The “bullwhip effect” was coined in 1997 and refers to a phenomenon within supply chain management whereby shifts in consumer demand cause greatly exaggerated changes further up the supply chain. Inventory swings act in bigger and bigger “waves” in response to consumer demand, with the largest “waves” impacting the suppliers of raw materials – either positively or negatively.
Bullwhip effects have played a significant role in recent supply chain bottlenecks caused, firstly, by the pandemic and then, since February, by the war in the Ukraine. Although over different timeframes, each event has led to massive inflationary pressures.
However, there now seems to be an emerging shift in consumer demand that points towards US inflation having peaked. March US retail numbers are due to be announced and this is expected to show that the savings stockpile of lower income groups has been depleted, which should lead to a normalisation of demand.
As this shift in demand moves in ever increasing impacts through the supply chain, the bullwhip effect this time around could result in less permanently high inflation, stabilising at more acceptable levels of between 3 and 5%, perhaps within the following twelve to eighteen months.
The direction, composition and pace of US inflation will be one of the most critical determinants in the short-term direction of global equity markets, as these factors will shape the slope of interest rate hikes during the course of the year.
“The bullwhip effect is defined as an upstream amplification of demand variability and has received interest within multinational companies for decades.”
– Klara Dahlin and Oscar Säfström, a study of the bullwhip effect, Volvo Group Service Market Logistics’ supply chain
Global News
- On the economic and market fronts, the week-to-date was dominated by news on a range of factors that point towards US inflation having already peaked. These include a moderation in the US consumer price measures, which showed a softening in the pace of core inflation; that surging energy prices accounted for half of March’s inflation, but that the oil market – perhaps initially – overshot in response to Russia’s invasion of the Ukraine; and that the Fed’s three-year charts suggest high inflation expectations will not be entrenched the way they were in the 1980s.
- European stocks and government bonds were mixed as investors await the European Central Bank’s meeting later on Thursday for clues on the monetary policy path.
- China wants long-term investors to buy more equities and major shareholders of listed firms to increase their holdings when stocks slump; this as it seeks to stabilise a stock market rocked by another Covid-19 outbreak. The Chinese government will also facilitate corporate financing in Covid hit areas and urge state shareholders of listed firms to actively buy undervalued stocks.
- Technology companies led gains in stocks on Thursday, with bond traders paring aggressive bets on Federal Reserve hikes amid speculation that inflation may be near a peak. Investors also weighed the start of the earnings season against geopolitical risks. Fed rate hike expectations will be tested in the coming months, and many traders are of the view that geopolitical and inflation risks will force them to be less aggressive with monetary tightening later this year.
- Corporate results for Q1 should show how inflation, whether caused by supply chain issues from China or commodity-related issues, are affecting business activities across different sectors and regions.
- China is expected to cut a key interest rate for the second time this year on Friday and reduce the reserve requirement ratio soon. “We have actually turned cautiously optimistic on the Chinese equity market in April already,” Stefanie Holtze-Jen, Asia-Pacific chief investment officer at Deutsche Bank AG in Singapore, said on Bloomberg Television. “We perceived the communication from the government as the line in the sand.” We will be monitoring, with interest, the effects on the companies which represent material weightings in our global equity portfolios.
- European natural gas prices fell ahead of Russian President Vladimir Putin’s meeting on energy on Thursday, which could give us all more clarity on payments for the country’s fuel in rubles. Logistics issues and payments for Russian oil and gas exports will be discussed at the gathering, according to Russian news agency Interfax. As debates on the ruble payment method continue, expectations of higher Russian flows via Ukraine and increased supplies from Norway, together with milder weather, are helping to ease supply concerns and are pushing prices down.
- FreightWaves, a company that specialises in supply chain analysis, recently published an article that retailers appear to have overbought and are sitting on unusually large inventories.
- At the time of writing, the MSCI World was up 0.43% for the week, with the S&P 500 up 0.5%.
Local News
- Retail trade sales for February fell 0.9% year-on-year, Statistics South Africa figures showed on Wednesday. The market expected a 1.1% decrease. However, sales in shops rose by 6.4% last year after contracting by 7.1% in 2020 and had got off to a flying start in January 2022, climbing by 7.7% year-on-year.
- The South African rand and other commodity currencies have continued to hold up surprisingly well, with the added benefit of attracting global capital flows. Most emerging market currencies are currently reflecting the impact of the Russia-Ukraine conflict and not their underlying fundamental values. The rand and Brazilian real are up 10.1% and 19.7% respectively year-to-date against the US dollar. In the short-term, the rand is expected to maintain current levels, although our research points towards the currency being overvalued and therefore vulnerable to both external and internal adverse developments. Historically, the currency has been prone to regular bouts of prolonged weakness relative to our fair value model.
- Meanwhile on the political front, Daily Maverick has stated that, when Parliament’s ethics committee cleared Zweli Mkhize, former health minister and now ANC backbencher, of violating the code of conduct in the Digital Vibes scandal, parliamentarians stuck rigidly to ticking the boxes – and therefore failed to uphold ethics, integrity, and accountability.
- The ANC’s national working committee was involved in a fierce debate this week to decide the fate of ANC Women’s League president Bathabile Dlamini. She had been sentenced for perjury, but the committee could not decide how to firm up guidelines for its step-aside rule.
- Capitec, South Africa’s third-largest bank by market value, said its focus on lower-fee digital banking continued to pay off in its year to end-February. Active clients grew 14% to 18.1 million in the year to end-February, with headline earnings rising 84% to R8.4 billion, one third higher than pre-pandemic levels.
- The SA Reserve Bank is collaborating with the Intergovernmental Fintech Working Group on tokenised money, releasing the Project Khokha 2 (PK2) report which explores the use of tokenised money, blockchain, and digital currency for use in South Africa. The report provides insight into the proof-of-concept, the design principles adopted for the project, and the prototypes built to support the project’s overall objectives.
- At the time of writing, the JSE ALSI was down 1.45% for the week.
Sources: Dynasty, Reuters, Bloomberg, BusinessLive, News24, New York Times, Business Insider, etc.
