Commodity prices are getting a lift after the news that China was shrinking the required quarantine schedule for inbound travelers to 10 days from three weeks. Copper is rebounding by 1.3%, iron ore by 3.3% after yesterday’s 5% bounce and brent is up by 2.3%. Travel and leisure stocks there too are rising. Commodity currencies like CAD and the Aussie$ are higher as well. We’ll see if this is a first sign of a more rational approach to covid. The world can use an unclogged Chinese supply chain and it could certainly use the Chinese consumer again. To the last point, Nike said “In Q4, revenue declined 20% on a currency neutral basis and EBIT declined 55% on a reported basis” in Greater China. Nike by the way has been in China for 40 years.
Also of note from the Nike conference call, “We expect to benefit from mid single-digit pricing actions and continued gains from our shift to a more direct business, offset by another 100 bps headwind from elevated ocean freight costs, increased product costs, discrete supply chain investments and normalization of historically low markdown rates. We expect FX to be a 30 bps headwind on gross margin due to strength in the US dollar.”
Here is what they said on transportation, “we continue to see transit times be elevated relative to pre-pandemic levels. It’s about two weeks longer than where we were. This is specifically in North America…And that’s obviously having a big impact on our in-transit inventory and the flow of goods into the marketplace. Right at the end of the quarter, we did start to see a little bit of improvement vis-a-vis the boat backlog at the West Coast ports. But at this point in time, given all the variables that we see there, we’re not planning for a significant improvement in transit times in fiscal ’23.”
Moving away from the Nike call but looking at container shipping rates, as of June 23rd, the World Container Index price for a 40 ft box from Shanghai to LA has fallen to $7,952 and that’s the lowest in a year, though still is 444% above where it was entering 2020. We’ll soon see what happens to rates as China hopefully more fully reopens.
WCI Shanghai to LA
German consumer confidence fell to -27.4 from -26.2 said GFK. That’s a new record low dating back to 1991 and GFK said “The ongoing war in Ukraine and disruptions in supply chains are causing energy and food prices in particular to skyrocket, resulting in a gloomier consumer climate than ever before. Above all, the increase in the cost of living, which is almost 8% at present, is weighing heavily on consumer sentiment and sending it into a downward spiral.”
In France, consumer confidence dropped by 3 pts m/o/m to a less than expected 82, the lowest since 2013.
Ahead of the Conference Board’s US confidence index today at 10am est and after Friday’s UoM index, the US consumer can certainly relate.
German Consumer Confidence
French Consumer Confidence
ECB president Lagarde speaking in Sintra today said they will hike 25 bps in July as expected but left it open to go by 50 bps increments thereafter if needed. European bonds are selling off across the board. On the anti-fragmentation situation, what the ECB will do is reinvest maturing bonds into those country bonds, such as Italy, that deviate in yield from Germany. It is not clear though what the yield trigger would be. That will begin on Friday. So, the ECB will be tightening monetary policy for Germany at the same time conducting pseudo yield curve control for Italy. Good luck with that.
As for that 40 yr JGB yield I believe is hugely important to watch, it rose another 2.5 bps overnight to 1.41%, up now 30 bps this month alone. In turn, the yen is weaker and back above 136, just off a 24 yr low vs the dollar.