We’re finally getting some good news on the snarled supply chain, which has been a key driver of inflationary pressures over the past few months.
Container freight rates have declined for several weeks in a row after spiking in September, and the number of containers sitting idle for more than nine days at the Port of Los Angeles has dropped by about 30 percent, according to Bloomberg. At the Port of Long Beach, the number of containers being unloaded now exceeds 2019 levels. Further, a regional Federal Reserve survey showed delivery times declined in November, and October job growth in logistics and manufacturing was strong.
There are still plenty of knots to untangle, but it’s clear that progress has been made getting goods where they need to be. Taking a step back, this speaks to the adaptability of the U.S. economy. Economic pain points are opportunities, and incentives emerge for businesses and operators to alleviate them with some creative problem solving. Of course, the U.S. economy is a massive, complicated machine, so it doesn’t exactly turn on a dime. But time and again, the free-market structure self-corrects and optimizes. We saw it happen during the pandemic, and it’s happening again as we sort out supply chain issues. That’s why we recommended investors remain patient through this inflationary spell, and here we are today seeing early signs that pressure is beginning to ease.
Now, let’s take a closer look at the week that was and prep you for the week ahead.
Wall Street wrap
Retail Sales: Amid warnings of potential shortages heading into the holiday season, consumers may have acted proactively and got a head start on holiday shopping. Retail sales for October rose 1.7 percent from September and sit 16.3 percent higher vs. the same time last year. That was the largest increase since March and exceeded analyst expectations.
Despite inflation at a 30-year high and low sentiment reads, consumers don’t seem to be deterred.
A Closer Look at the Retail Sector: Last week some of the biggest retailers in the country reported earnings, and Jeff Nelson, senior portfolio manager at Northwestern Mutual, provides a few key takeaways.
The supply chain disruptions were well telegraphed, and companies had time to prepare. Swift actions to get products on the shelves showed up in elevated inventory levels at the end of the quarter — ballooning $10 billion combined for Walmart, Target and Home Depot. Normally in retail, inventory growth above expected sales growth is a problem, as that often means they will have to discount products. This year, it’s a badge of honor, as having enough product for the anticipated strong holiday is expected to be more important than in most years.
Nelson said he thinks the Q3 gross margin hit at Target and Walmart may turn in both companies’ favor later in the holiday season if they don’t have to discount as much, especially if demand remains strong. Demand across the board remains strong, but supply chain disruptions are largely expected to linger well into 2022.
Production Ramps Up in October: Industrial production bounced back strongly in October, growing 1.6 percent following a 1.3 decline in September. The Federal Reserve attributed the sharp recovery following Hurricane Ida. The rebound was led by a boost in vehicle production, which rose 11 percent in the month. Capacity utilization and manufacturing activity both rose 1.2 percent in the month, with total utilization reaching 76.4 percent.
Sifting through the numbers, it’s plain to see production is accelerating. That’s a welcome sign, given the steep backlogs manufacturers have accrued. Bigger picture, as manufacturing ramps to meet demand that should provide some downward pressure on prices going forward.
Biden Sticks With Powell: The White House announced this morning that President Biden will nominate Jerome Powell for another term leading the Fed. The President will nominate Lael Brainard as vice chair. The move is an indication that Fed policy will remain status quo.
The week ahead
It’s shaping up to be quite a packed week in terms of data, with Wednesday looking particularly busy.
- Monday: The Chicago Fed national activity index is a general gauge of economic activity and inflationary pressure. In general, it shows whether we are above or below the economy’s long-term trend growth rate. We’ll also get October’s existing home sales tally.
- Tuesday: Important reads on the services and manufacturing sector for November are due from IHS Markit. These reports always have great insights about labor, material costs, shipping etc. We’ll look for further evidence supply chains are improving.
- Wednesday: This will be a big day. CPI and Core CPI for October will be released in the morning, and that will once again steal the spotlight for the day. There’s a handful of other reports, as well: personal income, minutes from the Fed’s latest meeting, new home sales, revised Q3 GDP, durable and capital goods orders and data on incomes.
- Thursday: Happy Thanksgiving!
Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.
There are a number of risks with investing in the market; if you want to learn more about them and other investment-related terminology and disclosures, click here.
As the chief investment officer at Northwestern Mutual Wealth Management Company, I guide the investment philosophy for individual retail investors. In my more than 25 years of investment experience, I have navigated investors through booms and busts, from the tech bubble of the late 1990s to the financial crisis of 2008-2009. An innate sense of investigative curiosity coupled with a healthy dose of natural skepticism help guide my ability to maintain a steady hand in the short term while also preserving a focus on long-term investment plans and financial goals.