Global Trade Interruptions: Impacts of the Red Sea Shipping Disruptions | Episode 092 | 01-24-24

In today's episode, Verdence Capital Advisors CIO, Megan Horneman looks into the latest Red Sea developments shaking up global trade. Houthi rebels are targeting ships in the Suez Canal and the Red Sea, diverting 90% of traffic and triggering rate increases predicted by major players like MSC and HLS. Projections hint at a prolonged disruption, potentially lasting six months to a year, leading to escalating freight rates and equipment shortages. Megan discusses the global trade implications, the economic risks tied to inflation volatility, and the challenges faced by the Federal Reserve. Stay informed and connect with us at podcast at Verdence dot com. 

Watch today's episode here: 

Hello, this is Megan Horneman, the Chief Investment Officer for Verdence Capital Advisors, coming to you today to discuss what's going on in the Red Sea. We understand and we've all read the articles about the Houthi rebels now indiscriminately attacking any container and vessel ships that are traveling through the Suez Canal and the Red Sea, and remember that this is the quickest shipping route and it is heavily used right now. I'm just going to give you some statistics. 90% of the traffic that typically goes through that Red Sea has been diverted. The world's biggest shipper, msc. They alerted that there'd be additional rate increases for some container traffic that's going to start hitting the US in mid-February. Hls. They're predicting the Red Sea situation. This could last for six months to a year and if that happens, they're expecting that freight rates and will continue to soar and you'll see equipment shortage. There's plenty more details and statistics about how important the Red Sea is to global trade.

When it comes to the economic impact, there's a couple things that we're concerned about. First of all, it's inflation. Inflation is highly sensitive to shipping costs, to all the costs that end up getting parts to different manufacturers. This is something that, if these go up, where does the cost get passed on? Does the company absorb it or does it get passed on to the consumer? So where will we see that? Either in margin pressure and lower earnings or higher inflation. We don't know quite yet, but we think that is a big risk to inflation volatility. We're not saying we're going to shoot back up to 9% inflation, but I think you're going to see some volatility in those monthly numbers throughout this year. It's also going to make the Fed's job difficult to get to that 3.5 to 2%.

On the second hand, it's the supply chain, and both the supply chain and inflation go hand in hand, and we saw that in the pandemic when there was a supply chain disruption which we finally have repaired after the pandemic when, if this gets disrupted for a significant period of time, this could lead to also inflation pressure. So something that we're keeping our eye on. The events seem to be happening regularly and they're indiscriminate, meaning they were targeting just ships that were associated with Israel, but now attacking any ships that are traveling through that area. So definitely something to keep an eye on. We'll watch it, we'll watch the impact in inflation and we'll be back with you guys any more information that we find about this. That's all we have today.

Tune in. We've got a bunch more economic data coming out this week. We're going to have GDP first reading for the fourth quarter. We're going to have personal income and spending and we'll also have the Fed's preferred inflation indicator, pce. So we'll be back with plenty more markets with Megan this week. If you have any questions or comments, please feel free to reach out to podcast at Verdence dot com. Thank you so much.