Morning Note: We’ve a Long Ways to Go — And — Allowing Clarity to Emerge

Here are a couple of key tidbits from yesterday’s release of the Fed’s Beige Book (an assessment of conditions across Fed districts):   emphasis mine…

Prices

Prices rose at a moderate to robust pace, with price hikes widespread across sectors of the economy. There were wide-ranging input cost increases stemming from strong demand for raw materials, logistical challenges, and labor market tightness. But wider availability of some inputs, notably semiconductors and certain steel products, led to easing of some price pressures. Strong demand generally allowed firms to raise prices with little pushback, though contractual obligations held back some firms from increasing prices.

Employment and Wages

Employment growth ranged from modest to strong across Federal Reserve Districts. Contacts reported robust demand for labor but persistent difficulty in hiring and retaining employees. Leisure and hospitality and manufacturing contacts reported an uptick in employment, but many were still limiting operating hours due to a lack of workers. Contacts in several other sectors also noted labor-related constraints on meeting demand. Childcare, retirements, and COVID safety concerns were widely cited as sources that limited labor supply. Many Districts noted concerns that the federal vaccination mandate could exacerbate existing hiring difficulties. Nearly all Districts reported robust wage growth. Hiring struggles and elevated turnover rates led businesses to raise wages and offer other incentives, such as bonuses and more flexible working arrangements.

And here are the featured respondents’ comments from Monday’s release of the November ISM Manufacturing Survey:

 “International component shortages continue to cause delays in completing customer orders. Backlog continues to increase.” [Computer & Electronic Products]

“Petrochemical supply chain is slowly showing signs of improvement after multiple weather disruptions in 2021.” [Chemical Products]


“Large volume drops due to chip shortage.” [Transportation Equipment]

“Oil is up, but our capital spending remains flat for now. No new orders at this time.” [Petroleum & Coal Products]

“All input costs are going up considerably, across the board.” [Food, Beverage & Tobacco Products]

“While steel plate and hot-rolled coil pricing seems to be approaching a plateau, the biggest challenge we have at the moment is finding qualified workers.” [Fabricated Metal Products]

“We are still seeing shortages with various metals. Plastic resins seem to be slowly improving. Electronic component lead times are still moving out.” [Electrical Equipment, Appliances & Components]

“Business is strong but meeting customer demand is difficult due to a shortage of raw materials and labor.” [Furniture & Related Products]

“In the first nine months of the year, business conditions were off the charts, and sales by far outpaced capacity. This has put backlog at record levels and, surprisingly, customers have been willing to wait, albeit reluctantly. However, there seems to be a flattening: Sales remain strong but are not growing at the same month-over-month pace from the previous six to nine months.” [Machinery]

“We are experiencing significant supply chain disruptions, which are resulting in historically long lead times to get product to our customers. Commodity-based inflationary pressures are widespread, and traditional means of addressing these pressures are not effective due to unprecedented demand.” [Miscellaneous Manufacturing]

“We are starting to catch a break in plastic resins, with (November) prices lower in both ethylene and propylene-based resins. Starting to notice improvement in availability/lead time as well.” [Plastics & Rubber Products]

While there are hints here and there of the inevitable (supply chain bottlenecks easing), we’ve a long ways to go. And while that easing will eventually alleviate some inflation pressure, never forget, wages are very sticky (difficult to bring back down) and are inflationary (in a structural sense) by definition.


Asian equities leaned green overnight, with 9 of the 16 markets we track closing higher.

Europe’s struggling this morning, with 15 of the 19 bourses we follow in the red, as I type.

US major averages are up across the board (although Nasdaq just barely): Dow up 404 points (1.19%), SP500 up 0.75%, SP500 Equal Weight up 1.51%, Nasdaq 100 up 0.02%, Nasdaq Comp up 0.06%, Russell 2000 up 1.47%.

The VIX sits at a concerning 29.30, down 5.85%.

Oil futures are down 0.53%, gold’s down 0.55%, silver’s up 0.73%, copper futures are up 0.94% and the ag complex is up 1.27%.

The 10-year treasury is down (yield up) and the dollar is down 0.05%.

Led by Latin American equities, AT&T, Disney (brand new position), bank stocks and Indian equities — but dragged by semiconductors, carbon credits, gold, Viacom/CBS and tech stocks — our core portfolio is up 0.93% to start the session.


Yes, these are uncertain times for sure! And while conditions are indeed “muddy” our minds don’t have to be. As investors/portfolio managers our essential task is to remain still/settled (in an emotional sense) and allow clarity to emerge amid the chaos:

“Who can (make) the muddy water (clear)? Let it be still, and it
will gradually become clear.”

–Laozi 


Have a great day!
Marty

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