American consumers have been on a spending spree since the pandemic eased. A measure of this has been the daily tally of container ships waiting outside the busy ports of Los Angeles and Long Beach, California. These two ports serve as entry points for about 40% of all goods imported into the United States (US). The queue of ships reached a record of 73 on 19 September 2021 and was still extremely long last weekend, frustrating retailers and highlighting the pressures on the US supply chain.
Key themes for the week include:
- US ports buckle under pressure
- South African business confidence above pre-pandemic levels
- Coal prices continue to soar amid fuel shortages
- Equities track higher as upbeat earnings overshadow inflation fears
SUPPLY CHAIN CRISIS HEADING INTO THE FESTIVE SEASON
The Biden administration announced steps to ease supply chain bottlenecks this week and help alleviate shortages as it secured pledges from major companies such as Walmart and FedEx to extend their working hours, and crucially won a commitment from the International Longshore and Warehouse Union to add shifts and move toward a 24/7 work schedule at the ports in Southern California.
Supply chain pressure has had a damaging effect throughout the economy, hurting both US retailers and manufacturers. Supply chain problems, however, are not just a US issue, they are being felt across the world. The global flow of goods remains frustrated, with the United Kingdom (UK) experiencing long queues at petrol stations due to fuel shortages, and the German auto industry suffering from shortages of components including computer chips and the metals used in car batteries.
Supply chain disruptions led to US inflation rising to 5.4% in September, as consumer prices rose to their highest level in 13 years, leading to questions around the feasibility of just-in-time supply chains. As the festive season approaches, logistics, labour, and manufacturing difficulties, combined, are likely to add another $225 billion to US retailers’ costs, which could in turn push up prices consumers pay for their gifts. That is, if they are available in store.
DATA IN A NUTSHELL
The number of Americans filing new claims for unemployment benefits fell to 293,000 in the week ending 9 October, the lowest level since the pandemic hit the US economy in March 2020 and well below market expectations of 316,000. The steady labour market recovery continues amid a rebound in demand for workers and a slowdown in firings, layoffs and separations. However, there are still signs that many individuals remain on the sidelines of the labour force due to lingering concerns over the Coronavirus, with the level of new claims remaining above the pre-COVID weekly average in 2019.
The UK unemployment rate declined yet again, dipping to 4.5% in the three months to August, the lowest in a year, and in line with market expectations, as the labour market continued its recovery. The rate however remained 0.5% higher than before the pandemic. UK gross domestic product expanded by 6.9% year-on-year in August, easing from a revised 8.8% growth in the previous month, beating market expectations of 6.7%.
Industrial output in the Eurozone rose by 5.1% year on year in August, following a revised 8% growth in the previous month, beating market expectations of 4.7%.
The South African Chamber of Commerce and Industry’s SACCI Business Confidence Index fell to 91 in September from 91.9 in the previous month, but remained above pre-pandemic levels. It was the lowest reading since September 2020, amid a decline in retail sales, manufacturing output and the real value of building plans passed. “Energy and water supply concerns, with increased utility tariffs, and higher fuel prices were also major contributors to a wary business outlook. Secure energy supply generally remains a crucial concern to the business community”, SACCI said. The decrease was partly offset by exceptional improved year-on-year merchandise export volumes, a stronger rand exchange rate, and an increased number of new vehicles sold. Gold Production in South Africa increased 17% in August compared to 13.5% in July, while mining production rose by 2% in August from a year earlier. Manufacturing production rose by 1.8% during the same period, beating market expectations.
UPBEAT EARNINGS BOOST SENTIMENT
US stock futures rose sharply on Thursday, as contracts on the Dow Jones jumped more than 200 points, after earnings from Citigroup, Wells Fargo, Bank of America, Morgan Stanley and UnitedHealth beat market forecasts. The earnings season kicked off yesterday, and traders are trying to assess how recent inflationary pressures and supply constraints impacted businesses. In addition, investors continue to digest recent Federal Open Market Committee (FOMC) minutes which showed the US Federal Reserve (Fed) could start tapering as early as mid-November.
The FTSE 100 rose 0.7% to a five-week high on Thursday, in line with its European counterparts, enjoying a good start to the September-quarter earnings season. The energy crisis in the UK continues to take its toll in the utilities sector, with two more companies exiting the market, forcing roughly 250,000 consumers to switch suppliers. Since August, 12 companies have collapsed due to soaring gas prices.
European stocks extended their gains to over two-week highs on Thursday, on the back of an upbeat start to the September-quarter earnings season. French advertising group Publicis saw double-digit organic growth in its third quarter revenues, as all regions returned to pre-pandemic levels, more notably in North America, which was up 9% compared to the third quarter of 2019. The pan-European Stoxx 600 and the German DAX were each up by 0.7% respectively.
The Japanese Nikkei 225 rose 1.46% while the broader TOPIX was up by 0.67% on Thursday, carried higher by tech heavyweights following a dovish statement from a Bank of Japan (BOJ) board member, Asahi Noguchi, who noted in a speech on Thursday, that reducing monetary stimulus in response to rising inflation will not be an option for Japan at the moment. He said the country has yet to achieve its 2% price stability target. Electronic giants Tokyo Electron, which gained 5.18%, Screen Holdings 4.33% and Advantest 3.8%, led the gains among tech heavyweights, tracking their Nasdaq peers.
The FTSE/JSE All Share index traded higher to around 66,735 points on Thursday, its highest since 1 September, tracking the global positive sentiment. However, concerns continue to persist over slowing growth and strong inflationary pressures. Locally, Eskom suspended loadshedding, though it warned a number of its generating units remained fragile and further breakdowns were a threat. On the earnings front, investment group Long4Life reported its results for the six months to end-August 2021, with revenue up 30% to R1.8 billion and profit up 335% to R214 million compared to the same period of 2020.
CHINA SEEKS COAL POWER
Coal futures remained firm, trading above $240 this week, due to elevated global demand, after hitting a record high of $269 last week. This week, China liberalised the price of coal-fired power to stimulate higher power generation and curb power shortages, a move that could add further pressure to the already tight coal market. Despite Russian President Vladimir Putin saying Gazprom would send more natural gas to Europe, there are concerns that it may be too little too late. Expectations are for natural gas supplies to remain tight throughout Europe’s winter, and for China’s aggressive bidding for gas to keep prices firm.
Gold traded within a tight range early in the week before bullish momentum drove the precious metal to a high of $1,800 per fine ounce on Wednesday. Gold consolidated three consecutive sessions of growth on Thursday closing at $1,794 per fine ounce. The momentum in gold comes after the dollar retraced some of its recent gains, along with the declines in longer-date US Treasury yields.
The West Texas Intermediate (WTI) Futures price pulled back from reaching a multi-year high of $83.18 per barrel on Wednesday to settle at $80.60 per barrel on Thursday as Organisation of the Petroleum Export Countries (OPEC) trimmed its global demand forecast for 2021 to 5.8 million barrels a day. OPEC members announced that the spike in natural gas prices may have the potential to further boost oil demand, however, reports suggest that European powerplants are yet ready to switch from gas to oil.
DOLLAR EDGES DOWN, WHILE TURKISH LIRA NOSEDIVES
The US Dollar Index retreated to below 94 on Thursday after briefly touching a 13-month high of 94.5 the day before, as investors digest recent inflation figures and FOMC minutes. Fresh consumer price index (CPI) data showed inflationary pressures remained high in September, raising concerns that inflation will stay at multi-year highs for longer than expected. At the same time, FOMC minutes showed the Fed is close to starting the tapering of asset purchases, possibly in mid-November.
The euro traded at $1.16/$ on Thursday, hovering around its weakest level since July 2020, amid concerns over mounting inflationary pressure due to rising energy prices and expectations the Fed will be tapering faster than the European Central Bank (ECB). The ECB is expected to hike rates by 10 basis points by the end of 2022, even as President Lagarde tried to appease the market’s inflation fear by saying she still expects supply shortages or rising energy prices to be transitory.
The British pound appreciated above $1.36/$, moving further away from a nine-month low of $1.34/$ hit earlier in the month, amid expectations that the Bank of England (BoE) will be raising interest rates sooner than expected. Official, Michael Saunders, said investors were right to bet on faster increases in borrowing costs, while Governor Andrew Bailey warned of a “very damaging” period of inflation unless policymakers take action. At the same time, concerns over the British economy mounted due to a surge in energy prices and the shortage of workers in the wake of Brexit and the COVID-19 pandemic. Investors also worry about the unemployment outlook, as a furlough scheme introduced to mitigate the effects of the pandemic ended in September.
Turkish president, Recep Erdogan, dismissed three top officials at the country’s central bank on Thursday as Turkey’s economy slid further into instability. The lira fell to record lows as the Turkish public struggles with devalued wages and rising costs of basic goods such as food. The president has consistently called for lower interest rates as part of a strategy to encourage economic growth and it is surmised that he dismissed the officials for resisting his demands. Erdogan has a history of intervening at the bank. He fired three of its governors over two years, and recently installed a chief in March who agrees with his interest rate desires.
The South African rand gained momentum, on Thursday, to trade around R14.70 against the US dollar, its strongest since 23 September, as the dollar retreated, despite persistent fears of a slowdown in global growth and the prospect that the Fed would announce a tapering of stimulus next month. At the same time, the South African Reserve Bank turned more hawkish on raising borrowing costs through 2023.
We start the day at R14.76/$ R17.13/€ and R20.19/£.
Written by Citadel Global Director, Bianca Botes and Citadel Equity Analysts, Thambo Mthwalo and Zain Ghoor.