There’s a lot to look at in markets at the moment, but in the last week of February, the central concern seemed to be interest rates, with the benchmark US 10-year Treasury touching a one-year high of 1.61 per cent on Thursday.
Cue a frantic sell-off in theoretically interest-rate-sensitive growth stocks, perhaps best encapsulated by the ARK Invest family of ETFs, as investors scrambled to rotate their portfolios as fears of inflation swept through the markets. By Friday, however, it was back to normal. And so it was in early trading on Monday.
The market’s current schizophrenia towards inflation and rates is understandable. Judging whether prices will become a problem, or a tailwind, for the US economy is in our view impossible. Covid has created a lot of idiosyncratic effects on both the supply and demand side of the economy that will create natural distortions in price data. So figuring out where the steady-state-rate of inflation will settle post-recovery feels like, to be polite, a mug’s game.
Yet Monday’s PMI readings from ISM do suggest that, at the moment, if pricing pressure is going to persist it will be due to the supply side.
In case you missed the headlines, the US manufacturing purchasing managers’ index came in at 60.8 per cent, up 2.1 percentage points from January’s reading. It is, by all accounts, a blockbuster number — the highest reading since February 2018 (the Trump tax-cut era, as you might recall).
But look closely at the responses, and you’ll see that supply chains seem to be the central concern for the businesses surveyed by ISM.
Here’s a selection of the best ones, with the relevant industry added at the end (if you’re wondering what the bracketed part means):
“Steel prices have increased significantly in recent months, driving costs up from our suppliers and on proposals for new work that we are bidding. In addition, the tariffs and anti-dumping fees/penalties incurred by international mills/suppliers are being passed on to us.” (Transportation Equipment)
“Prices are going up, and lead times are growing longer by the day. While business and backlog remain strong, the supply chain is going to be stretched very [thin] to keep up.” (Machinery)
“We have seen our new-order log increase by 40 per cent over the past two months. We are overloaded with orders and do not have the personnel to get product out the door on schedule.” (Primary Metals)
You get the picture: demand is robust, but producing the goods for customers is proving problematic. This has knock on-effects on costs. Zero in on the prices — the cost of raw goods for products — reading in the survey and you’ll see it came in at a whopping 86 per cent. According to Alphaville pals Bespoke Research Group, the consumer price index reading when this figure is above 85 has been at an average of 3.2 per cent since 1990. The last CPI reading? 0.3 per cent.
We already knew that the rise in oil prices and pent-up…
Go to the news source: The US’s blockbuster manufacturing PMI points to supply chain issues