the time it exits the terminal gates in the U.S. or Europe.

The curve of the trans-Pacific eastbound OTI roughly mirrors the GSCPI. After peaking at 113 days in the week ending on Jan. 23, it fell 24% to 86 days on the week ending on Sept. 25.

Spot freight rate indexes have likewise trended in the opposite direction from inflation in 2022. The weekly Drewry World Container Index peaked at $10,377 per forty-foot equivalent units (excluding premiums) in the week ending on Sept. 23, 2021. It has since fallen 61% to $4,014 per FEU.

Yet another example: Container bookings have followed a similar downward slope as the GSCPI, OTI and Drewry World Container Index. FreightWaves SONAR’s Container Atlas features a proprietary index of bookings based on scheduled date of departure to the U.S. This index saw a sharp decline starting in May. Between its late April high and Sunday, it has fallen 35%.

Why hasn’t supply chain easing helped inflation?

Unlike in late 2021, when retail execs on conference calls talked about import delays and marking up goods to pass along surging freight costs, they’re now talking about having too much inventory in warehouses and discounting goods to clear the excess.

If the supply chain crunch was such a major driver of inflation, why are so many indicators pointing to an easing of supply chain pressures at the same time inflation remains exceptionally high?

One theory is that the supply chain was at least something of a red herring. Another is that supply chain pressures are indeed easing, but they’re still way above pre-COVID levels. In other words, the supply chain crunch is not over yet, so the positive payoff for inflation is yet to come.

The GSCPI, while down sharply from its peak, is still almost six times higher than it was in 2017-19. Flexport’s OTI is still more than double its pre-COVID level. 

The Drewry World Container Index is currently three times higher than it was at this time of year in 2019. The FreightWaves SONAR Container Atlas Ocean TEU index for US-bound cargoes is currently 35% higher than it was at this time in 2019.

Meanwhile, U.S. imports remain near all-time highs and have yet to materially fall. According to Descartes, U.S. imports in August were flat versus July and up 18% versus August 2019, pre-COVID. Customs data on FreightWaves SONAR shows that September imports were very close to September 2021 levels.

Ship-position data and queuing lists showed 109 container vessels waiting off U.S. ports as of Sunday. That’s down from a high of over 150, but still far above the pre-COVID normal in the single digits.

Signs of hope but supply chain crunch not over

Flexport addressed the status of the supply chain squeeze in a presentation on Thursday. The consensus: Yes, it’s winding down, but it’s too soon to declare victory.

Flexport Chief Economist Phil Levy highlighted the role of the supply chain crunch in public policy. “It has fed into a lot of macroeconomic policy and into what the Fed has been doing. To the extent one thought supply chain problems would get fixed, that was part of the rationale for calling [inflation] transitory.”

On a positive note, Levy pointed to the drop in the cargo transit times measured by the OTI. “If you look at the [historical] pattern, it gets better around late spring and early summer and then in late summer, it starts to get worse. We saw that in 2020 and in 2021. We waited to see that in 2022 and it didn’t happen. To me, that’s notable. I would put that down as a sign of hope.”

On the other hand, Levy noted that U.S. consumer spending on durable goods continues to be surprisingly strong. “Durable consumption is down from the peak in the spring, but we’re still consuming 20% more durables [than pre-pandemic]. And nondurables are not even that far off the peak. So, we have not seen a big consumption drop-off. There’s still a lot of demand out there.”

September 30, 2022

European Inflation

Red-Hot European Inflation Hits A New Record, Rising By Double Digits For The First Time

by Tyler Durden

Friday, Sep 30, 2022 – 07:40 AM

Another month, another red hot inflation print in Europe.

In the flash inflation release for September, Euro area headline HICP inflation rose 82bp to a record 10.0% (technically 9.96%), well above the median forecast of 9.7% and marks the fifth straight month the result has exceeded consensus. Before the inflation data, every one of the 40 economists surveyed by Bloomberg predicted a record outcome this month, with four reckoning on 10%.

While energy and food once again drove inflation, an underlying measure that excludes them also topped estimates to reach an all-time high of 4.8%, above expectations of 4.70%, and piling pressure on the European Central Bank to keep raising interest rates aggressively.

Here are the key flash numbers for September:

• Euro area Core HICP: 4.79% Y/Y vs. consensus 4.7%, last 4.3%
• Euro area Headline HICP: 9.96% Y/Y vs. consensus 9.7%, last 9.14%
• France Headline HICP: 6.23% vs consensus 6.6%, last 6.56%
• Italy Headline HICP: 9.46% vs consensus 9.4%, last 9.11%

Main points:

• Euro area headline HICP inflation rose 82bp in September to 9.96%yoy, above expectations. Core HICP inflation, excluding energy, food, alcohol and tobacco, rose 49bp to 4.79%yoy, also above expectations.
• The breakdown by main expenditure categories showed services inflation rose five-tenths of a percentage point to 4.3%yoy, and non-energy industrial goods inflation rose 0.5pp to 5.6%yoy. Of the non-core components, energy inflation rose 2.2pp to 40.8%yoy, while food, alcohol and tobacco inflation rose 1.2pp to 11.8%yoy.
• In a separate release , French HICP headline inflation was 6.2%yoy in September, below consensus expectations. The press release notes a more marked seasonal downturn in travel-related prices as one of the drivers of the decline in inflation in September. In Italy, headline inflation surprised to the upside at 9.5%yoy, and the press release notes strength in non-durable and semi-durable goods, and food prices as the primary drivers of the increase.

The actual result masked considerable divergence across the euro region. In Germany, Europe’s biggest economy, price growth surged much more than expected.  The end of summer discounts on public transport and fuel helped drive a gain there to 10.9%, the highest headline rate seen in the Group-of-Seven industrialized economies since the energy crisis struck. Italy, the Netherlands and Belgium saw significant accelerations too. By contrast, price growth unexpectedly slowed in France and weakened much more than expected in Spain.

Europe’s inflation data have proven critical in driving momentum toward large rate hikes in previous months, and this result is likely to embolden calls for another large move at the next ECB decision on Oct. 27. Investors this week began pricing in a second straight 75 basis-point increase.

“The next step still has to be big because we are still far away from rates that are consistent with 2% inflation,” ECB Governing Council member Martins Kazaks, said Wednesday in an interview in Vilnius, Lithuania, where price growth was 22.5%. “I would side with 75 basis points.”

While officials ramped up their aggression with a move of that size on Sept. 8, they’ve also sought to differentiate the euro zone’s experience with that of the US, insisting that inflation in their own region is far more supply-driven than the demand-propelled consumer-price situation across the Atlantic.

Even so, Bloomberg notes that policy makers will be nervous at yet another record reading. Boris Vujcic, the Croatian central-bank governor who will join the ECB Governing Council in January, warned in an interview published this week that “when inflation is high, when it nears double-digit levels, it can become a disease in itself.”

With Russia starving Europe of gas supplies and winter approaching, policy makers are bracing for an even more difficult few months. Price increases may yet accelerate further in some countries, while recessions are becoming increasingly likely.

The latest OECD forecasts chime with that view. Officials on Monday raised their projection for euro-zone inflation next year by 1.6 percentage points to 6.2%, noticeably exceeding the ECB’s own outlook. Hours later, ECB President Christine Lagarde reiterated that her officials also see the danger of a higher outcome.

“The risks to the inflation outlook are primarily on the upside, mainly reflecting the possibility of further major disruptions in energy supplies,” she told lawmakers. “We expect to raise interest rates further over the next several meetings to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.”

A relatively tight labor market may intensify such pressures. A separate report from Eurostat showed euro-zone unemployment held at a record-low 6.6% in August.

Looking ahead, Goldman now expects Euro area core inflation to peak at 5.0%yoy in December, and looks for headline inflation close to peak at 11.7%yoy in January.

https://www.zerohedge.com/economics/red-hot-european-inflation-hits-new-record-rising-double-digits-first-time

September 30, 2022

European Inflation

Red-Hot European Inflation Hits A New Record, Rising By Double Digits For The First Time

by Tyler Durden

Friday, Sep 30, 2022 – 07:40 AM

Another month, another red hot inflation print in Europe.

In the flash inflation release for September, Euro area headline HICP inflation rose 82bp to a record 10.0% (technically 9.96%), well above the median forecast of 9.7% and marks the fifth straight month the result has exceeded consensus. Before the inflation data, every one of the 40 economists surveyed by Bloomberg predicted a record outcome this month, with four reckoning on 10%.

While energy and food once again drove inflation, an underlying measure that excludes them also topped estimates to reach an all-time high of 4.8%, above expectations of 4.70%, and piling pressure on the European Central Bank to keep raising interest rates aggressively.

Here are the key flash numbers for September:

• Euro area Core HICP: 4.79% Y/Y vs. consensus 4.7%, last 4.3%
• Euro area Headline HICP: 9.96% Y/Y vs. consensus 9.7%, last 9.14%
• France Headline HICP: 6.23% vs consensus 6.6%, last 6.56%
• Italy Headline HICP: 9.46% vs consensus 9.4%, last 9.11%

Main points:

• Euro area headline HICP inflation rose 82bp in September to 9.96%yoy, above expectations. Core HICP inflation, excluding energy, food, alcohol and tobacco, rose 49bp to 4.79%yoy, also above expectations.
• The breakdown by main expenditure categories showed services inflation rose five-tenths of a percentage point to 4.3%yoy, and non-energy industrial goods inflation rose 0.5pp to 5.6%yoy. Of the non-core components, energy inflation rose 2.2pp to 40.8%yoy, while food, alcohol and tobacco inflation rose 1.2pp to 11.8%yoy.
• In a separate release , French HICP headline inflation was 6.2%yoy in September, below consensus expectations. The press release notes a more marked seasonal downturn in travel-related prices as one of the drivers of the decline in inflation in September. In Italy, headline inflation surprised to the upside at 9.5%yoy, and the press release notes strength in non-durable and semi-durable goods, and food prices as the primary drivers of the increase.

The actual result masked considerable divergence across the euro region. In Germany, Europe’s biggest economy, price growth surged much more than expected.  The end of summer discounts on public transport and fuel helped drive a gain there to 10.9%, the highest headline rate seen in the Group-of-Seven industrialized economies since the energy crisis struck. Italy, the Netherlands and Belgium saw significant accelerations too. By contrast, price growth unexpectedly slowed in France and weakened much more than expected in Spain.

Europe’s inflation data have proven critical in driving momentum toward large rate hikes in previous months, and this result is likely to embolden calls for another large move at the next ECB decision on Oct. 27. Investors this week began pricing in a second straight 75 basis-point increase.

“The next step still has to be big because we are still far away from rates that are consistent with 2% inflation,” ECB Governing Council member Martins Kazaks, said Wednesday in an interview in Vilnius, Lithuania, where price growth was 22.5%. “I would side with 75 basis points.”

While officials ramped up their aggression with a move of that size on Sept. 8, they’ve also sought to differentiate the euro zone’s experience with that of the US, insisting that inflation in their own region is far more supply-driven than the demand-propelled consumer-price situation across the Atlantic.

Even so, Bloomberg notes that policy makers will be nervous at yet another record reading. Boris Vujcic, the Croatian central-bank governor who will join the ECB Governing Council in January, warned in an interview published this week that “when inflation is high, when it nears double-digit levels, it can become a disease in itself.”

With Russia starving Europe of gas supplies and winter approaching, policy makers are bracing for an even more difficult few months. Price increases may yet accelerate further in some countries, while recessions are becoming increasingly likely.

The latest OECD forecasts chime with that view. Officials on Monday raised their projection for euro-zone inflation next year by 1.6 percentage points to 6.2%, noticeably exceeding the ECB’s own outlook. Hours later, ECB President Christine Lagarde reiterated that her officials also see the danger of a higher outcome.

“The risks to the inflation outlook are primarily on the upside, mainly reflecting the possibility of further major disruptions in energy supplies,” she told lawmakers. “We expect to raise interest rates further over the next several meetings to dampen demand and guard against the risk of a persistent upward shift in inflation expectations.”

A relatively tight labor market may intensify such pressures. A separate report from Eurostat showed euro-zone unemployment held at a record-low 6.6% in August.

Looking ahead, Goldman now expects Euro area core inflation to peak at 5.0%yoy in December, and looks for headline inflation close to peak at 11.7%yoy in January.

https://www.zerohedge.com/economics/red-hot-european-inflation-hits-new-record-rising-double-digits-first-time

September 29, 2022

EVERCHEM UPDATE: VOL. 02 – Nearshoring

Multi-national companies have always had the option to move their primary production hubs as markets and costs shift, but what about small and medium enterprises? Bleak pricing realities of natural gas for manufacturing in European nations are forcing the hands of SMEs, and a new consideration has surfaced: Nearshoring.

The Everchem Update is a new biweekly publication of under-reported polyurethane industry news – insider views and conversation about the polyurethane market.

Interested in urethane prepolymers that are REACH approved? Contact Everchem today here.

September 29, 2022

EVERCHEM UPDATE: VOL. 02 – Nearshoring

Multi-national companies have always had the option to move their primary production hubs as markets and costs shift, but what about small and medium enterprises? Bleak pricing realities of natural gas for manufacturing in European nations are forcing the hands of SMEs, and a new consideration has surfaced: Nearshoring.

The Everchem Update is a new biweekly publication of under-reported polyurethane industry news – insider views and conversation about the polyurethane market.

Interested in urethane prepolymers that are REACH approved? Contact Everchem today here.