For all the discussion these past few months around the inflationary impact of global protectionism I would like to offer a slightly different perspective on a Saturday morning as I sip my coffee and muse on the world.
Let’s begin with the release of Core PCE data this past week out of the US. I’m looking at the table break down of that data point and I see multiple line items showing month over month declines when comparing February vs March. The overall print itself indicated zero inflation in the most important inflationary gauge watched by the Fed.
Think about that for a moment. Most prices for both durable and non durable goods were actually down on the month as were overall transportation costs and food service accommodation.
Yes, it’s probable that as imported prices of goods begin to show up in key inflation metrics we see some upward bias and then think upon the disinflationary offsets as well that may counter balance those forces.
Take the Crude Oil curve for instance. The price of spot crude Oil now trades below $60.00/ a barrel, a level not seen since before the time of Covid. Curve dynamics in the Crude Oil market themselves don’t indicate a resumption of an upward trend and technically bearish sentiment prevails. This downward pressure in energy markets is occurring at the exact same time as a complete collapse in global trade volumes has led to greater then 50% declines in major world container freight indexes that measure the cost of shipping goods from Asia to the US.
The cost of shipping a regular 40ft container from Shanghai to NewYork at the start of this year was north $6,800 and this is now around $3,500 - almost a 50% drop. Similiar % drops are being reported at trade routes into the US from across the world.
Things don’t look promising on the demand front either. Both Manufacturing and Services PMI’s out of the US remain in contractionary territory and 1st quarter GDP growth this week came in -0.3% for the quarter, driven lower by a sharp decline in exports. Labor market health, on the surface looks ok with a healthy creation of 177,000 non farm jobs posted yesterday, but leading indicators for employment in both the ADP releases and Jolts releases indicated underlying weakness to come.
The combination of a supply driven shock pushing up on prices and a potential demand driven recession weighing down on the economy will make the Fed’s task extremely difficult in the coming weeks and months as it tries to ascertain the correct response to this most unique of situations.
Let’s see how they respond.
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