Identifier : Chaîne d'approvisionnement

The global manufacturing PMI new orders index – a timely indicator of industrial momentum – registered a surprise small rise in September, with weaker results for major developed economies foreshadowed in earlier flash surveys offset by recoveries in China and a number of other emerging markets.

Does this signify an end to the recent slowdown phase, evidenced by a fall in PMI new orders between May and August? The assessment here is that the rise should be discounted for several reasons.

First, it was minor relative to the August drop. The September reading was below the range over October 2020-July 2021.

Secondly, the increase appears to have been driven by inventory rebuilding. The new orders / finished goods inventories differential, which sometimes leads new orders, fell again – see chart 1.

Chart 1

Remember that orders growth is related to the second derivative of inventories (i.e. the rate of change of the rate of change). Inventories are still low and will be rebuilt further but the pace of increase – and growth impact – may already have peaked.

Thirdly, the recovery in the Chinese component of the global index was contradicted by a further fall in new orders in the official (i.e. NBS) manufacturing survey, which has a larger sample size. The latter orders series has led the global index since the GFC – chart 2.

Chart 2

Fourthly, the OECD’s composite leading indicators for China and the G7 appear to have rolled over and turning points usually mark the start of multi-month trends. The series in chart 3 have been calculated independently using the OECD’s published methodology and incorporate September estimates (the OECD is scheduled to release September data on 12 October). The falls in the indicators imply below-trend and slowing economic growth.

Chart 3

Finally, additional August monetary data confirm the earlier estimate here that G7 plus E7 six-month real narrow money growth was unchanged at July’s 22-month low – chart 4. The historical leading relationship with PMI new orders is inconsistent with the latter having reached a bottom in September. The message, instead, is that a further PMI slide is likely into early 2022, with no signal yet of a subsequent recovery.

Chart 4

While the focus of inflation is typically centered on rising raw material costs and wage increases, we are seeing transportation costs become an additional and significant part of the inflation problem, and one that is not as easily passed on to consumers.

Transportation affects every aspect of a company’s supply chain and the rising costs are unavoidable. Further, it has been a recent topic of conversation for our own holdings, as well as some of the largest companies in the world. At a recent conference, Molson Coors, the fifth largest brewer in the world, said transportation costs are the main contributing factor to inflation, while Proctor and Gamble warned that an announced price increase will not be enough to offset higher commodity and transportation costs due to not only the size, but the speed of the increases. Multinational conglomerate 3M is a good barometer, as it is seeing “a lot of pressure on logistics costs.” Dollar Tree is one of the largest retail importers in the United States (US) and at their recent quarterly earnings presentation, they spent a considerable amount of time discussing the global supply chain and higher freight costs, saying they were “not counting on material improvements in 2022, especially in the first portion of the year.”

The recovery from the pandemic has seen a huge increase in demand, but with continued quarantine controls, distancing measures at ports and labour shortages are causing severe backlogs. The Suez Canal blockage and summer typhoons off the Chinese coast did little to ease the problem. Another consideration is the consolidation of ocean shipping lines’ key shipping routes being dominated by a handful of companies, causing fewer vessels in general to be travelling between ports.

The ocean carriers have responded to the high demand by increasing container capacity by 22%, but this does not solve the problem of logjams and the waiting lines reaching record levels at some of the ports.[1] The order book for container ships has doubled in 2021, but the majority won’t be delivered until 2023.

So what does all this mean? Container rates seem to be stabilizing, yet remain extremely elevated. Freightos, a digital booking platform for international shipping, published containerized freight rates. The cost of a container from Asia to the US East Coast is over $20,000, an increase of 415% compared to last year. Shipping from Asia to the US West Coast is slightly less, but the cost is up 452% in comparison to a year ago. Shipping from Asia to North Europe has seen the largest year-over-year increase, up 714% to $13,855. Freight rates from Northern Europe to the US East Coast have been the least affected, up “only” 238% from the period last year to $5,929. In view of these rates, shipping companies are focusing on the most profitable trade routes, meaning reduced volumes crossing the Atlantic. The Baltic Dry Index is a benchmark for the price of shipping major raw materials by sea and is at its highest level since before the Great Financial Crisis.

Source: Bloomberg

The majority of companies are struggling to solve this logistical headache, but our portfolios contain two names that have been natural beneficiaries.

Clipper Logistics (CLG.LN) is a leading provider of value-added logistics solutions, e-fulfilment, and returns management services to the retail sector, primarily in the United Kingdom (UK), but with an expanding presence in Europe. Sales are comprised of the following: 60% of sales come from e-fulfilment and returns management, supporting the online activities of customers; 28% of sales come from non e-fulfilment businesses, supporting traditional brick and mortar customers; and the remaining 12% of sales comes from commercial vehicles sales. Of the logistics related revenues, 85% comes from the UK. Over 90% of Clipper’s contracts are on an open book basis (i.e. cost plus), or hybrid contract, protecting them from increasing costs. However, they are not immune to labour shortages, as they recently flagged the impact that a shortage of HGV drivers is having.

Kerry Logistics (636.HK) is a third-party logistics service provider based in Hong Kong with global exposure. The company provides many supply chain solutions, including integrated logistics, international freight forwarding (air, ocean, road, rail, and multimodal), industrial project logistics, cross-border e-commerce, last-mile fulfilment, and infrastructure investment. Revenue mainly comes from Asia-Pacific, which accounts for 74% of sales (Mainland China 32%, Hong Kong 13%, Taiwan 7%, and other Asia 21%). The Americas accounts for 16% and Europe about 10%. Their customers are mainly big multinational companies, across many industries, including fashion, electronics, food and beverages, FMCG, industrial, automotive, and pharmaceutical.

Perhaps the best advice we could give readers is that with supply chain and transportation issues showing little signs of abating, you would be wise to start your holiday shopping sooner, rather than later.

[1] https://splash247.com/more-than-40-ships-waiting-outside-la-and-long-beach-setting-new-record/

The economic / market view here remains cautious based on 1) an expected slowdown in global industrial momentum through H2 (already apparent in Chinese data) and 2) recent less favourable “excess” money conditions.

Global six-month real narrow money growth, however, may have bottomed in May / June. A Q3 rebound would signal a stronger economy in H1 2022. An associated improvement in excess money could reenergise the reflation trade in late 2021.

The issue can be framed in cycle terms: does the recent top in the global manufacturing PMI new orders index mark the peak of the stockbuilding cycle (implying a shortened cycle) or will the peak be delayed until H1 2022?

Possible drivers of a real money growth rebound include Chinese policy easing, a slowdown in global consumer price momentum and a pick-up in US / Eurozone bank loan expansion.

The H2 industrial slowdown view remains on track. The global manufacturing PMI new orders index fell further in July, confirming May as a top. Chinese orders were notably weak and have led the global index since the GFC – see chart 1.

Chart 1

Global six-month real narrow money growth fell steadily between July 2020 and May but a stabilisation in June has been confirmed by additional monetary data released over the last week – chart 2.

Chart 2

Will PBoC policy easing drive a recovery in Chinese / global money growth? The hope here was that the 15 July cut in reserve requirements would be reflected in an early further fall in money market interest rates and easier credit conditions. Three-month SHIBOR, however, has moved sideways while corporate credit availability is little changed, judging from the July Cheung Kong Graduate School of Business survey – chart 3. July money data, therefore, could show limited improvement.

Chart 3

Global six-month real money growth should receive support from a slowdown in consumer price momentum as commodity price and bottleneck effects fade. Eurozone six-month CPI inflation eased on schedule in July, with further moderation suggested and the move lower likely to be mirrored in other countries (Tokyo July numbers also showed a slowdown) – chart 4.

Chart 4

US monetary prospects are foggy. Disbursement of stimulus payments boosted nominal money growth over March-May but there was a sharp slowdown in June. Weekly data indicate a reacceleration in July as the Treasury ran down its cash balance at the Fed to comply with debt ceiling legislation – chart 5. This effect, however, will be temporary and an improving fiscal position suggests a reduced contribution from monetary financing during H2 and into 2022.

Chart 5

Stable or higher US money growth, therefore, may require a pick-up in bank loan expansion. The Fed’s July senior loan officer survey, released yesterday, is hopeful, showing a further improvement in demand balances across most loan categories (not residential mortgages) – chart 6. The ECB’s July lending survey gave a similar message – chart 7. The survey indicators, however, are directional and the magnitude of a likely loan growth pick-up is uncertain. Actual lending data remained soft through June.

Chart 6

Chart 7

Failure of global real money growth to recover in Q3 – and especially a further slowdown – would suggest that the stockbuilding cycle is already at or close to a peak. The cycle bottomed in Q2 2020 and – based on its average historical length of 3.33 years – might be expected to reach another low in H2 2023, in turn implying a peak no earlier than H1 2022. As previously discussed, however, the current upswing could be short to compensate for a long (4.25 years) prior cycle.

Proponents of the consensus view that replenishment of stocks will underpin solid industrial growth in H2 cite the still-low level of the global manufacturing PMI finished goods inventories index – chart 8. Research conducted here, however, indicates that the stocks of purchases index (i.e. raw materials / intermediate goods) is a better gauge of the stockbuilding cycle and tends to lead the finished goods index. The former index is already at a level consistent with a cycle top and the rate of change relationship with the new orders index is another reason for expecting orders to weaken significantly during H2 – chart 9.

Chart 8

Chart 9

Some forecasters expect global industrial momentum to receive a further boost over coming months from a rebuilding of manufacturing inventories. The assessment here, by contrast, is that the growth impact of the inventory cycle is peaking, although major weakness is unlikely until next year.

The stockbuilding or inventory cycle, also known as the Kitchin cycle, has an average length of 3.5 years – more precisely, 40 months – and is a key driver of overall economic activity and market behaviour. The history of the cycle is illustrated in chart 1, showing the contribution of stockbuilding to G7 annual GDP growth.

Chart 1

The cycle bottomed in April 2020, suggesting that the next low will occur around August 2023, based on the average 40-month length. This, in turn, would imply a cycle mid-point around December 2021 – seemingly supportive of the consensus view that that the growth impact of the cycle will remain positive in H2 2021.

There are three reasons, however, to doubt this interpretation.

First, the cycle usually peaks early after deep recessions. The maximum growth contribution topped out within five quarters after the 1975, 1982 and 2009 recessions, suggesting a current peak by Q3 2021.

Secondly, the current cycle could be shorter than average to compensate for a 50-month previous cycle, which was extended by covid shock, i.e. the current cycle could compress to 30 months, implying a mid-point around July 2021.

Thirdly, cycle peaks are signalled in advance by slowdowns in global real narrow money. Six-month growth of real money peaked in July 2020, with annual growth topping in January 2021.

The view that the cycle will deliver a further significant boost is based partly on the low level of the global manufacturing PMI finished goods inventories index. However, the stocks of purchases index, covering intermediate goods and raw material inputs, is near the top of its historical range – chart 2.

Chart 2

Growth of new orders and output is related to the rate of change of stockbuilding. This is illustrated in chart 3, showing a significant correlation between the PMI new orders index and the deviation of the stocks of purchases index from a moving average.

Chart 3

This rate of change measure has already peaked and will decline further even if the stocks of purchases index maintains its current high level, as shown by the dotted line on the chart. For this not to occur, the index would have to continue to rise by 0.25 points per month, implying a move through its record high during H2.

Will the drag on new orders from a stabilisation or decline in the rate of increase of intermediate goods / raw material stocks be offset by faster accumulation of finished goods inventories. The assessment here is that the net effect will be negative, based on two considerations.

First, there has been a stronger historical correlation between new orders and the rate of change measure for intermediate goods / raw material stocks than the corresponding measure for finished goods inventories.

Secondly, the maximum correlation is contemporaneous for the former measure but incorporates a three-month shift for the finished goods inventories measure, i.e. finished goods inventories lag new orders by three months. So a rise in this measure over June-August would be consistent with a May peak in new orders.

The view here remains that the PMI new orders index will weaken through late 2021, based on the fall in global six-month real narrow money growth between July and April – chart 4. An early estimate of real money growth in May will be available later this week, assuming release of Chinese numbers.

Chart 4

Additional country releases in recent days confirm that global six-month real narrow money growth fell further in April, to its slowest pace since January 2020 – see chart 1. The decline from a peak in July 2020 is the basis for the forecast here of a significant cooling of global industrial momentum during H2 2021.

Chart 1

The April fall reflected both slower nominal money growth and a further pick-up in six-month consumer price momentum – chart 2. The latter is probably at or close to a short-term peak and the central scenario here remains that real money growth will stabilise and recover into Q3. The risk is that nominal money trends continue to soften – the boost to US numbers from disbursement of stimulus payments may be over and this year’s rise in longer-term yields may act as a drag.

Chart 2

Six-month growth of real broad money and bank lending also moved down in April, with the former close to its post-GFC average and the latter considerably weaker – chart 3. Forecasts last year that government guarantee programmes would lead to a lending boom have so far proved wide of the mark; monetary financing of budget deficits, mainly by central banks, remains the key driver of broad money expansion.

Chart 3

Charts 4 and 5 shows six-month growth rates of real narrow and broad money in selected major economies. The UK remains at the top of the range on both measures, supporting optimism about near-term relative economic prospects, although slowing QE and a sharp rise in inflation promise to erode the current lead.

Chart 4

Chart 5

Eurozone real money growth, by contrast, is relatively weak: monetary deficit financing has been on a smaller scale than in the US / UK, while six-month inflation is higher than in the UK / Japan. Bank lending has been expanding at a similar pace in the Eurozone and UK. The recent step-up in ECB PEPP purchases could lift Eurozone broad money growth although the change is modest and could be offset by an increased capital outflow – see previous post.

China remains at the bottom of the ranges and monetary weakness was expected here to trigger PBoC easing by mid-year. Policy shifts usually proceed “under the radar” via money market operations and directions to state-run banks. The managed decline in three-month SHIBOR continued this week, while the corporate financing index in the Cheung Kong Graduate School of Business survey stabilised in April / May after falling over October-March, which could be a sign that banks have been instructed to increase loan supply.

The PBOC’s quarterly bankers’ survey, due for release later this month, could provide further corroboration of a policy shift: the differential between loan approval and loan demand indices leads money growth swings – chart 6. Monetary reacceleration in China remains the most likely driver of a rebound in global six-month real narrow money growth – required to support a forecast that H2 industrial cooling will represent a pause in an ongoing upswing rather than a foretaste of more significant weakness in 2022.

Chart 6

The forecast here remains that global industrial momentum, as measured by the manufacturing PMI new orders index, is at or close to a peak, with a multi-month decline in prospect.

The basis for the forecast is a fall in global six-month real narrow money growth from a peak in July 2020 – the rise into that peak is judged to correspond to the increase in PMI new orders to an 11-year high in April.

Available April monetary data indicate that real narrow money growth fell further last month, suggesting that the expected PMI decline will extend into late 2021 – see chart 1.

Chart 1

The presumption here is that PMI weakness will be modest, partly reflecting a view that the global stockbuilding cycle will remain in an upswing through H2. The cycle has averaged 3.5 years historically and bottomed in Q2 2020, suggesting a peak in Q1 2022 assuming an upswing of half-cycle length. Large declines in PMI new orders (i.e. to 50 or below) have usually occurred during cycle downswings.

Any PMI pull-back, however, could have significant market implications given consensus bullishness about global economic prospects.

Historically, a declining trend in global manufacturing PMI new orders has been associated with underperformance of cyclical equity market sectors and outperformance of quality stocks within sectors. The price relative of MSCI World cyclical sectors to defensive sectors peaked in mid-April, falling to a three-month low last week – chart 2.

Chart 2

The decline has been driven by a correction in tech – the MSCI cyclical sectors basket includes IT and communication services. The price relative of non-tech cyclical sectors to defensive sectors has moved sideways since March.

The MSCI World sector-neutral quality index, meanwhile, has recovered relative to the non-quality portion of MSCI World since March, following underperformance in late 2020 / early 2021 when cyclical sectors were outperforming strongly.

Equity market behaviour, therefore, appears to have started to discount a PMI roll-over, although confirmation is required – in particular, a breakdown in the price relative of MSCI World non-tech cyclical sectors to defensive sectors.

A sign that this could be imminent is a recent sharp fall in the non-tech cyclical to defensive sectors relative in emerging markets – chart 3. A possible interpretation is that the decline reflects worsening Chinese economic prospects, with China likely to be a key driver of a global slowdown. Early Chinese monetary policy easing may be required to mitigate this drag and lay the foundation for a resumption of cyclical outperformance.

Chart 3

Global six-month real narrow money growth appears to have edged lower in March, continuing a downtrend since last summer. This suggests that an expected relapse in global industrial momentum will extend through late Q3 / early Q4.

The global manufacturing PMI new orders index reached a new recovery high in March, consistent with a surge in six-month real narrow money growth into July / August 2020, allowing for the historical average 6-7 month lead time. More recent national surveys hint that March will mark a top – see chart 1.

Chart 1

The March real money growth estimate is based on information for the US, China, Japan, India and Brazil, together accounting for 70% of the G7 plus E7 aggregate tracked here. The US component is estimated from weekly data on currency in circulation and commercial bank deposits – official March money numbers are released next week and the Fed no longer provides weekly updates.

Global six-month real narrow money growth appears to have eased further to its lowest level since February 2020, reflecting stable nominal growth and another rise in six-month CPI inflation – charts 2 and 3.

Chart 2

Chart 3

Chart 4 shows the early reporting countries individually. US six-month real narrow money growth is estimated to have edged lower despite disbursement of $318 bn of stimulus payments to households – these were made in the second half of the month and may have a larger impact in April (the money numbers are month averages).

Chart 4

Six-month growth also eased slightly further in Japan and China, with a small rise in India. Brazil moved into contraction although this needs to be placed in the context of an extraordinary surge last summer – 12-month growth is still strong.

Markets could be starting to offer corroboration of the scenario of a global manufacturing PMI new orders peak and pull-back, with Treasury yields stalling and equity market cyclical sectors no longer outperforming – chart 5.

Chart 5

Will global six-month real narrow money growth recover? Six-month CPI inflation is likely to rise slightly further in April / May but could fall back in H2 as commodity prices move sideways or correct.

Fiscal stimulus is acting to push up US nominal money growth but there may be an offsetting drag across the G7 from recent bond yield rises – chart 6.

Chart 6

A revival in Chinese narrow money growth probably requires a PBoC policy shift. The view here has been that policy was overtightened in H2 2020 and the economy would slow in H1 2021. This scenario appears to be playing out, with Q1 GDP disappointing and industrial output falling in March. Core CPI inflation (i.e. ex. food and energy) is at 0.3% and a surge in PPI inflation reflects input cost rises that are squeezing downstream margins. The PBoC has allowed three-month SHIBOR to drift back to its January low, consistent with a switch to an easing bias – chart 7.

Chart 7

Global six-month real narrow money growth is estimated to have fallen further in February, based on monetary data covering 70% of the G7 plus E7 aggregate calculated here. The decline from a July 2020 peak suggests a slowdown in industrial momentum extending through Q3 2021.

Turning points in six-month real narrow money growth have led turning points in the global manufacturing PMI new orders index by 6-7 months on average historically. The July money growth peak, therefore, suggested a new orders peak in January-February. The current high point of the orders index is November 2020 but this may have been surpassed in March. These are details: the key point is that the index appears to be reaching a peak on schedule, with money trends suggesting a significant relapse by end-Q3.

Chart 1

Cooler consumer goods demand is consistent with a coming industrial slowdown. Global retail sales fell between October and January, with early data suggesting another decline in February – chart 2.

Chart 2

Industrial output growth appears to have been sustained by a continued recovery in investment goods demand and – probably more importantly – a rebuilding of depleted inventories. Restocking, however, will have been accelerated by softer consumer goods demand and the associated output boost may be peaking.

A key point, often neglected, is that the level of industrial output is related to the rate of change of inventories. These are probably still lower than desired and restocking should continue. A slowdown in the rate of increase, however, is sufficient to exert a negative impact on the level of output.

A normalisation of US six-month real narrow money growth has been a key driver of the slowdown in the global measure, although smaller declines have occurred elsewhere – chart 3. US money growth should rebound strongly in March / April as the Treasury transfers cash to households from its account at the Fed (i.e. helicopter money).

Chart 3

A US rebound could drive a pick-up in global six-month real narrow money growth, signalling industrial reacceleration in late 2021 / H1 2022. This isn’t guaranteed, however: a further inflation rise will drag on real money growth near term, while nominal money trends elsewhere may continue to cool.

Analysis of US narrow money trends has been complicated by banks reclassifying some savings accounts as transactions accounts following a Fed decision to lift restrictions on the former. This artificially boosted the old M1 measure in 2020, particularly later in the year, when its six-month growth rate rebounded strongly – chart 4. The numbers used here attempt to correct for this distortion but the suggestion of a significant slowdown was disputed by some readers.

The debate has now been resolved by the recently released Q4 financial accounts – these contain M1 flow data adjusted for reclassifications and other discontinuities. The fall in six-month growth of the break-adjusted M1 series during H2 2020 was similar to that of the corrected measure calculated here.

Chart 4

A global industrial slowdown in Q2 / Q3 may not be reflected in GDP data because of services reopening. The latter, indeed, could contribute to industrial softening as consumer demand switches back from goods to services. The judgement here is that industrial trends are a better guide to underlying economic momentum and a more important driver of markets, partly reflecting a stronger correlation with equity market earnings.

A simple rule for switching between global equities and US dollar cash discussed in previous posts holds cash when six-month growth of global real narrow money is below that of industrial output. A negative cross-over occurred in October 2020 and – allowing for data publication lags – resulted in the switching rule recommending a move to cash at end-2020.

Real money growth was below industrial output growth in January and early indications are that this remained the case in February – chart 5. The rule, therefore, will continue to recommend cash in April and, probably, May. The rule is currently about 4% offside since the end-December switch. Such a drawdown is not unusual and compares with a 32% gain when the rule was in equities between end-April and end-December 2020.

Chart 5

Global money trends continue to suggest a near-term economic slowdown, with the caveat that interpretation of US monetary statistics is complicated by recent regulatory changes.

The key global monetary indicator followed here – six-month growth of real narrow money in the G7 economies and seven large emerging economies – is estimated to have fallen further in December, based on monetary data covering 70% of the aggregate. Real money growth has led the global manufacturing PMI new orders index by 6-7 months on average historically, so the continued decline from a July 2020 peak suggests that this PMI measure will move lower into Q2 – see chart 1. 

Chart 1

An important qualification is that the G7 plus E7 money numbers for November / December incorporate an adjustment to US data to correct for an apparent upward distortion due to some banks reclassifying savings deposits (excluded from M1 and related measures) as demand deposits (included).

Excluding this adjustment, six-month growth of US narrow money rose to a new high at year-end – see chart 2. Some monetary observers ignore or are unaware of the reclassification distortion, arguing that the narrow money surge presages a super-strong economy and sharply higher inflation.

Chart 2

Fed statisticians haven’t responded to a request for confirmation of a reclassification effect on the data. The view that the strong November / December numbers are explained by such an effect – rather than a genuine flow of money out of « inert » savings deposits into “high velocity” demand deposits – rests on three considerations. 

First, the Fed indicated that deposit reclassifications would occur following its decisions to cut reserve requirements on transactions deposits to zero and remove restrictions on withdrawals from savings deposits last spring. 

Secondly, the big fall in savings deposits and corresponding rise in demand deposits occurred between the weeks ending 16 November and 30 November – see chart 3. Movements outside this two-week window were “normal”. The weekly numbers are averages of daily data, so the reclassification is likely to have occurred during the week ending 23 November, with the effect carrying over into the following week. (The alternative view is that US election results triggered a big movement of money.) 

Chart 3

Thirdly, the Fed implicitly acknowledged that the M1 data have become distorted in its decision to redefine the aggregate to include savings deposits from next month. Six-month growth of the new M1 measure continued to slide in November / December – see chart 4. 

Chart 4

The suggestion that US monetary conditions have become less expansionary is supported by broad money trends, while bank lending continued to contract into year-end (with weakness not due to PPP loan forgiveness, which has yet to kick in) – see chart 5. 

Chart 5

The fall in global six-month real narrow money growth in December also reflected declines in China, Japan and Brazil. The further slowdown in China – extending to broad money and credit, as shown in chart 6 – is consistent with the view here that PBoC policy is too tight and Chinese economic news is likely to disappoint in early 2021. A dovish PBoC policy shift may be needed to trigger the next leg of the global reflation trade but isn’t expected by the consensus and could be conditional on a prior market setback.