According to Macquarie strategists, war and climate change tensions are a main risk to the Fed’s rate cuts. Inflation could rise above 2%, creating an opportunity for a more conservative monetary policy. Drought in the Panama Canal and Red Sea attacks creating supply shocks similar to pandemic era, resulting in less intense rate cuts from the Fed.
The main risk to the view that the Fed will cut aggressively is war and climate change, according to analysts led by Thierry Wizman.
While the Panama Canal is far too parched to transport as many vessels, freight flows are stalling amid rising attacks from Houthi rebels in the Red Sea.
Wizman said that is inviting flashbacks to pandemic-era supply shocks.
As a result of these disruptions, yields and breakevens may not fall, and the Fed’s easing may be less intense.
The Drewry World Container Index, which tracks container costs, shows that prices have spiked over 122% since December.
Detours around Africa add several days to the journey for shipping giants like Maersk and CMA CGA.
Oil prices spiked Friday after the US and UK launched airstrikes against Houthi militias based in Yemen.
The Red Sea is a major shipping artery – the Suez Canal, which connects the Red Sea to the Mediterranean Sea, carries about 12% of global trade.
As vessels reroute and freight costs rise, global shipments just got a lot more expensive to transport, which could delay a Fed rate cut.
Likewise, the Panama Canal is experiencing problems. A major drought has drained the waterway, limiting the number of ships that can pass through and creating massive snarl-ups.
Wizman writes that the locks connecting the Atlantic Ocean and Pacific Ocean via these fresh-water lakes are nearing the point of being too shallow to accept fully loaded container ships.
Maritime infrastructure is at risk from increasingly frequent droughts, floods, and storms, according to the International Monetary Fund.