Supply chain pressures have 'eased significantly' and inflation could be next: Morning Brief
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Friday, July 1, 2022
Today's newsletter is by Sam Ro, the author of TKer.co. Follow him on Twitter at @SamRo.
On Thursday, we learned the Fed's preferred inflation measure — core PCE — moderated in May, rising 4.7% over the prior moth and marking the third-straight month of moderating price pressures.
And while investors will be closely watching for signs of this trend continuing, or reversing, in the coming months, the much-maligned global supply chain is beginning to show some signs of operating more smoothly.
One of the most intuitive measures of supply chain health is supplier delivery times, which hit their longest points on record last fall.
Earlier in June, we learned manufacturers’ delivery times in the New York Fed and Philadelphia Fed’s regions had gotten significantly shorter during the month.
Since then, we’ve learned from the Kansas City Fed and Richmond Fed that delivery times also improved in their regions. However, delivery times got worse in the Dallas Fed’s region.
Ed Yardeni of Yardeni Research has a composite index consisting of delivery times and order backlogs — another good proxy for supply chain delays — from those five regional Fed banks. And Yardeni found these pressures, when looked at holistically, are beginning to ease.
“June's surveys of five of the 12 district Federal Reserve Banks strongly suggest that supply-chain disruptions have eased significantly in recent months,“ Yardeni wrote on LinkedIn.
This is a big deal, because supplier delivery times have a relatively tight relationship with inflation rates.
“The question is whether the drops in regional indexes tracking unfilled orders and delivery times during the first half of this year reflect more ample supplies or diminishing demand,” Yardeni noted.
Yardeni argues that if the decline is largely due to demand, then prices should be falling sharply.
But that hasn’t been the case so far.
“It's a puzzle that will most likely be resolved during the second half of this year,” he said.
It would be nice to learn in hindsight that falling supplier delivery times were largely driven by a faster-than-expected recovery on the supply side of the equation, rather than a deterioration on the demand side.
Regardless, it’s encouraging to see that these key supply chain metrics are improving.
Of course, in the current economy, it only matters if it leads to “clear and convincing” evidence that inflation is cooling down.
And even then, as Fed chair Jerome Powell said this week, there is "no guarantee" a bad outcome for the US economy can be avoided.
What to Watch Today
Economic calendar
S&P Global U.S. Manufacturing PMI, June final (52.4 expected, 52.4 prior)
Construction Spending, month-over-month, May (0.4% expected, 0.2% during prior month)
ISM Manufacturing, June (54.7 expected, 56.1 during prior month)
ISM Prices Paid, June (80.0 expected, 82.2 during prior month)
ISM New Orders, June (55.1 during prior month)
ISM Employment, June (49.6 during prior month)
Wards Total Vehicle Sales, June (13.40 million, 12.68 during prior month)
Earnings
Pre-market
No notable reports scheduled for release.
Post-market
No notable reports scheduled for release.
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