12 January 2024
There has been enough economic data out this week to keep the market scratching their heads as to when the first interest rate cut will be, and by how much.
In the UK we had the economic growth data for November, which showed an expansion of 0.3% month on month. This proved a pleasant surprise after the 0.3% fall posted in October, whilst also beating the consensus forecast of 0.2%. The gain was mainly driven by services. Depending on what we see in December, the stronger than expected figure might mean that we can avoid a period of contraction for the fourth quarter of 2023. In reality, the difference between a slowdown and a recession, defined as two consecutive quarters of negative economic growth, could be immaterial, but psychologically it certainly changes the news headlines.
In the US there was good news for anyone looking to by a second hand car, with a further 0.5% fall in December, meaning a 7% fall year on year. In reality, however, all eyes were on inflation data. This showed that core inflation rose 0.3% in December, in line with expectations, meaning that the year on year figure stood at 3.9%. The all-encompassing inflation figure, meanwhile, ticked up a little further than expected, up 0.3% on the month versus forecast of 0.2%, meaning a year on year rate of 3.4%. Over half of this rise in the month was due to shelter costs. Whilst only a slight miss to the upside, it was enough to get some investors excited. In reality, the move back to target was never going to be straight line, but the general consensus remains that this is the direction in which we are heading.
If producer prices are any sort of guide, then the path of consumer prices should continue lower. The year on year figure to December for core produce price inflation came in at 1.8%, lower than the November reading of 2% and below the consensus forecast of 1.9%. Here, we are now back at a more consistent level with what we saw pre-pandemic.
As we stated earlier, there will always be the potential for some bumps in the road when it comes to inflation. The one perhaps most on investors minds at the moment is what is going on in the Red Sea. With container ships being attacked, many companies are now taking the decision to avoid here and therefore passage through the Suez Canal, instead opting to sailing around the southern tip of Africa. This undoubtedly adds not only to journey time, but also to cost.
As you may therefore expect, the price for shipping a container around the world has risen significantly. The Drewry World Container Index, which measures the cost of shipping a 40 foot container, has risen from $1,382 on the 30 November to $3,072 as at the 11 January, a very significant rise. Breaking that figure down further, the cost change has differed depending on the destination from Shanghai.
As always, the picture is not as clear as it seems. There are two further indices which are widely referred to when it comes to measuring the cost of shipping containers around the world. The first is the Shanghai Export Containerized Fright Index, the second the China Export Containerized Freight Index. The first index moves depending on the changes in weekly spot rates, i.e. the weekly changes seen in the cost of shipping a container. As you would perhaps expect, this has seen a very similar trajectory to that shown by the Drewry index. Indeed, the Shanghai index has risen by c.118% since the first of December.
The second index however, the China Export index, posts a very different picture. This index is broader, in that it looks at the price of containers leaving all Chinese ports. Furthermore, it is a composite of spot rates (rates now) and contractual rates. It is estimated that c.75% of the global trade market operates on contractual rates. The increase in this index has still been large, at almost 33%, but is much lower than the Shanghai index.
So, how do we interpret this. I guess a lot will depend on how long this diversion for container ships remains in place. If it is only short then hopefully longer term contractual rates wont be affected too much. If it becomes a more protracted affair, however, shipping companies will need to cover their increase in costs somehow, and this will undoubtedly feed more into longer term contractual rates. That ultimately could mean a higher cost of goods for us all. Keep an eye on the cost of goods you would typically buy over the next few weeks and months which need to travel via a containership.
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