10.14.2021: The global pandemic redefined global trade. Peak infections last year prompted a worldwide scramble for personal protection equipment, swabs and disinfectant. Now, vestiges of the lockdowns are having affecting the recovery, leading to widespread supply shortages. Short supply mixed with unbridled demand is leading to unprecedented pricing pressure. Semiconductor capacity will likely constrain chip production through 2022, thanks to factory closures and longer delivery times. China’s power crunch could force additional closures and exacerbate the shortages.

Analysts estimate chip shortages could cost automakers more than $200 billion in lost sales this year. Q3/21 will likely see the trough in auto production. According to Auto Forecast Solutions, an industry consulting firm, the chip shortage will crimp North American production by more than 1 million vehicles this year. Ford and GM are the most profoundly affected: the Ford “F-Series”, at over 100,000 units, and General Motors’ Chevrolet Equinox, at about 80,000 units. Meanwhile, demand for new and used automobiles has skyrocketed, as commuters avoid public transportation and the rental car companies replacing the fleets they abandoned last year.

China’s shift away from coal earlier this year has rippled through the energy markets, pushing the prices of crude oil and natural gas to multi-year highs. At the same time, a shortage of truck drivers is sending petrol prices skyward in Europe and the UK, prompting gas lines we haven’t seen since the oil embargoes of the late 1970s.

The demand and supply imbalances are reflected in consumer prices, prompting economists to debate just how long “transitory” is? CPI expanded 5.4 per cent year over year, while the “sticky” elements of prices, like housing, grew 2.8 per cent, meaningfully higher than the Federal Reserve’s 2 per cent target.

Graph 1, Market Update, 10.14.2021

As we enter earnings season investors will be watching company profit margins, particularly those engaged in industries like retailers and automakers, where shortages are acute. Dollar General is a prime example. The company competes for workers with Amazon and Walmart, both of which are paying upwards of $17/hour. At the same time, half of their products – representing most of their profits – are imported, meaning their supply is both more crimped and more expensive. The supply side of their business is already challenging enough but, as a “dollar store,” Dollar General must also try to hold the line on $1 price points. The difference between consumer price growth and producer price growth could offer an early indication of the direction of corporate profit margins. Year-over-year producer prices expanded 11.8 per cent, more than double the rate of consumer prices. That suggests companies are not able to pass through their costs.

Graph 2, Market Update, 10.14.2021

Energy and financials, two value-oriented sectors, are largely insulated from supply shortages. While the energy sector is immersed in oil and natural gas, these companies can pass higher commodity costs along to their customers. These sectors are relatively cheap and their margins should remain intact this quarter.