InvestMacro

By JustForex

At the close of trading on Friday, the Dow Jones index (US30) decreased by 1.71% (-2.75% for the week), while the S&P500 (US500) was 1.51% lower (-2.64% for the week). The NASDAQ Technology Index (US100) fell by 0.75% on Friday (-0.39% for the week). As the Fed tightened its monetary policy to tame the strongest inflation in decades, the US Treasury yields jumped to their highest level in more than a decade, causing stocks to plummet.

Markets are entering the final stretch of 2022 after a tumultuous third-quarter close Friday, driven by persistently high inflation, rising interest rates, and fears of a recession. The US stock market has now posted three consecutive quarterly declines for the S&P 500 and Nasdaq since 2008, as well as the longest quarterly decline for the Dow Jones. Analysts believe investors are likely to see increased market volatility with a downward bias in the near term as we approach the reporting season.

European stock markets mostly rallied on Friday, but almost all closed in negative territory at the end of the week. German DAX (DE30) gained 1.16% (-0.96% for the week), French CAC 40 (FR40) gained 1.51% (+0.31% for the week), Spanish IBEX 35 (ES35) gained 0.91% (-2.22% for the week), British FTSE 100 (UK100) gained 0.18% (-1.78% for the week).

Inflation in the Eurozone reached double digits for the first time ever. In September, it jumped to a record 10% (9.1% in August) on an annualized basis. Core inflation (which excludes food and fuel prices) reached 4.8% (4.3% in August). The extremely high inflation figures mean that the ECB will continue to raise rates quickly in upcoming meetings. Analysts believe rates will be raised by 75 BPS in October, 50 BPS in December, and 25 BPS in the first quarter of 2023.

Four treaties were signed in the Kremlin on Friday to admit new entities to the Russian Federation. The so-called DNR, LNR, Kherson, and Zaporizhzhia regions were “annexed” by Russia. Now, Moscow will consider possible strikes by Ukraine against the territories that will “join” Russia as an act of aggression against Russia. For its part, Ukraine applied to NATO under an accelerated procedure. The European Union, the US, Canada, Australia, and many other countries said they would never recognize the results of the referendums on the new territories joining Russia, and called on other countries to condemn them.

EU countries reached a preliminary agreement on a new package of measures against Russia.

The US and UK introduced a new package of sanctions against Russia, which included dozens of individuals and entities. US President Joe Biden said after Russia’s annexation of new territories, the US would support Kyiv’s attempts to take them back. Biden said that Russia violated international law and the UN charter with its actions. The UK also imposed sanctions on services and an export ban, targeting Russia’s economic vulnerability. The UK is imposing an export ban on nearly 700 goods that are critical to Russia’s industrial and technological capabilities. The UK will also prohibit Russia from accessing the services of its engineering, architectural, auditing, legal, and advertising companies.

Embassies of many countries have advised their citizens, whose stay in Russia is not dictated by necessity, to leave Russia as soon as possible. Norway may impose a travel ban on Russian tourists, similar to that previously imposed by Finland.

According to analysts, OPEC+ will consider cutting production by more than 1 million barrels a day this week. The meeting will be held on October 5. OPEC+, which brings together OPEC nations and allies such as Russia, has refused to increase production to lower oil prices despite pressure from major consumers, including the US, to help the global economy. Nonetheless, prices fell sharply last month because of concerns about the global economy and the rising US dollar. Oil over $90 is non-negotiable for OPEC+ leadership, so they will act to keep that price floor.

Fears that further interest rate hikes could slow economic growth, coupled with the looming financial crisis in Europe and the UK, have led some investors to start buying gold again. But it should be noted that as long as there are tightening policies from Central Banks, which leads to higher government bond yields, the price of gold and silver will not have fundamental support.

Asian markets were trading lower last week. Japan’s Nikkei 225 (JP225) decreased by 3.15% for the week, Hong Kong’s Hang Seng (HK50) fell by 3.14% for the week, and Australia’s S&P/ASX 200 (AU200) was down 1.52% for the week.

In the commodities market, futures on orange juice (+5.82%), wheat (+4.86%), WTI oil (+2.98%), and Brent oil (+2.96%) showed the biggest gains. Futures on cotton (-7.78%), soybeans (-4.19%) and lumber (-2.34%) showed the largest drop.

S&P 500 (F) (US500) 3,585.62 −54.85 (−1.51%)

Dow Jones (US30) 28,725.51 −500.10 (−1.71%)

DAX (DE40) 12,114.36 +138.81 (+1.16%)

FTSE 100 (UK100) 6,893.81 +12.22 (+0.18%)

USD Index 113.02 +1.67 (+1.50%)

• – Japan Manufacturing PMI (m/m) at 03:30 (GMT+3);
• – Switzerland Consumer Price Index (m/m) at 09:30 (GMT+3);
• – Spanish Manufacturing PMI (m/m) at 10:15 (GMT+3);
• – Switzerland Manufacturing PMI (m/m) at 10:30 (GMT+3);
• – Italian Manufacturing PMI (m/m) at 10:45 (GMT+3);
• – French Manufacturing PMI (m/m) at 10:50 (GMT+3);
• – German Manufacturing PMI (m/m) at 10:55 (GMT+3);
• – Eurozone Manufacturing PMI (m/m) at 11:00 (GMT+3);
• – UK Manufacturing PMI (m/m) at 11:30 (GMT+3);
• – Canada Manufacturing PMI (m/m) at 16:30 (GMT+3);
• – US ISM Manufacturing PMI (m/m) at 17:00 (GMT+3);
• – US FOMC Member Williams Speaks (m/m) at 22:10 (GMT+3).

By JustForex

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.

By Michael Okrent, Colorado State University Global 

Shortages of basic goods still plague the U.S. economy – 2½ years after the pandemic’s onset turned global supply chains upside down.

Want a new car? You may have to wait as long as six months, depending on the model you order. Looking for a spicy condiment? Supplies of Sriracha hot sauce have been running dangerously low. And if you feed your cat or dog dry pet food, expect empty shelves or elevated prices.

These aren’t isolated products. Baby formula, wine and spirits, lawn chairs, garage doors, butter, cream cheese, breakfast cereal and many more items have also been facing shortages in the U.S. during 2022 – and popcorn and tomatoes are expected to be in short supply soon.

In fact, global supply chains have been under the most strain in at least a quarter-century, and have been pretty much ever since the COVID-19 pandemic began.

I have been immersed in supply chain management for over 35 years, both as a manager and consultant in the private sector and as an adjunct professor at Colorado State University – Global Campus.

While each product experiencing a shortage has its own story as to what went wrong, at the root of most is a concept people in my field call the “bullwhip effect.”

What is the ‘bullwhip effect’?

The term bullwhip effect was coined in 1961 by MIT computer scientist Jay Forrester in his seminal book “Industrial Dynamics.” It describes what happens when fluctuations in demand reverberate and amplify throughout the supply chain, leading to worsening problems and shortages.

Imagine the physics of cracking a whip. It starts with a small flick of the wrist, but the whip’s wave patterns grow exponentially in a chain reaction, leading to the tip, a snap – and a sharp pain for anyone on the receiving end.

The same thing can happen in supply chains when orders for a product from a retailer, say, go up or down by some amount and that gets amplified by wholesalers, distributors and raw material suppliers.

The onset of the COVID-19 pandemic, which led to lengthy lockdowns, massive unemployment and a whole host of other effects that messed up global supply chains, essentially supercharged the bullwhip’s snap.

Cars and chips

The supply of autos is one such example.

New as well as used vehicles have been in short supply throughout the pandemic, at times forcing consumers to wait as long as a year for the most popular models.

In early 2020, when the pandemic put most Americans in lockdown, carmakers began to anticipate a fall in demand, so they significantly scaled back production. This sent a signal to suppliers, especially of computer chips, that they would need to find different buyers for their products.

Computer chips aren’t one size fits all; they are designed differently depending on their end use. So chipmakers began making fewer chips intended for use in cars and trucks and more for computers and smart refrigerators.

So when demand for vehicles suddenly returned in early 2021, carmakers were unable to secure enough chips to ramp up production. Production last year was down about 13% from 2019 levels. Since then, chipmakers have began to produce more car-specific chips, and Congress even passed a law to beef up U.S. manufacturing of semiconductors. Some carmakers, such as Ford and General Motors, have decided to sell incomplete cars, without chips and the special features they power like touchscreens, to relieve delays.

But shortages remain. You could chalk this up to poor planning, but it’s also the bullwhip effect in action.

The bullwhip is everywhere

And this is a problem for a heck of a lot of goods and parts, especially if they, like semiconductors, come from Asia.

In fact, pretty much everything Americans get from Asia – about 40% of all U.S. imports – could be affected by the bullwhip effect.

Most of this stuff travels to the U.S. by container ships, the cheapest means of transportation. That means goods must typically spend a week or longer traversing the Pacific Ocean.

The bullwhip effect comes in when a disruption in the information flow from customer to supplier happens.

For example, let’s say a customer sees that an order of lawn chairs has not been delivered by the expected date, perhaps because of a minor transportation delay. So the customer complains to the retailer, which in turn orders more from the manufacturer. Manufacturers see orders increase and pass the orders on to the suppliers with a little added, just in case.

What started out as a delay in transportation now has become a major increase in orders all down the supply chain. Now the retailer gets delivery of all the products it overordered and reduces the next order to the factory, which reduces its order to suppliers, and so on.

Now try to visualize the bullwhip of orders going up and down at the suppliers’ end.

The pandemic caused all kinds of transportation disruptions – whether due to a lack of workers, problems at a port or something else – most of which triggered the bullwhip effect.

The end isn’t nigh

When will these problems end? The answer will likely disappoint you.

As the world continues to become more interconnected, a minor problem can become larger if information is not available. Even with the right information at the right time, life happens. A storm might cause a ship carrying new cars from Europe to be lost at sea. Having only a few sources of baby formula causes a shortage when a safety issue shuts down the largest producer. Russia invades Ukraine, and 10% of the world’s grain is held hostage.

The early effects of the pandemic in 2020 led to a sharp drop in demand, which rippled through supply chains and decreased production. A strong U.S. economy and consumers flush with coronavirus cash led to a surge in demand in 2021, and the system had a hard time catching up. Now the impact of soaring inflation and a looming recession will reverse that effect, leading to a glut of stuff and a drop in orders. And the cycle will repeat.

As best as I can tell, these disruptions will take many years to recover from. And as recent inflation reduces demand for goods, and consumers begin cutting back, the bullwhip will again work its way through the supply chain – and you’ll see more shortages as it does.

About the Author:

Michael Okrent, Part-Time Faculty in Project Management, Colorado State University Global

This article is republished from The Conversation under a Creative Commons license. Read the original article.