If there were such a thing as a global supply chain index, it would be signalling “buy bonds”. Such a benchmark might be a better indicator of inflation, interest rates and market movements than conventional indices.
Conditions in global supply chains are continuing to return to normal in the aftermath of Covid-19, which suggests that all things being equal, inflation and interest rates will continue to decline, which is obviously good for bonds.
But instead of focusing on such real-world indicators, markets prefer to direct their gaze to what the US Federal Reserve is doing with interest rates and money supply. This is despite the fact that the Fed and major global counterparts got it wrong for so long on inflation, ascribing too much importance to monetary policy and not enough to other factors that influence prices and rates.
If supply chain trends had been monitored closely over the past decade, it would have revealed why the so-called “Great Moderation” in inflation was happening, and saved a lot of pain from subsequent asset and other price inflation.
Few people – Japan’s Eisuke Sakakibara or “Mr. Yen”, a former vice finance minister for international affairs, is one exception – realised that the great disinflation was due largely to China flooding the world with cheap goods.
Many economists and financial analysts also appear to now be unaware of what supply chain indices are indicating about continuing disinflation. They would do well to study data from the Institute of International Finance in Washington.
“We have had a dovish US inflation view for all of this year,” the IIF says in a recent report on supply chains, an assessment based on the “unprecedented” scale of supply chain snarls caused by Covid-19.
Although delivery delays from the disruptions lessened during 2022, the IIF suggests that it should have been clear that prices which were marked up during the pandemic would take time to normalise.
This is precisely what has happened as inventory managers have remained nervous about the supply situation in industrial goods, and have only recently begun to reduce prices.
Having started later than expected, the disinflation process is thus expected to continue for longer than was previously thought.
“We estimate that supply chain disinflation still has further to run,” the IIF says, predicting that it will probably peak in the first quarter of 2024 in the US but “well after” that in the eurozone.
If this analysis is correct, downward pressure on prices of goods is likely to persist longer than many analysts expect, which in turn signifies that the large decline in bond yields in recent times is still far from being over.
This is a view supported by Dave Sekera, Morningstar’s chief US market strategist, who says in a recent commentary that “long-term interest rates are projected to decline further as the Fed shifts course and begins to ease monetary policy in 2024”.
Analysts and investors might also be well advised to direct their eyes – if they can tear them away from equity market indices – to data related to global trade.
According to the United Nations Conference on Trade and Development, global trade is set to contract 5% or $1.5 trillion in 2024, or by $2 trillion in terms of goods traded, excluding services.
Prospective slower growth in advanced and emerging economies also points to further downward pressure on prices. So it is not only supply chain figures that are flashing green for bonds.
So in order to “get real”, look at what’s happening in the real economy or the real world.
