Rabo: If You Want To Talk About Decoupling, It Begins With Shipping And Logistics
By Michael Every of Rabobank
Wait and Sea
The US CPI report yesterday did not have the drama of the previous few iterations. Headline was 0.5% m/m as expected, keeping the y/y rate at a 13-year high of 5.4%, and core CPI was 0.3% m/m vs. 0.4% expected and 4.3% y/y. With the over-used argument that the prices of over-used cars are now starting to come down, market opinion was that inflation is now moderating: whether these data captured the surge in rents being seen in the US did not matter. Following the print, US 10-year Treasury yields dropped from 1.38% to 1.31%, closing at 1.33%. One cannot call that a sea-change given that despite the recent move higher in yields the “transitory” meme remained permanent. However, there are moves afoot across the sea and on it that will surely impact the inflation outlook ahead.
Most obviously, in lieu of local shale or Keystone XL, the White House has called on OPEC+ to increase oil output in order to bring energy prices down. Coming just after the IPCC declared the risk of the end of life on earth if drastic climate action is not taken immediately, how this sits with front-and-center Greenery remains unclear. Then again, with funding for fossil fuel projects disappearing globally just as demand picks up (and Russian supply to the EU tails off), and years before a true green transition can actually happen, one wonders what other U-turns will have to be made despite thinking about degrees C (or F).
Also crucial is that in China the evidence is now clear that we are seeing a policy shift and not a spasm of regulation. Let’s use Bloomberg as a barometer of the market zeitgeist as this sinks in: first, “China regulators Go After Online Insurance in Widening Crackdown”; then, “China Signals Regulatory Crackdown Will Deepen in Long Push”. (They didn’t say Long March, but most of Wall Street would probably that was akin to a leap year February if they had.)
The announcement via Xinhua –which Wall Street will read for once now they see these matter for markets, right?– states detailed policy goals out to 2025. Moreover, the direction of travel is clear. It begins with “Hold high the great banner of socialism with Chinese characteristics, adhere to the guidance of Marxism-Leninism, Mao Zedong Thought, Deng Xiaoping Theory, the important thinking of the “Three Represents”, the scientific outlook on development, and Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era”. While too long to repeat here in full, particularly notable are the goals to:
(7) Actively promote legislation in important areas such as national security, technological innovation, public health, culture and education, ethnic religion, biosecurity, ecological civilization, risk prevention, anti-monopoly, and foreign-related rule of law;
(14) Strengthen law enforcement in key areas;
(30) Strengthen the analysis, mining, processing and application of big data;
(34) In-depth promotion of “Internet +” supervision and law enforcement; and
(35) Strengthen theoretical research and public opinion propaganda.
The central thrust is “Much more of what you have just been seeing”. The key question for markets is if this is positive or negative for growth: and it is a timely question given Total Social Financing data yesterday at -9.8% y/y in a debt-driven economy again grappling with Covid. Does all the above presage RRR/rate cuts and (quasi)fiscal stimulus, which the FX market might now be sniffing in a softening CNY? And if not that, then surely something even more deflationary? Something for Treasury Secretary Yellen to ponder as she apparently mulls a trip to China.
But I mentioned moves on the sea, not just over it. Delta is leading to further disruption to shipping at China’s busiest ports, and even Vietnamese and Thai production are being impacted by the virus. In short, shipping snarls are going to get worse. Anecdotes are of shippers telling clients they will not deliver except at a premium; of smaller firms, and countries(!), being pushed down the priority list; of ships refusing to pick up goods exports from some locations; and of a structural supply-demand mismatch of sought-after shipping containers.
Against that backdrop, the bipartisan “Ocean Shipping Reform Act of 2021” has been put forward to the US House of Representatives, which would make sweeping changes to shipping law in line with the patterns seen in US maritime history. (Which I have been alluding to here for weeks now, and which are anything but “because markets”). The proposed legislation would:
Establish reciprocal trade to promote US exports as part of the Federal Maritime Commission’s (FMC) mission;
Require ocean carriers to adhere to minimum service standards that meet the public interest;
Require ocean carriers/port operators to certify that detention and demurrage charges comply with federal regulations or face penalties;
Shift burden of proof regarding detention or demurrage charges from the invoiced party to the ocean carrier or marine terminal operator;
Prohibit ocean carriers from declining US exports unreasonably, determined by the FMC;
Require ocean common carriers to report to the FMC each quarter on total import/export tonnage and TEU (loaded/empty) per vessel that makes port in the US; and
Authorize the FMC to self-initiate investigations of ocean common carrier’s business practices and apply enforcement measures, as appropriate.
Most notably, what does “reciprocal trade” mean? One TEU in, one TEU out? By tonnage? By dollar value? And if demurrage charges are carried by the carrier at a time of delays, will they skip that port? If US shipping prices come down as a result of this, who will pay more to compensate? Or will it delay shippers adding to their supply-constrained fleets and ports to capacity?
This all has massive implications for shipping and supply chains; and so to inflation; and to geopolitics – because if you want to talk about decoupling, it begins with shipping and logistics as much as it does with tariffs or FDI. The first ever Act of Congress in 1789 was a 10% tariff on UK imports/shipping to promote US industry and to build a US maritime marine fleet to take on the British naval behemoth, which dictated who could buy (and hence who could produce/make) what and where.
Of course, ‘Too Big to Sail’ carriers — the top 10 ocean carriers controlled 12% of shipped volume in 2000 vs. 80% today — say the proposed legislation is “doomed to fail” and will start a “protectionist race to the bottom.” Yet these are mainly Asian and EU firms at a time of rising US populism, and political questions of who should hold real power – markets/firms or governments; the Bill is bipartisan; it sits alongside the July White House executive order targeting shipping; and endorsements for it are from a who’s who of US agri exporters.
So, “wait and sea”. Or rather sea-change.
Thu, 08/12/2021 – 10:00