TwentyFour Asset Management
Pandemic-related supply chain disruption has been hitting the headlines in the US and elsewhere in recent days, and for bond investors this is a topic worth keeping an eye on as they look ahead to the November 2-3 FOMC meeting, where the Fed is widely expected to announce the tapering of its asset purchase program.
Three weeks into Q3 earnings season S&P 500 executives have used the phrase “supply chain” over 3,000 times on investor calls, according to data from Bloomberg. Firms from tech bellwether Apple to building products distributor Home Depot and retailer Walmart have noted various forms of supply chain disruption they are witnessing. The range of root causes has been just as wide, with materials supply problems, transportation and logistics bottlenecks and labor shortages all cited as key points of friction.
Anecdotal evidence from the ports of Los Angeles and Long Beach on the coast of California has highlighted the unprecedented nature of this disruption. Los Angeles and Long Beach are the two largest ports in the US by containers handled and key hubs for both exports and imports. Last week over 160 shipping vessels were queuing to unload cargo at these two ports alone, according to the Mariner Exchange, with some waiting almost two weeks to dock. The knock-on impact of problems up and down the supply chain is also clear; port officials noted only 40% of vessels were arriving on time, blaming a lack of trucking and warehouse labor as well as a lack of transportation and logistics equipment. The scale of the gridlock has prompted President Biden to mandate emergency measures for the two ports, allowing them to operate around-the-clock.
Clearly, supply chain disruption of this magnitude leads to cost pressures and has implications for inflation, which is already front of investors’ minds in the run-up to the Fed’s FOMC meeting next week. At a virtual conference late last week, Fed Chairman Jerome Powell said supply-side constraints “have gotten worse” and that the central bank would have to be “positioned for a range of possible outcomes”. Separately over the weekend the Treasury Secretary, Janet Yellen, noted that inflation will “remain high into next year”, persisting through mid-2022 before easing thereafter. These comments from Powell and Yellen represent acknowledgements that the inflationary pressures we’re witnessing are less ‘transitory’ than previously expected. Earlier this year, both communicated with strong conviction that they viewed inflationary pressures as transitory and temporary, but they now appear to be tempering that stance.
The price pressures we’re currently witnessing cast some doubt on the fleeting nature of 2021’s inflationary economic data, and suggest the Fed may have to move sooner rather than later to combat potential inflation risks. Without some action, markets would likely become uncomfortable if inflation did indeed “remain high into next year”. Despite the recent sell-off in US Treasuries, the current backdrop reinforces our cautious view of duration and we continue to closely monitor potential inflation risks as they evolve. All eyes will now be focused on next week’s FOMC meeting and the Fed’s next move.