Is inflation peaking? The shipping news

Plus, Australia’s Q4 CPI outlook and US November non-farm payrolls

The continued moderation in US CPI inflation over October was a welcome sign that global inflation pressures may have peaked and financial markets responded accordingly. The release came alongside a continued decline in spot freight rates, which provide a close to real-time measure of global supply chain pressures. The cost of shipping a 40ft container from Shanghai to Los Angeles has now declined to close to pre-pandemic levels and similar declines are evident in most routes out of Shanghai, while inbound Shanghai and non-China routes have seen smaller declines:

The New York Fed’s global supply chain pressure index has also declined substantially to be only one standard deviation above its long-run average:

Some analysts have interpreted the decline in freight rates through a demand lens to argue that this is symptomatic of an emerging global downturn. There is certainly evidence of a decline in container volumes based on the RWI/ISL container throughput index. The index covers 94 international ports accounting for around 64% of global container traffic:

The overall index (shown above) declined 2.8% m/m in SA terms, while the North Range index covering Northern Europe and Germany recorded a 5.7% m/m decline. But overall global merchandise trade volumes have been growing at pre-pandemic and pre-Trump trade war rates, at least through to September this year. Growth is stronger than during the global mini-recession of 2015-16:

Source: CPB.

Subsequent readings may well show evidence of a decline, particularly in view of events in China and some disastrous PMI reads out of both the US and Europe. Shipping capacity is notable for the fact that it cannot be stored, as well as being characterised by high fixed but low marginal costs, giving rise to volatility in its price. This is one of the reasons the Baltic Dry Index has a sketchy reputation as a global demand indicator.

Of greater concern from a demand perspective is the continued yield curve inversion in the US, with the 3m-10yr spread confirming the long-standing signal from the 2yr-10yr spread, which is the most inverted since 1982. Yield-curve based recession probability models point to a greater than 50% chance of a near-term recession based on the 3m-10yr spread.

Perhaps the best indicator that US inflation has peaked is the growth in M2, or lack thereof. As Scott Grannis notes, we are now seeing some of the weakest M2 growth since at least 1960. Divisia M2 (M2 components weighted for liquidity/yield) growth is also showing significant weakness. Just as M2 growth led inflation on the way up, it can be expected to lead inflation on the way down:

Australia Q4 trimmed mean inflation rate

The US October CPI saw the Cleveland Fed’s trimmed mean measure moderate to 0.4% from an average 0.5% monthly rate in Q3. Putting that into our Australian trimmed mean inflation rate model yields an estimate of 1.6% q/q and 6.6% y/y for Q4 compared to 1.8% q/q and 6.1% y/y in Q3. This would put the trimmed mean inflation rate a little ahead of the 6.5% y/y rate the RBA forecast for Q4 in its November Statement on Monetary Policy, but would still constitute a welcome moderation in the quarterly rate of trimmed mean inflation. The ABS monthly CPI indicator recorded a 0.3% m/m increase for its trimmed mean in October, down from the 0.5% m/m pace seen in every prior month since May. So we are on track for a year-end peak in the domestic inflation process. We will update the Q4 inflation outlook closer to its release in January next year.

US November non-farm payrolls

We are again above market on US November non-farm payrolls, with a forecast of 230k compared to a median expectation of 195k. The market is expecting a steady unemployment rate at 3.7%. The unemployment rate has been alternating between 3.5% and 3.7% since July, but we are at market with a 3.7% forecast. Although the pace of employment growth has been moderating, it remains above historical averages and another strong read for employment growth in November will add to market caution on a peak in inflation and prospective step-down in the pace of Fed tightening.

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ICYMI

• Double contrarian indicator of the week: not only in The Economist, but featured in a Tooze Bros chart regurgitation:

  

• If it were a snake, it would have bitten you: Money in the New Keynesian Model.

• More money makes you happier, but not if you think it does.

• Apropos of everything happening right now: Now Out of Never: The Element of Surprise in the East European Revolution of 1989.