For the last few weeks, we have been highlighting that supply has been the major constraint on activity as the economy continues to normalize. The data this week continued that trend across multiple economic and market data points.
The April Manufacturing and Services PMIs were released, and both remained at high levels (the ISM versions declined slightly and the Markit versions increased). Both indicators pointed to continued order backlogs, increased hiring, lack of inventory, and supply delays.
Source: Hedgeye.
Source: Hedgeye.
This continued to put upward pressure on inflation as the ISM Manufacturing and Non-Manufacturing Price Indices increased to the highest level since July 2008.
The quarterly Senior Loan Office Opinion Survey (SLOOS) was released. This is a look into how banks view current underwriting conditions and borrower demand across various client types (consumer, corporate, commercial real estate, residential housing). The latest update showed banks are easing lending standards for the vast majority of borrower types. This should lead to increased lending which should support future economic activity.
The April nonfarm payroll report came in lighter than expected at +266,000 versus an estimate of close to a million. The majority of the gains came in Leisure and Hospitality and younger workers. On the surface, this looks like a big miss and a negative for the recovery trend. Looking at other labor market signs, it suggests supply, not demand, is a constraint in the labor market. Initial jobless claims continued to decline and are at the lowest level since the lockdowns in March 2020. The average work week increased to the longest level since 2006 and the services work week was the longest since 1984. The labor force increased by 430,000 (which works to temporarily increase the unemployment rate) and the labor force participation rate increased.
Source: Hedgeye.
Source: FRED.
Source: FRED.
If companies did not have enough demand for labor, initial claims would be increasing, hours would be reduced, and openings would be declining. Also, potential workers would stop looking for work and the labor force/participation would decline.
One of the potential forces contributing to limited labor supply is the enhanced fiscal stimulus which has made it less necessary to return to work at the current time. This will likely lead to less political will to keep extending these policies. As they expire, more people will likely return to work. The decline in COVID cases and continued rollout of vaccines will also have an impact on capacity limitations and absenteeism.
On the market side, commodity prices continue to respond to the supply demand mismatch by moving higher. This is true across all types of commodities.
The broad commodity index moved to the highest level since the end of 2014.
Source: Koyfin.
The agriculture index closed at the highest level since August 2017.
Source: Koyfin.
Copper ended the week at a new all-time high.
Source: Koyfin.
Supply constraints are still rampant across the economic landscape, including the labor market, and are supporting the prices of commodities and inflation sensitive assets. This trend is likely to continue as demand indicators remain positive and supply struggles to catch up in the near term.
The views expressed herein are presented for informational purposes only and are not intended as a recommendation to invest in any particular asset class or security or as a promise of future performance. The information, opinions, and views contained herein are current only as of the date hereof and are subject to change at any time without prior notice.
Senior Vice President, Investment Strategy
Boyd Watterson Asset Management, LLC