The Rime of the Ancient Mariner
January 21, 2024 -weekly comment
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Day after day, day after day,
We stuck, nor breath nor motion:
As idle as a painted ship
Upon a painted ocean.
-Samuel Taylor Coleridge
I don’t know enough about shipping (and military) affairs to determine how much weight should be placed on current issues. All I do know is that supply chain problems were a large contributor to the initial surge in inflation. I’m sure the current disruptions won’t be nearly as bad as 2020/21, but many analysts have opined that inflationary aspects can’t be ignored. I’m just clipping a bunch of notes together so that I personally have a better understanding.
From the Council on Foreign Relations regarding Houthi attacks in the Red Sea (Jan 12)
The Red Sea is one of the most important arteries in the global shipping system, with one-third of all container traffic flowing through it. Any sustained disruption in trade there could send a ripple effect of higher costs throughout the world economy. This is particularly true of energy: 12 percent of seaborne oil and 8 percent of liquified natural gas (LNG) transit the Suez Canal.
From CNBC (Jan 11) about the Panama Canal and low water levels:
In an advisory to clients, Maersk informed shipping customers that vessels that use the Panama Canal will no longer be traversing the canal with freight from Oceania (Australia and New Zealand) because of the ongoing water situation.
Forty percent of all U.S. container traffic travels through the Panama Canal every year, which in all, moves roughly $270 billion in cargo annually.
From ZeroHedge (Jan 20)
On Thursday, top container shipper AP Moller-Maersk sent a memo to customers, warning how the global shipping network is fracturing because of the elevated risks in the Red Sea:
“While we hope for a sustainable resolution in the near-future and do all we can to contribute towards it, we do encourage customers to prepare for complications in the area to persist and for there to be significant disruption to the global network.”
From Thoughtful Money with guest Jim Bianco (Jan 19)
Sailing around the Horn of Africa rather than traversing the Red Sea takes an additional 3300 miles and ten days.
Obviously the factors above entail significant cost increases in terms of shipping goods. Now let’s move more to the military aspects.
From Geopolitical Futures by George Friedman (Jan 16)
But it is not only the Pacific with which it is concerned. The Atlantic is not at risk right now, but just as it was a central figure in both world wars, so too could it be in the future. AUKUS [Australia, UK, US] members understand that any existential threat they face will come from the sea.
On December 14, Navy Sec’y Carlos Del Toro “called on the nation to help the Navy return to being a global leader in shipbuilding.”
“History demonstrates a clear pattern: no great naval power has ever existed without also being a dominant commercial maritime power, encompassing both shipbuilding and global shipping,”
Del Toro referenced a series of statistics: China dominates the global commercial shipbuilding industry today with over 40 percent of the market controlled by its shipyards. In just 20 years, the People’s Liberation Army Navy has tripled in size and is projected to have a fleet of over 400 warships by 2030.
China also has the world’s largest fishing fleet and third largest merchant marine fleet, exceeding 7,000 ships, compared to the United States’ 178 , which ranks 70th. China controls a significant portion of the global commercial maritime supply chain, he said.
Del Toro envisioned a multi-pronged approach to putting the United States on top in shipbuilding, including investing in the revitalization of the U.S. shipbuilding industry and merchant marine fleet; developing innovative technologies to maintain its naval edge; strengthening partnerships with key allies to counter China’s growing influence; and promoting fair competition.
From Marine Link (marinelink.com Jan 21)
The United States and Japan are looking to make a deal for Japanese shipyards to regularly overhaul and maintain U.S. Navy warships so they can stay in Asian waters ready for any potential conflict, U.S. Ambassador to Japan Rahm Emanuel said on Friday.
China has more than 370 ships and submarines, up from the 340 ships they had in 2023, according to an annual report released by the Pentagon in October, making it numerically the largest navy in the world.
I don’t know what the market implications are, besides higher shipping prices at the margin, and increased hoarding of inventories by businesses and (aware) consumers. It seems to me that no matter which political party wins the upcoming election, shipbuilding is going to be a growth industry, and there are probably a myriad of specialized suppliers that will see large increases in orders.
Like one, that on a lonesome road
Doth walk in fear and dread,
And having once turned round walks on,
And turns no more his head;
Because he knows, a frightful fiend
Doth close behind him tread.
OTHER THOUGHTS
Last week the short end of the curve once again trimmed odds of near-term easing. Twos and fives (both being auctioned this week) rose about 25 bps in yield, while the 30y yield rose 16.5.
SFRH4/SFRM4 three-month calendar has had a huge round-turn move in the past couple of weeks. On Friday, January 5 it settled -41 (9493/9534), obviously reflecting ease in Q2. One week later, on Jan 12, it settled -56.5 (9501/9557.5) as military activity heated up in the Red Sea. On Jan 19, it came right back to -41 (9486/9527). BIG moves for a three month spread. The bias is still heavily weighted toward ease, but the panic of the previous week abated as economic data gives little reason to support lowering rates.
There’s a lot of talk about trimming QT; I think consensus is that the Fed will trim the size of treasury sales right after the March FOMC. Last week Waller indicated that MBS sales should continue at the current pace of $35b per month, saying there’s no reason for the Fed to have MBS on the balance sheet. Since the Fed doesn’t hedge and the private market does, I suppose there’s an argument for slightly higher bond vol.
This week includes 2, 5 and 7-year auctions starting Tuesday. Q4 Advance GDP estimate on Thursday, expected 2.0%. Atlanta Fed GDP Now is 2.4%. New York Fed Nowcast is also 2.4%.
Friday brings Core PCE Prices, expected +0.2 on the month and 2.6% yoy. Core expected +0.2 on the month and 3.0 (from 3.2 last).
| 1/12/2024 | 1/19/2024 | chg | ||
| UST 2Y | 413.4 | 438.9 | 25.5 | |
| UST 5Y | 383.0 | 408.0 | 25.0 | |
| UST 10Y | 394.8 | 415.0 | 20.2 | |
| UST 30Y | 419.5 | 436.0 | 16.5 | |
| GERM 2Y | 251.7 | 273.0 | 21.3 | |
| GERM 10Y | 218.4 | 234.0 | 15.6 | |
| JPN 20Y | 130.7 | 146.0 | 15.3 | |
| CHINA 10Y | 252.2 | 251.6 | -0.6 | |
| SOFR H4/H5 | -163.5 | -144.0 | 19.5 | |
| SOFR H5/H6 | -21.0 | -29.0 | -8.0 | |
| SOFR H6/H7 | 13.0 | 10.5 | -2.5 | |
| EUR | 109.51 | 108.98 | -0.53 | |
| CRUDE (CLH4) | 72.79 | 73.25 | 0.46 | |
| SPX | 4783.83 | 4839.81 | 55.98 | 1.2% |
| VIX | 12.70 | 13.30 | 0.60 | |
https://www.poetryfoundation.org/poems/43997/the-rime-of-the-ancient-mariner-text-of-1834
