Supply Chains Not Likely to Untangle in Time to Save the Fed from Hiking by Mid-Year
Supply Chains to Remain Tangled Well into 2022
As you read this the November CPI numbers will likely have been released and will probably signal another month of steamy inflation that will have the Fed poised to increase the pace of tapering at next week’s FOMC meeting. The overall CPI is expected to print the highest year-over-year rate since 1982 at 6.8%, while the core rate is expected to print the highest year-over-year number in 30 years at 4.9%. With those numbers in hand, the Fed is likely to accelerate tapering from $15 billion per month to $30 billion per month beginning in January.
That would finish the job after March allowing the Fed to assess the inflation and growth landscape for possible rate hikes in late spring or early summer. The market continues to expect 2.7 rate hikes in 2022 per fed funds futures. Beginning in June, the Fed will have five FOMC meetings left for the year giving them plenty of opportunities to begin tightening policy rates if inflation remains a risk, which seems will be the case (see our article on container ships and supply chains below).
Job Market Inching Closer to Full Employment
The November jobs report was a tale of two surveys. The establishment survey posted only modest job gains of 210 thousand while the household survey posted a more robust 1.1 million. And that’s the same survey that generates the various unemployment rates and labor force participation numbers. The issue there is that survey is much smaller in size, and thus prone to a wide error band. The establishment survey is much larger and fed electronically which makes it less prone to error but it’s far from perfect. We tend to put a little more reliance on that survey, call it 60-40, but its far from a science.
It’s very likely that 210 thousand will be adjusted higher while the household survey will be adjusted lower, and with a higher weight for the establishment survey one can easily see the true number coming in near 500-600 thousand, much like the APD print. Thus, we see the Fed looking at November as another month closer to full employment and another month closer to rate liftoff.
Another reason for the Fed’s confidence that the full employment mandate will be met sooner rather than later is the latest from the Job Openings and Labor Turnover survey. The report runs a month behind the more famous nonfarm payrolls report but the October report held only good news on the health of labor market. Job openings totaled 11.033 million, just short of the all-time high of 11.098 million in July. Expectations were for 10.469 million so a nearly 600 thousand beat on openings. With 6.9 million people reported unemployed from the November jobs report there are nearly two unfilled jobs for every unemployed person. That indicates either a skills mismatch for many of those unemployed or plenty of those folks not really looking for employment.
The other indicator in the report, the Quits Rate, measures those that leave a position voluntarily, either with the thought of acquiring a new and better job, or leaving the workforce altogether. At 2.8% of total employed and job leavers, the quits rate is off the 3.0% high but well above the 2.3% rate that prevailed pre-pandemic. The Fed is likely to look at the unfilled job openings number month after month as a sign that their task is just about done with regards to returning the economy to full employment. It’s the old story, you can lead a horse to water…..
Container Ships Signal a Long, Slow Untangling of the Supply Chain
You no doubt have heard about the logjam of container ships at key ports across the U.S. as one very visible example of the broken or enfeebled supply chain. You may have also heard that some of that log jam may be easing indicating a smoother running supply chain in the near future, and perhaps a relenting of price pressures. Well, don’t bet the farm on that just yet.
Container prices skyrocketed early in the reopening phase as demand suddenly surged. When prices started to show some declines in the fall, it was hailed as a turn in the supply chain story. Price per container peaked in September, increasing 470% from January 2020. By the first week of October prices began to slide from $10,377 in September to $9,050 by December 1, a 12% decrease. The fact is container prices typically fall during this period as the holiday shipping season ends months before the holidays themselves. This year was no different. Some shipping industry officials note too that huge lines like Maersk and CMA CGM put in pricing freezes after facing much customer ire. These same executives note the shipping channels and ports remain clogged and slightly lower prices are not reflective of an improvement in the backlog.
Declining ships at anchor near major ports was another reason cited for improvement, but the truth is ships were anchoring further out from the 40-mile demarcation line. When a full accounting of ships were made, some 150 miles from port, the totals were just as high as ever. It seems the supply chain issues will continue to be with us well into 2022 and beyond.
Agency Indications — FNMA / FHLMC Callable Rates
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