An earnings warning and withdrawal of full-year guidance sent shares of FedEx plummeting on Friday (-21.4%). That the global economy is slowing is not news, nor is the normalisation of freight rates. The Shanghai Containerized Freight Index posted its largest weekly drop (-10.0%) since early 2016 last week, and is now down 43.9% y/y.
At other points in this cycle, a drop in container freight rates would have been a boon for stocks, by pushing the 10-year Treasury yield lower. But the narrative around China and its impact on markets finally seems to have shifted. Prior to this week, China’s disinflationary impulses were going to bail out Western Central banks, and lift growth stocks by pushing down on the discount rate. Now, however, weak Chinese demand is going to hit company revenues and earnings, without materially impacting the Treasury market.
Ultimately, this is because domestic services inflation in the US is not yet under control. Federal Reserve rate hikes are colliding with global disinflationary impulses which are sweeping through the traded goods sectors and housing. This combination is precarious for stocks.
The bond market has received the Fed’s message now: there will be no early pivot. This has sent the 10-year US real yield up past 1.0%.
