By Jeff Anderson, CFA
FedEx Delivers an Inflation Message

FedEx reported earnings this week that disappointed analysts, sending shares down over 10% for the week. The earnings miss was attributable to a higher cost of labor and overall labor shortages. Packages were re-routed to distribution hubs that had sufficient labor availability. The company stated, “The current labor environment is driving inefficiencies in the operation of our network and significantly impacting our financial results”. FedEx’s President and COO also announced that shipping rates will increase 6 to 8% in January 2022 in addition to a fuel surcharge increase starting November 1, 2021.
The FOMC met this week
Fed Governor Jay Powell held his quarterly press conference Wednesday, where he delivered the Fed’s message re: the state of the economy, inflation expectations, interest rates and tapering. The economy is continuing to grow and is still coping with the effects of the global pandemic economic shutdown in 2020. Even though inflation expectations have been raised multiple times by the FOMC (now at 2.2%), the current pace of inflation is running much higher (see chart), yet the Fed is standing firm on their belief that it is still transitory. Mr. Powell stated that the Fed will begin tapering their bond purchases later in the year by $10 billion per month. At the current pace of $120 billion per month, tapering should be completed within 12 months, at which time we can expect the Fed to begin raising interest rates. Interestingly, the 5-year US inflation breakeven expectation is still below 2.5%, slightly above the FOMC’s upper range but well below the current run rate. The UST 10-year note bumped up is a week from 1.3% to roughly 1.4%, still firmly in the negative real yield zone.
August Housing Starts increased 3.9% to a 1.615 million annual rate.

The gain was entirely due to multi-family starts. Single-family starts declined 2.8% for the month. First Trust’s senior economist wrote this week that, “While it’s too early to know for sure, there are signs developers may be shifting resources away from single-family home construction and toward larger apartment buildings in response to rapidly rising rents as some people move back into big cities and the eviction moratorium ends”. First Trust’s Brian Wesbury went on to say “While the monthly pace of activity will ebb and flow as the recovery continues, we expect housing starts to remain in an upward trend. A big reason for our confidence is that builders have a huge number of permitted projects sitting in the pipeline waiting to be started. In fact, the backlog of projects that have been authorized but not yet started is currently the highest since the series began back in 1999” (emphasis added).
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