Supply Chain Index Not Yet Impacted By Threats To Shipping

Oil prices have a geopolitical risk premium priced in but remain vulnerable to an escalation of the situation in the Middle East or Ukrainian attacks on Russian refining facilities. The tensions in the former in particular impact more than just oil and gas with merchant shipping targeted by both Houthi rebels in Yemen and now Iran in the Strait of Hormuz. While unlikely, the closure of the Strait remains a key risk.

• The resolution of supply-chain issues since the pandemic has helped to reduce inflation. There was some concern that attacks on merchant shipping off Yemen would create supply pressures but that doesn’t seem to be the case with the NY Fed’s supply chain pressure index at -0.27 in March. While it has risen from its -1.6 trough in May 2023, a negative implies that supply issues continue to ease.
• Risks to shipping and the cost of rerouting has added to rates with the FBX global container index up 87% this year, it is off its 2024 peak though, but the Baltic dry index is down 17.4%. Even though rates are up sharply they remain significantly below pandemic peaks but the decline from those peaks contributed to the disinflation seen in recent years and that doesn’t look likely to continue for now.