Hedley July Market Commentary

Little more than a year ago, all eyes were focused on the disruption in the global supply chain. Ports were backed up, transportation costs were soaring, and there was a shortage of essential consumer goods. These bottlenecks caused massive stress in the economy and skyrocketing inflation. Today, things are very different.

Excess capacity in ocean freight shipping, trucking, and other components of the supply chain is putting downward pressure on prices and contributing to the decline in inflation.

The New York Fed's Global Supply Chain Pressure Index (GSCPI), designed to monitor global supply chain stress, highlights a dramatic change over recent months. The index has plummeted over the past 18 months, falling to pre-pandemic levels.

Evidence suggests the crisis is over with every component in the global supply chain seeing improvement - ocean freight shipping, the price of shipping containers, barge transportation, air cargo, freight, and warehouse capacity - all provide evidence of improvement.

In addition, we have recently had China’s official manufacturing reading which points to an improvement in July, but still in contraction. The inflation level in China is also at a very low level and many economists are warning of the possibility of deflation in that economy. So why does all this matter? The supply chain and the importance of Chinese manufacturing and prices were key components in fueling inflation, particularly in Europe. Once this is normalised then we should begin to see this have a positive impact on inflation levels at home, albeit with a lag effect. Supply chain issues and their impact on price rises were a key part of rising inflation and while there are other components at work here, we should at least see the benefits once this unwinding feeds through.

There is now much debate over whether we have now seen most, if not all, the interest rate rises from The Federal Reserve Bank, The ECB and The Bank of England. It is probably too soon to call the peak just yet but there is no doubt that with inflation now edging lower and a softening in some areas of the economy, that the bulk of the work is now done, with perhaps some minor tweaks along the way. If this is the case, and we will know more over coming weeks, then this could give some positive impetus to both equities and bonds which has certainly been lacking over the past 18 months.