Supply Chain & Rates

Michael Rudd, CFA | President, CEO & Portfolio Manager

This week, we write on two topics. First, the US Federal Open Market Committee (FOMC) voted to hold rates steady on Wednesday, as the futures curve that we previously noted in this Outlook indicated. It now looks like the curve, and the FOMC are implying 1-2 more 25 basis point hikes until a potential peak is reached at 5.6-5.75% in the next 6 months or so. This is a change from a month ago, which means that the market is implying that inflation will remain somewhat sticky. It is worth noting that both the market and the FOMC believe that over time, inflation will settle back down to a long run rate of 2.5%. The last US CPI reading was 4.0%, so they have some work to do to get there. Many commentators suspect that rates will be held high until economic data softens. Then they will be reduced quickly to avoid a recession. Figure 1 presents the US fixed income market. As you can see, it has changed dramatically since 2019.

Second, we found some data with respect to the global supply chain from the New York Fed database that we really like. From their website: “Our research indicates that changes in the GSCPI are associated with goods and producer price inflation in the United States and the euro area, both during the pandemic period and before…”. The index focuses on marine and air freight, as well as supply chain data from PMI surveys, of interlinked economies like China, the euro area, Japan, South Korea, Taiwan, the United Kingdom, and the United States. As you can see from Figure 2, after peaking in 2022, supply chain stress has dropped substantially. This is consistent with our view that there are very broad forces, initially created from the mitigation measures from the pandemic, at play. We are now in a period of loose supply… verses early 2022 when it was extremely tight. This is a positive development.

“This means that” for the rates point, we tend to agree that the FOMC is in a good spot and can hold rates at these or close to these levels for some time, and hopefully ease into a soft landing. With respect to the global supply chain, we are glad to see that the pressure has been removed from the system. It makes the inflation fight easier at the margin for the FOMC.

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