Federal Reserve Hikes Rates 75 Basis Points
RedStone Resource
June 17, 2022
Inside This Edition
Inventory to Sales Ratios Remain Balanced
The latest data on the inventory to sales ratio for most sectors of the freight economy came in slightly higher than prior, but they remain historically lower. For instance, the national inventory to sales ratio for all businesses came in at 1.29 months of inventory on hand. This is 2.4% lower than a year ago and was 9% lower than it was in prior to the pandemic.
Global Supply Chain Volatility Through the End of the Year, Major Milestones to Watch For
There are some significant milestones coming up in the coming months that could help shape the global supply chain. First on tap is China’s 20th Communist Party National Congress set for November of this year.
Several labor negotiations are also taking place not only around the US, but around the world. Everything from port and rail labor contract discussions to trucking labor strikes in parts of the world spanning Asia to Europe are creating further uncertainty for sourcing managers.
Lastly, the hurricane season is just now getting underway and this year is extremely critical for the oil and diesel production sector. With diesel supplies remaining tight across the country and more specifically in the northeast, keeping refiners operating is critical.
Energy Prices the Key to Future Shape of Market
Global energy supplies are volatile, and prices are obviously rising fast enough to keep it in the headlines. It is driving consumer sentiment to record lows and is squeezing consumer spending. Even from a corporate spending perspective, it is beginning to eat into executive sentiment and could weaken corporate investment in the future.
ECONOMIC BRIEFING
Federal Reserve Hikes Rates 75 Basis Points
There is always a risk in running a story too early after a major, catastrophic event like Hurricane Ian. Official estimates of damage and structural surveys are still ongoing and could be for weeks. But the damage is historic, and the recovery effort could change many economic fundamentals across the country in the coming months. Early estimates suggest that more than 1.04 million homes were in the direct cone of impact of the hurricane as it came ashore as a Category 4 hurricane (just 5 mph from a Category 5). Estimates on cost damages are wildly different, but the range currently is running from $68 billion to $258 billion in personal property damages alone. That would not include the roads and bridges that were damaged, renovating and restoring waterways, ports, and other infrastructure.
As is always the case in an event like this one, the impact on the global supply chain could be significant. Lumber, plywood, and all types of construction materials will be in higher demand – just as the housing market was beginning to slow down and core construction materials were becoming more available for builders. This could reverse that trend and might create some additional tailwinds for US macroeconomic growth, especially in the construction and manufacturing sector.
But there is a downside. It could also slow down efforts to cool inflation and could keep the Federal Reserve guessing on how aggressive to be on interest rates, and if they tighten further because inflation remains hot, it might create additional threats for the rest of the country and impact housing activity in the process.
Inventory to Sales Ratios Remain Balanced
The latest data on the inventory to sales ratio for most sectors of the freight economy came in slightly higher than prior, but they remain historically lower. For instance, the national inventory to sales ratio for all businesses came in at 1.29 months of inventory on hand. This is 2.4% lower than a year ago and was 9% lower than it was in prior to the pandemic.
Even in the much-debated retail sector (since volatile Q1 earnings reports), inventory to sales ratios across the board came in at 1.18 months of inventory on hand, this was 8.3% higher than a year ago (showing some recovery in inventories) but they remained 20% lower than they were prior to the pandemic. As long as these ratios remain low, rebuilding efforts will continue. With China off and on, in and out of lockdowns, the uncertainty in the global supply chain could continue to push sourcing managers to continue to build at a faster pace – especially essential consumer products that will see high demand throughout a higher inflationary period.
Manufacturers and wholesale trade were also both still lower on a historical basis. Ports are still reporting that inbound activity is stable and congestion and backlogs are also still an issue for many areas.
TRANSPORTATION BRIEFING
Global Supply Chain Volatility Through the End of the Year, Major Milestones to Watch For
There are some significant milestones coming up in the coming months that could help shape the global supply chain. First on tap is China’s 20th Communist Party National Congress set for November of this year. Chinese policy on a zero-Covid approach is unlikely to change before that Congress event. It is a proud celebration for the Chinese community and holding Covid risk to a minimum is a priority. That will keep reopening activity sporadic, and global supply chains will have to adjust accordingly, many opting to carry more inventories into the fall as a result. After the Congress meeting, all bets are off as to how China will approach future activity and new vaccine regimens could also follow which would help prevent future full lockdowns.
Several labor negotiations are also taking place not only around the US, but around the world. Everything from port and rail labor contract discussions to trucking labor strikes in parts of the world spanning Asia to Europe are creating further uncertainty for sourcing managers. This is not the year of labor, but negotiations thus far in many parts of the world have led to temporary service disruptions prior to agreements being put in place. That is not to say that it will happen this year across rail and port operations in the US, but the uncertainty still weighs on shippers.
Lastly, the hurricane season is just now getting underway and this year is extremely critical for the oil and diesel production sector. With diesel supplies remaining tight across the country and more specifically in the northeast, keeping refiners operating is critical. A significant hurricane in the Gulf of Mexico could become a negative event this year, more so than perhaps in other years, because of what it could do to diesel supplies in parts of the country.
Keeping supply chain flexibility in place will remain critical in the months to come as the global economy works through these volatile times.
Energy Prices the Key to Future Shape of Market
Global energy supplies are volatile, and prices are obviously rising fast enough to keep it in the headlines. It is driving consumer sentiment to record lows and is squeezing consumer spending. Even from a corporate spending perspective, it is beginning to eat into executive sentiment and could weaken corporate investment in the future. As we all know, gasoline and diesel prices are still at all-time highs and petroleum hit $122 a barrel the week of the 15th, the second highest level on record next to $143 a barrel hit in 2008 just before the global financial crisis hit. Today, crude oil accounts for 60% of the price of a gallon of gasoline and 49% of the price of a gallon of diesel.
Diesel inventories are likely the most immediate concern. Diesel inventories are 25% lower than the 5-year average and inventories in the northeast of the US are at levels not seen since the 1990’s. Refineries are running at nearly 100% utilization and the risk of a disruption from a maintenance issue, accident, or major weather-related event is high. With the US also exporting upwards of one million barrels per day of diesel to Europe to help fill stock gaps left by the War in Ukraine, there is no relief in sight. Resulting fuel surcharges are at least 73% higher year-over-year (on top of a high surcharge rate last year).
Energy prices currently account for a significant portion of the national inflation challenge.
