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Stock indexes continue to drift lower with little in the way of fresh news for the bulls to chew on. The big headline currently is of a cargo ship that crashed into a key bridge in Baltimore and has led to the indefinite closure of the Port of Baltimore.
Shippers are now scrambling to divert cargoes headed to or from the port, which is in turn expected to clog up nearby East Coast ports and likely have some impact on supply chains.
There are also reportedly several ships already in the area that may be unable to leave anytime soon. It will probably take a few days to understand the full extent of the shipping snarl. The Port of Baltimore is the top American port for the import and export of autos and light trucks, as well as wheeled farm vehicles and construction machinery. I’ve included more details below.
The key worry is that this new supply chain obstacle could fan inflation and force the Federal Reserve to keep interest rates higher for longer than Wall Street currently anticipates. Right now, investors don’t seem very concerned but this could obviously change if the supply chain hiccups start to look more disruptive and/or longer lasting than anticipated.
Today is pretty quiet as far as economic data with really nothing of note on the calendar. Later this evening, Federal Reserve Board Governor Christopher Waller is scheduled to deliver opening remarks regarding the economic outlook at the Economic Club of New York.
This will be of some interest to investors but is scheduled well after markets close (7 p.m. CST). Waller tends to lean more dovish if anything but also tends to stick very close to the Fed script. Meaning it would be surprising if he reveals any new insights.
On the earnings front today, Carnival and Cintas are the key releases. As we get closer to the Good Friday holiday, markets will likely start thinning out as traders get an early jump on the long holiday weekend.
It would not be surprising to see stocks continue to drift sideways to lower as many investors could be reluctant to put any new money on the line ahead of the stock market being closed for an extended period.
I should also mention that there remains a lot of anxiety about oil supplies, particularly as Ukraine continues to target Russian refineries and other oil infrastructure.
Russian oil refining capacity shut down by the attacks has reached 14% of the country's total capacity, according to Reuters. While only a handful of countries now accept Russian oil due to Western sanctions, the country’s contributions nonetheless impact available global supplies.
The good news is that with US crude oil prices at or near $80, US producers will likely be incentivized to start pumping more oil and help keep a lid on prices. The main concern right now is that a lucky strike by Ukraine on a key Russia target could create a sizable, though likely temporary, supply gap and send oil prices skyrocketing.
Keep in mind, we also still have the crazy terrorist activity impacting ships in the Red Sea.
Trader Joe's Raises Banana Prices for First Time in 20 Years: Trader Joe's customers may experience sticker shock the next time they buy a banana —after more than 20 years, the retailer has hiked the price for the first time. The price of a single banana has gone up roughly +20%, rising from 19 cents each to 23 cents. A company spokesperson said that Trader Joe's only changes its prices when costs change. Trader Joe's didn't go into detail about the reasons behind the price increase, but food prices have remained stubbornly high, even as inflation has cooled. By the end of 2023, consumers were paying nearly +20% more for the same groceries as they were in 2021. Cocoa and sugar are among the items with rising prices. Futures for a pound of sugar are up about 8% in 2024, after rising 2.7% in 2023. And cocoa prices hit record highs recently, with rising temperatures stressing and damaging crops in West Africa, where most of the world's cocoa is produced. In fact, cocoa futures are up over +255% in just the past 52-weeks. Wow!
Retail Layoffs Continuing to Build: Canada Goose will cut about -17% of its corporate workforce, which included about 915 employees as of April 2023. The layoffs at Canada Goose come after Nike, Macy’s, Wayfair, Hasbro, and Etsy all announced widespread layoffs over the past few months. Several retailers, including Under Armour and Nike, have said recently that wholesale orders have been sluggish as department stores look to keep inventories in check and contend with a slowdown in demand. Source CNBC
Oil's Geopolitical Problems Getting Harder to Ignore: Crude prices are increasingly at risk from geopolitical factors that are getting harder to ignore as the continued conflict in the Red Sea is hampering global supply chains. Oil prices closed higher on Monday, with markets increasingly pricing in geopolitical risk, rather than fears about global demand. The prolonged interruptions and delayed deliveries from disrupted shipping routes are a threat to fragile supply networks and a force multiplier for stubborn inflationary pressures that refuse to die. This is especially true for gasoline prices, which are steadily creeping toward $4 per gallon as winter gives way to spring in the U.S. Current developments in the Red Sea come at a time when Panama Canal transits face additional pressure because of low water levels caused by drought. Trade via the Suez Canal, one of the most important global choke points and maritime waterways, plunged 50% in the first two months of 2024, according to International Monetary Fund data. Meanwhile, the volume of trade transiting around the Cape of Good Hope surged by an estimated 74% year-over-year, boosted by desperate shippers looking for alternate routes. The shipping disruption has also pushed the amount of oil in transit to record levels, with significant volumes of oil remaining on the water, according to the latest International Energy Agency's Oil Market Report. In February alone, oil on the water surged by 85 million barrels as more cargoes diverted around Cape of Good Hope, as tanker attacks surged. Source Axios
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If the Office Market is So Bad, Why Are Rents Still So High? U.S. office markets are suffering from soaring vacancy rates, a record amount of available sublease space, and rising defaults. But curiously, office rents are holding steady or even climbing. Average U.S. asking office rents are $35.24 a square foot, compared with $34.92 in the fourth quarter of 2019, according to data firm CoStar Group. Higher asking prices are a reflection of the seemingly oddball way the commercial real-estate market works. Rents are a critical metric used by lenders and others to determine the value of a property. Owners will do everything they can to avoid cutting them, even if it means keeping space vacant because the rental prices deter prospective tenants. Landlords who cut rents significantly to fill empty space “would significantly reduce the appraised values of their buildings,” said David Bitner, the head of global research for Newmark Group, a commercial real estate services firm. “This in turn could lead to a covenant default on their loans or at minimum would make it harder for them to refinance.” Office rents are expected eventually to tumble, probably after owners and lenders are forced to restructure mortgages or sell distressed properties. For now, landlords are trying to justify the elevated levels by lavishing new tenants with expensive interior build-outs, months of free occupancy and other incentives. Source WSJ
Baltimore Bridge Fallout to Extend Coast-to-Coast in Cargo Shift: The bridge collapse Tuesday that shut the Port of Baltimore and closed a major highway will cause weeks or months of transportation disruptions in the Mid-Atlantic region and accelerate a shift of cargo to the US West Coast as importers and exporters try to avoid potential bottlenecks at trade gateways from Boston to Miami. “Companies have already begun shifting volumes from the East Coast to the West Coast,” said Ryan Petersen, the founder and chief executive of Flexport Inc., a digital freight platform based in San Francisco. “Baltimore being taken offline means all the other ports on the East Coast are getting this bubble of cargo — creating congestion and delays.” That also means companies and consumers may face a repeat of one of the big supply chain lessons of the Covid pandemic: that a sudden 10% or 20% increase in volumes through a port “is enough to cause massive backlogs, congestion, ships waiting offshore and all sorts of delays that can compound on themselves,” Petersen said. Local, state, and federal officials remain focused on rescue efforts and won’t speculate on how long the port might stay closed. The consensus among logistic experts and economists is that it will remain a logistical choke-point for a while, but a localized one that shouldn’t derail an otherwise solid US economy, with companies able to adapt. European carmakers including BMW, Volkswagen, and Mercedes-Benz Group have facilities in and around the port to handle vehicle shipments. Ford Motor Co. said it’s already trying to find alternative routes, as is General Motors Co. According to Dean Croke, principal industry analyst at DAT Freight & Analytics, Baltimore is one of the nation’s leading gateways for farm equipment and construction machines . March “is the peak import month in Baltimore for farming equipment ahead of planting season in the Midwest,” Croke said. It’s also a key port for construction materials like lumber and gypsum, he said. Source Bloomberg
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Baltimore Port is an Ag Equipment Hub: The tragedy surrounding the collapse of the Francis Scott Key Bridge in Baltimore continues to unfold. Early Tuesday morning, a container ship plowed into one of the ship’s columns, sending the bridge’s steel superstructure into the cold Patapsco River below. Officials have stated that there is still a search-and-rescue effort ongoing and that they may be looking for up to seven people, but that number could change. As a result, the Port of Baltimore, one of the Northeast’s busiest, is closed to shipping traffic until further notice, and it is likely that many ships will have to be diverted to neighboring ports up and down the East Coast. The website Marine Traffic shows at least a dozen ships with a destination of Baltimore waiting to get into port. The impact on shipping traffic will no doubt be felt for weeks and months to come. For agriculture, the Port of Baltimore is the closest in proximity to the Midwest and is the largest U.S. port by volume for handling farm and construction machinery. According to state data, the port handled a record 1.3 million tons of roll-on and roll-off farm and construction machinery in 2023. This includes tractors, combines, hay balers and more. The top five agricultural products that are imported and exported from the Port of Baltimore are sugar, soybeans, grain (corn and wheat), coffee, and grocery items. But it’s a relatively small player in this area, at least compared to much larger ports like New Orleans. Source Feedstuffs
Walmart, 7-11, Chick-fil-A Pilot New Drone Delivery Tech: Walmart, 7-Eleven and Chick-fil-A will be the first retailers to pilot new technology from a Virginia startup trying to solve drone delivery's ground logistics problems, Axios is first to report. Getting a drone to deliver a hot chicken sandwich or a cold Slurpee in a matter of minutes depends a lot more on what happens on the ground than what occurs in the sky. A company called DroneUp, partially owned by Walmart, on Tuesday unveiled a proprietary autonomous drone "ecosystem" that its CEO says will revolutionize last-mile logistics. It includes an automated, climate-controlled storage locker called DBX where drones can pick up and drop off packages. The system's software enables "end-to-end autonomy," meaning drones automatically know where to go and when — and how to avoid other aircraft. (Humans are still in the loop, but now a single operator can monitor many drones instead of flying just one.) The company is also introducing a more advanced drone that travels 60 mph, has a 30-mile range, and uses a claw-like grabber to lift packages up to 10 pounds and store them safely inside its belly. Source Axios
Insurers Report Rising Hail Damage Claims: Golf balls, tennis balls, softballs. All sound like the stuff of fun games — except when they are used to describe the size of the hailstones that often accompany severe thunderstorms. Those hailstones can cause significant damage to homes and cars, a growing worry as warming temperatures fuel more destructive storms. This month, baseball-size hail, sometimes called “gorilla hail” because of its heft, was reported in Kansas and Missouri. The insurance industry reported $60 billion in losses from “severe convective storms” — a catchall name for thunderstorms that may spawn hail, heavy rain, lightning, high winds and tornadoes — last year, said Mark Friedlander, a spokesman for the Insurance Information Institute, a trade group. In 2022, the industry reported $31 billion in losses. Data from the National Oceanic and Atmospheric Administration’s Storm Prediction Center show 5,879 reports of hailstones of one inch or larger in 2022, up 17 percent from 5,020 in 2021. Preliminary data for 2023 show 6,962 reports, including a significant increase in reports of very large hailstones of two inches or more. A weather expert countered that it was unclear whether severe hail had significantly increased in the United States over the long term. Harold Brooks, senior research scientist at the National Severe Storms Laboratory, which is also part of NOAA, said the storm prediction center’s hail data should be viewed with caution. Still, insurers are reporting bigger hail losses. In 2023, State Farm paid 27,300 claims for hail damage to homes and businesses, up from 23,200 in 2022, said Heather Paul, a company spokeswoman. Payouts totaled $6.1 billion last year, more than the previous two years combined. Source NYTimes
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