Here is more on the transportation sector where the DJTA fell another 2.8% Tuesday. Out yesterday, the March 2022 Logistics Manager’s Index rose to the highest level in the history of the index. At 76.2, it compares with the long term average of 65.2. What has driven this? “The first three months of 2022 have been marked by high levels of inventory, and insufficient capacity to deal with it.” But, this portends an eventual moderation.
LMI added this on the growing inventory situation, some of which is purposeful as companies don’t want to get caught short again, and some will take time to work off likely because of over ordering. The higher inventory “trend started at the end of 2021 when inventories increased by 2.4% in December 2021, an all time month to month record. This was driven particularly by downstream retailers, who saw inventories up by 4.5% in December, handily outgaining manufacturers and wholesalers. This influx, combined with a cool down in consumer demand due to the move away from goods and back towards services with easing Covid restrictions, as well as price pressure due to burgeoning inflation, has left firms with more inventory than they know what to do with. Because of this, both inventory costs and warehousing prices reached all time high levels in March. Warehousing Capacity also hit a record in March, reaching an all time nadir of 36.1 this month. Transportation prices remain high and transportation capacity is still contracting this month.” On that last point though, “in the Upstream portion of our respondent base we saw some loosening in the transportation market.” Bold is mine.
Their bottom line, which included acknowledgement of record high diesel prices, is that we could be on the cusp of a transportation downturn. “This could mean that we are finally seeing a move away from the unsustainable supply/demand mismatch we have seen over the past 18 months and moving back towards a more viable market equilibrium. While we do observe signs of supply chains turning a corner, only time will tell what is on the other side.”
Just an fyi with this index, “The LMI score is a combination of 8 unique components that make up the logistics industry, including: inventory levels and costs, warehousing capacity, utilization, and prices, and transportation capacity, utilization, and prices.”
Moving on. As we’re all in this bond boat together, the Treasury selloff yesterday spilled over into Asia overnight, Europe today and leading to even higher rates in the US with the 10 yr yield jumping by 10 bps to 2.65% after the 15 bps move yesterday. With so many rate hikes already priced in to the short end(January 2023 fed funds futures contract yielding 2.58%), if the bond market is going to break further from here, the longer end is where it could happen, and we can actually get some steepening again but not for the right reasons.
The 10 yr JGB yield got back to just under .25%, up by 2.6 bps which is a big move in that market, providing another game of chicken with the BoJ. The Australian 10 yr was up by almost 8 bps and is getting close to 3% which it hasn’t seen since 2015. The German 10 yr bund yield is breaking out to a fresh 4 yr high at .67%, up 6 bps today. The Italian 10 yr BTP yield, the home of the region’s biggest debt pile, is up by 8 bps to 2.34% which is exactly double the 1.17% yield that was seen at year end 2021, just 3 months and 6 days ago. It is the rapidity of these moves that are the most jarring.
Let me know if there is a company, household or country that had debt due this year that needed to be rolled over or has floating rate debt that budgeted for this rapid rise in interest rates going into 2022.
Last week the SEC said they were tightening the rules around ‘disclosure requirements’ with respect to SPAC’s. They added some other new rule proposals too with the end result likely less SPAC’s. This was an interesting stat that I read in last night’s Almost Daily Grant’s from Jim Grant, “Of the 259 SPAC’s that have managed to complete a merger since 2018, only 36 remain above their IPO price, while 18 have absorbed a drawdown of 80% or more.”
For the week ended April 1st, the average 30 yr mortgage rate rose another 10 bps w/o/w to 4.90% and by a whopping 80 bps over the past month according to the MBA. In turn, refi’s fell another 10% after a 15% drop last week and a decline of 14.4 in the week prior. They are now down 62% y/o/y. The level of refi’s are now at a 3 year low. On the purchase side, after some stability over the past month as buyers jumped to lock in rising mortgage rates, applications fell 3.4% w/o/w and are down 9% y/o/y. Expect further weakness in the pace of purchase transactions with how quickly rates are rising on top of homes that are between 15-20% more expensive than they were one year ago.
Thanks to the still aggressive covid approach, the March Caixin China services PMI which focuses on private business (which by the way employees about 85% of the Chinese population) fell to 42 from 50.2 and that was well worse than the estimate of 49.7. Now the covid shutdowns have the obvious impact but Caixin also said “Overseas demand remained weak, with the gauge of new export business falling to its lowest since October 2020.” Hong Kong’s March PMI remained depressed at 42 vs 42.9 in February.
On the flip side, India’s services PMI rose to 53.6 from 51.8. India certainly has suffered over the past two years from covid but they did a remarkable job of powering thru via vaccination and natural immunity but also helped by their very young population. In March, they further liberalized covid restrictions and that is the main reason for the m/o/m lift in Indian services. That said, inflation remains the big concern. “The March results showed the sharpest upturn in input costs for 11 years.”
Finally, as the ECB hems and haws on whether they will end QE at the beginning of Q3 or the end of Q3, and whether rates will still be below zero by year end or just maybe get back to zero, the February (so somewhat dated relative to the March CPI just seen last week) PPI was up another 1.1% m/o/m after the 5.1% spike in January. Versus last year, PPI was higher by 31.4%. Higher energy prices is certainly the main contributor but even ex energy prices rose 12.2% y/o/y. What does the ECB chief economist Philip Lane have to say soon after this data was reported this morning? “It’s important not to over or under react to inflation.” He also was dead wrong about inflation over the past year plus and was the captain of the European chapter of Team Transitory.
The German 10 yr inflation breakeven by the way is up another 5 bps to 2.83%, the highest on record dating back to 2009 when these linkers were 1st issued.
German 10 yr Inflation Breakeven