Here is what Intel said last night on the all important issue of semi chip supply, “While I expect the shortages to bottom out in the second half, it will take another one to two years before the industry is able to completely catch up with demand.” While semi supply constraints will be temporary, two years of temporary will still be challenging for many. And I’ll argue again, the practice of just in time inventory as we knew it is dead. That means keeping more inventory on the shelves, tying up more working capital, reducing inventory turns, which will result in lower cash flow, less productivity and likely higher prices to offset some of this.
It’s July PMI day. Australia’s shutdowns again were clearly reflected in its service component which plunged to 44.2 from 56.8 while manufacturing slipped by 1.8 pts to 56.8. Markit said “Various Australian states experienced increased movement restrictions in July, leading to the sharp contraction of both domestic and foreign demand for services.” With manufacturing, new orders and production slowed and this was said about supply and inflation: “Lead times meanwhile continued to lengthen at a marginally slower, but still severe, rate. Concurrently, price pressures sustained for Australian manufacturers with input price inflation accelerating. Over and above the disruption of renewed Covid restrictions, firms highlighted supply constraints weighing on their outlook for the next 12 months.” While it was definitely disappointing to see another round of shutdowns and its impact, because Australia has been so slow in rolling out vaccines, Australian markets are not surprised and stocks, bonds and its currency are little changed today.
For the Eurozone on the other hand which furthered its vaccination rates and saw a broader reopning, its manufacturing and services composite index rose to 60.6 from 59.5 but the components were mixed as manufacturing fell .8 pts m/o/m, offset by a 2.1 increase in services. The estimate was 60.0. Markit said the manufacturing decline was “linked in many cases to worsening supply lines” and “backlogs of work rose at a joint survey record rate amid capacity constraints.” Delta is a worry as “Business confidence…took a hit from rising concerns over the delta variant, pushing sentiment for the year ahead to a 5 month low.” Employment growth was strong and this is what was said on supply and inflation: “Average selling prices for goods and services meanwhile rose at a near survey record pace in July, primarily reflecting constrained supply at a time of rapid demand growth. Supplier delivery times continued to lengthen at one of the sharpest rates ever recorded by the survey, playing a key role in driving input costs higher. Manufacturers’ input prices rose to a degree unsurpassed since survey data were available in 1997. Service sector input cost inflation eased modestly, but remained the 2nd highest in 13 years.”
In the UK, both its manufacturing and service PMI’s fell m/o/m in July. The country balanced the full reopening with the Delta flare up. Supply shortages too are inhibiting the flow of goods and services. With respect to supply and pricing in manufacturing, “delivery times continued to signal severe supply chain delays…but the latest downturn in vendor performance was the least marked since April. Input price inflation also eased from June’s peak, but factory gate charges increased at the fastest pace since this index began in November 1999.” With services, businesses are also having difficulty in filling vacancies and a “subsequent increase in wage inflation added to pressure on operating expenses across the service economy. Measured overall, input prices rose at the fastest pace since this index began in July 1996.”
Inflation breakevens are rising both in the Eurozone and in the UK today and bond yields are higher after yesterday’s ECB driven bounce on Lagarde’s uber dovishness. As for the ECB, they chose the path of the Bank of Japan even with all the lessons that should have been learned and they are now trapped as well in QE and NIRP forever.
The Bank of Russia hiked interest rates again, this time by 100 bps to 6.5% and “If the situation develops in line with the baseline forecast, the Bank of Russia will consider the necessity of further key rate increase at its upcoming meetings.” This 6.5% benchmark rate compares with their inflation forecast of 5.7-6.2% in 2021 so no negative real interest rates here and it is amazing the differing approaches to monetary policy in the developed world vs emerging markets that have more experience with inflation. The ruble is higher in response.
Peter is the Chief Investment Officer at Bleakley Advisory Group and is a CNBC contributor. Each day The Boock Report provides summaries and commentary on the macro data and news that matter, with analysis of what it all means and how it fits together.