How will U.S. supply chain inflation play out in the future?

core point

At present, the supply chain is still slow to ease. The disturbance of the domestic epidemic in my country and the ongoing conflict between Russia and Ukraine have also led to increased supply shortages in the transportation and production links. It is expected that the supply chain will continue to ease the inflation in the United States this year. If the conflict between Russia and Ukraine eases in the future, the prices of energy, metals, and grains will gradually fall, which may indicate that the supply chain will be substantially eased. It is expected that US inflation will still show strong resilience and will still run at a high level this year. We expect the Fed to raise interest rates to around 2.75-3% this year. In this context, there is still room for an upward trend in U.S. bond interest rates, the U.S. dollar may not have peaked, and U.S. stocks are at risk of adjustment.

Under the CPI rule of eight, transportation is one of the main drivers of inflation in the United States. There are eight divisions and three divisions in the specific classification methods of CPI. Under the Rule of Eights, the CPI is mainly divided into food and beverages, housing, clothing, transportation, healthcare, entertainment, education and communications, and other goods and services. Under the rule of thirds, the CPI is divided into energy, food and core CPI. Transportation items, food and beverage items, clothing items, and housing items are the dominant factors in this round of US inflation.

Repairs in the supply chain are expected to remain slower this year. Under the impact of the epidemic, commodities with long supply chains may eventually face greater price effects and longer interruptions. A typical example is the automotive industry, which requires many parts and has a long and complicated supply chain. From the perspective of the automotive industry, the current supply chain production shortage is slow to ease. On the whole, as the impact of the epidemic in the United States has subsided, and the sensitivity of American residents to the epidemic has decreased, consumer habits are shifting from goods to services. It is expected that under the trend of changing consumption habits, the pressure on the supply side from the demand side may increase. ease. Looking forward to the future, as the epidemic is still affecting the production order of some countries in the world, the impact of the Russian-Ukrainian conflict on the shortage of energy, metals (aluminum, copper, nickel, palladium, etc.), rare gases and other materials will also directly and extensively affect industrial production. rhythm and production costs. If the situation in Russia and Ukraine has not eased in the future, the global epidemic disturbance will continue, and the speed of supply chain easing may be slower.

Focus on the transportation link: The pressure on domestic transportation in the United States is gradually easing, and there are still obstacles to foreign transportation. After the epidemic in 2020, the key restraints in U.S. Sinotrans transportation are insufficient supply of shipping, insufficient port handling capacity, shortage of containers, etc., the conflict between Russia and Ukraine and the disturbance of the epidemic have increased freight rates again, and some transportation links have experienced marginal relief, but there are still obstacles as a whole . Due to the shortage of labor and truck capacity after the epidemic in 2020, domestic transportation capacity in the United States is limited, but the supply and demand relationship has reversed since 2022. It is expected that under the background of changes in consumer consumption habits and increased transportation capacity, the pressure on domestic transportation may be further eased.

How will the U.S. financial market play out in the future? Due to the limited speed of supply-side easing, the Fed’s tightening has a certain lag in suppressing demand, and it is expected that U.S. inflation will remain relatively sticky. Although U.S. bond interest rates have fallen recently, there is still room for an upward trend in U.S. bond interest rates in the future. Due to the divergence of economic fundamentals in other major economies and monetary policy from the U.S., the U.S. dollar has shown an upward trend since 2021, and the U.S. dollar is expected to strengthen further. It is expected that the tightening of the Federal Reserve and worries about the US economic recession will have an impact on US stocks, and US stocks will still face adjustment risks in the future.

Conclusion: In the context of globalization of production and trade, the shortage of any key component caused by the impact of the epidemic may set off a storm of shortages in the commodity market. Under the background that the current conflict between Russia and Ukraine is still unclear and the epidemic disturbance in some countries around the world still exists, the supply side is still slow to ease in other aspects except for domestic transportation in the United States. The supply-side easing is expected to be slow and uncertain this year, so the cooling effect of the supply-side on U.S. inflation is expected to be limited this year. Superimposed that there is a certain lag in the suppression of demand by the Fed’s tightening, it is expected that the US inflation will fall slowly, and it may continue to run at a high level in the second half of the year. It is expected that U.S. bond interest rates will still have room to rise, the dollar may further strengthen, and U.S. stocks will still face the risk of adjustment in the follow-up.

Risk factors: Violent fluctuations in the macro environment of the United States; unexpected changes in the situation in Russia and Ukraine; more than expected spread of the local epidemic in China; more than expected tightening by the Federal Reserve.

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This round of rising U.S. inflation is driven by both demand and supply. Against the backdrop of a surge in commodities, the impact of the epidemic and geopolitical conflicts have led to supply chain disruptions and rising cost prices. At present, the supply chain is still slow to ease. The local epidemic disturbance in my country and the ongoing conflict between Russia and Ukraine have also led to the tightening of supply in the transportation and production links. It is expected that the supply chain will continue to ease the inflation in the United States this year. If the conflict between Russia and Ukraine eases in the future, the prices of energy, metals, and grains will gradually fall, which may indicate that the supply chain will be substantially eased. It is expected that US inflation will still show strong resilience and will still run at a high level this year. We expect the Fed to raise interest rates to around 2.75-3% this year. In this context, there is still room for an upward trend in U.S. bond interest rates, the U.S. dollar may not have peaked, and U.S. stocks are at risk of adjustment.

Transportation is one of the main drivers of U.S. inflation

There are eight divisions and three divisions in the specific classification methods of CPI. Under the Rule of Eights, the CPI is mainly divided into food and beverages, housing, clothing, transportation, healthcare, entertainment, education and communications, and other goods and services. In the CPI, housing, transportation, and food and beverages have the highest weights, at about 42%, 18%, and 14%, respectively. Under the rule of thirds, the CPI is divided into energy, food and core CPI, and the core CPI is the inflation level excluding energy and food, two items whose prices fluctuate too much and generally have a short-term impact.

Transportation items, food and beverage items, clothing items, and housing items are the leading factors in this round of inflation in the United States. Compared with December 2019, the year-on-year contribution rates in April 2022 increased more in order of transportation, food and beverages, clothing, and housing. At the same time, the highest year-on-year contribution rate in April was the energy item under the rule of thirds and the transportation under the rule of eighth, reflecting that the increase in energy prices has greatly increased the fuel price under the transportation item, which is one of the main factors for this round of inflation. one. This is followed by food under the rule of thirds, and food and beverages, clothing and housing under the rule of eights. There are two types of sub-items with high contribution rate. One is represented by energy items, with low weight but high year-on-year growth rate; the other is represented by residential items, with high weight and high growth rate.

Slower easing of supply-side bottlenecks

Supply chain repairs expected to remain slower this year

In addition to the surge in demand stimulated by policy, supply chain disruption is another core factor in this round of inflation in the United States. Before the outbreak of the epidemic in 2020, the degree of globalization of commodity production continued to deepen, and the production chain of commodities was complex and scattered. European and American countries were more of the role of end consumers in the global division of labor. Emerging countries, due to their abundant resources and cheap labor, were more productive. By. Under the impact of the epidemic, production, transportation and other links in various countries have been affected, and commodities with long supply chains may eventually face greater price effects and longer interruptions. A typical example is the automobile industry, which Many parts are required, and the supply chain is long and complex.

Take the automotive industry as an example to review the evolution of this round of supply chain constraints. Initially, the impact of the epidemic in 2020 caused global factories and transportation to be paralyzed, and sluggish demand for automobiles caused auto companies to cut orders for components such as chips. The subsequent surge in commodity demand stimulated by fiscal and monetary policies, the automotive industry is facing the dilemma of competing for chips with non-automotive industries (such as computers, game consoles, and other consumer electronic products). In the first half of 2021, due to extreme weather and unexpected events (extreme weather such as the ice storm in Texas and accidents such as the fire at the Renesas NAKA factory in Japan), the wafer manufacturing productivity at the front end of the chip industry chain was limited, while in the summer of 2021 The outbreak of the epidemic in Southeast Asia has caused factories in Malaysia (accounting for about 13% of the world’s chip packaging capacity) and Vietnam to stop operating, which in turn has led to limited chip packaging and testing capabilities and a shortage of components such as wiring harnesses. In September 2021, due to rising domestic coal prices and the requirement for dual control of energy consumption, China imposed power rationing on industrial provinces, which further limited the production capacity of enterprises. After the conflict between Russia and Ukraine in 2022, the shortage of rare gases and metals (nickel, cobalt, etc.) has pushed up the cost of chips and batteries. In addition, the local epidemic disturbance in my country in the second quarter of this year also caused some disturbance to the pace of automobile production.

From the perspective of the automotive industry, the current supply chain shortage is slow to ease, and it is expected that the supply chain repair speed will still be slow this year. After April 2020, due to the surge in demand, the ratio of U.S. auto inventory to sales began to fall, fell below 1 for the first time in May 2021, and is still at the bottom. However, the problem of supply chain shortages is still severe. According to data from the global chip industry association SEMI, semiconductor manufacturing equipment spending will increase by 44% in 2021. However, most of the new investment spending will not achieve mass production until 2023 at the earliest. The CEO of ASML, the core company of lithography machines, also said that the multi-billion-dollar expansion plan of chip manufacturers will be limited by the shortage of key equipment in the next two years. At present, the semiconductor supply is still slow to ease, and all links and resources in the supply chain are coordinated. Low volatility and merchants hoarding goods to deal with supply chain fluctuations still exist. In addition, due to the conflict between Russia and Ukraine, the prices of non-ferrous metals and steel have soared to historical highs, and outstanding orders such as U.S. steel and automobiles have further increased under the influence of the conflict between Russia and Ukraine. At the same time, the local epidemic in China may continue to cause certain disturbances to the automotive supply chain.

The speed of supply chain mitigation in the future is still not optimistic. This round of inflation in the United States is caused by a combination of surging consumer demand for goods and supply chain bottlenecks. At present, as the impact of the epidemic in the United States has subsided and the sensitivity of American residents to the epidemic has decreased, consumer habits are shifting from goods to services. It is expected that under the trend of changing consumption habits, the pressure on supply from the demand side may ease. The gradual decline in PMI inventory orders and the marginal increase in delivery time also reflect a certain cooling in demand, and supply chain obstacles are still relatively large. Looking forward to the future, as the epidemic is still affecting the production order of some countries in the world, the impact of the Russian-Ukrainian conflict on the shortage of energy, metals (aluminum, copper, nickel, palladium, etc.), rare gases and other materials will also directly and extensively affect industrial production. rhythm and production costs. If the situation in Russia and Ukraine has not eased in the future, the global epidemic disturbance will continue, and the speed of supply chain easing may be slower.

Focus on transportation: the pressure on domestic transportation in the United States is gradually easing, and there are still obstacles to foreign transportation

After the epidemic in 2020, the key restraints in U.S. Sinotrans transportation are insufficient supply of shipping, insufficient port handling capacity, shortage of containers, etc., the conflict between Russia and Ukraine and the disturbance of the epidemic have increased freight rates again, and some transportation links have experienced marginal relief, but there are still obstacles as a whole . In the second quarter of 2020, the U.S. transportation scale gradually recovered with demand, and in 2021, the transportation capacity basically returned to the level of 2019, but the high freight rate continued, mainly because the surge in demand could not be satisfied by the supply. The shortage of port capacity, sea capacity, air capacity and container supply will only start to ease in the fourth quarter of 2021. Congestion at U.S. ports has eased faster than expected, but due to my country’s domestic epidemic prevention and control measures, the scale of containers leaving and entering Asia has been affected, and the demand for imports and exports in the United States is unbalanced, resulting in a backlog of empty containers in U.S. ports. The ongoing conflict between Russia and Ukraine has once again raised shipping prices, causing freight rates to surge again in early 2022. The Baltic Dry Index (BDI) more reflects the freight rate trend of raw materials, the Baltic Freight Index (FBX) is more representative of the freight rate trend of semi-finished or final products, the rise of the BDI index reflects that the demand for raw materials is still strong, FBX The index reflects that the freight lines between the US and Europe are still hindered, and the transportation pressure between the US and China has eased marginally.

After the epidemic in 2020, due to the shortage of labor and truck capacity, the domestic transportation capacity was limited, but the supply and demand relationship has reversed since 2022. It is expected that under the background of changes in consumer spending habits and increased transportation capacity, the pressure on domestic transportation in the United States may further ease. Against the background of stronger wage growth and the gradual dissipation of the impact of the epidemic, the shortage of truck drivers has eased relatively quickly, and the number of trucking employees has increased to more than 2019 levels. In addition, trucking volumes continue to rise, and amid a shift in consumer spending from goods to services (service consumption is not a significant driver of freight), data released by Cass Information Systems shows a month-over-month decline in freight volumes, and even with energy Against the background of rising prices, the continuous decline in truck spot rates since entering 2022 also reflects that the supply and demand pattern of the freight market has changed, and it is expected that the impact of future freight capacity restrictions will be less.

How will the U.S. financial market play out in the future?

Due to the limited speed of supply-side easing, the Fed’s tightening has a certain lag in suppressing demand, and it is expected that U.S. inflation will remain relatively sticky. We are in “Bond Market Enlightenment Series 20220513 – Can the U.S. Economy Achieve a Soft Landing?” “In the detailed analysis of the fundamentals of the U.S. economy, it is believed that the U.S. economy is still resilient, and the current demand is still relatively strong, causing inflation to remain “high fever”. Inflation in the United States showed strong stickiness in April, and there was a trend of commodity inflation spreading to service inflation. After the impact of the previous rounds of the epidemic in the United States gradually dissipated and the epidemic control was relaxed, travel demand began to release, resulting in a significant month-on-month increase in travel-related prices such as air tickets. While the U.S. domestic capacity shortage has eased significantly and port congestion is less, there are still obstacles to outbound shipments. In addition, there are still some concerns about the epidemic in China in the short term. The impact of the conflict between Russia and Ukraine is far-reaching and continuous. It is expected that the supply chain restrictions and other problems will ease this year or will be slow. At the same time, Indonesia began to completely ban palm oil exports on April 28. On May 13, India, which exports about 4 percent of the world’s wheat, announced a ban on wheat exports due to a rare heatwave. Soaring food prices may spur more protectionist measures around the world, and food supplies are expected to be further constrained. Therefore, the future supply-side mitigation of U.S. inflation is expected to be slow and uncertain. There is a certain lag in the cooling of demand due to the Fed’s tightening. Although due to the base effect, the future US inflation is expected to fall in the first half of the year, but the rate of decline may be slower, and it may remain at a high level in the second half of the year.

Although U.S. bond interest rates have fallen recently, there is still room for an upward trend in U.S. bond interest rates in the future. Recently, U.S. bond interest rates have fallen due to rising concerns about a U.S. economic recession, rising investor risk aversion and falling stock markets. On May 12, Powell said in an interview that there is a possibility of raising interest rates by 50bps in the next two meetings, and at the same time reiterated that he has not actively considered raising interest rates by 75bps. The Fed has not made further aggressive statements recently. We expect that the Fed may raise interest rates to around 2.75-3% this year, and there is a high possibility of raising interest rates by 50bps in the next few meetings. After the September interest rate meeting, the Fed’s tightening may slow down. We expect US bond interest rates to continue to rise. space.

Due to the divergence of economic fundamentals in other major economies and monetary policy from the U.S., the U.S. dollar has shown an upward trend since 2021, and the U.S. dollar is expected to strengthen further. The European Central Bank’s April interest rate meeting said that it expects to cut net asset purchases at the beginning of the third quarter, and the earliest interest rate hike may be in July. policy; it is difficult to raise interest rates when China’s domestic economic growth is under great downward pressure. Against this background, it is expected that the monetary policy divergence between the United States and other major economies will intensify, which may support the further rise of the dollar. At the same time, the differences in the economic fundamentals of the United States and other major economies will also support the strength of the dollar. The conflict between Russia and Ukraine continues to enhance Europe. The risk of stagflation, while for Japan, rising energy commodity prices and food prices lead to Japan’s trade deficit, and the Japanese Prime Minister supports the policy of the depreciation of the yen to benefit Japan’s exports. It is expected that the monetary policies and fundamentals of the United States and other major economies may further diverge, and the dollar still has some room for growth.

Fed tightening and fears of a U.S. recession will impact U.S. stocks, and U.S. stocks will still face adjustment risks in the future. While not all bear markets are accompanied by recessions, every recession since 1960 has confirmed the direction of the stock market’s decline, triggering a steeper decline in the stock market. The average duration of a bear market without a recession after 1960 was about half a year and the average decline was 27%, while the bear market with a recession had an average duration of 1.2 years and an average decline of 37%. At present, the S&P 500 has rebounded at 3858.87 points, but in the future, against the backdrop of strong inflation resilience in the United States and the expected rapid tightening of the Federal Reserve, US stocks still face downside risks. If the U.S. economy achieves a soft landing in the future, the downside risk of U.S. stocks will be limited in the medium and long term.

in conclusion

In the context of globalization of production and trade, the shortage of any key component caused by the impact of the epidemic may set off a storm of shortages in the commodity market. Under the background that the current conflict between Russia and Ukraine is still unclear and the epidemic disturbance in some countries around the world still exists, the supply side is still slow to ease in other aspects except for domestic transportation in the United States. The supply-side easing is expected to be slower and uncertain this year, that is, the supply-side cooling effect on U.S. inflation this year will be limited. Superimposed that there is a certain lag in the suppression of demand by the Fed’s tightening, it is expected that the US inflation will fall slowly, and it may continue to run at a high level in the second half of the year. It is expected that U.S. bond interest rates will still have room to rise, the dollar may further strengthen, and U.S. stocks will still face the risk of adjustment in the follow-up.

risk factor

The macro environment in the United States fluctuated violently; the situation in Russia and Ukraine changed more than expected; the spread of the local epidemic in my country exceeded expectations; the Fed tightened more than expected.

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