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Rates drift in the summer doldrums – but is a bounce coming?

E-commerce activity is still strong, though markets worry about a slowdown in China as well as in the West

Air freight rates stayed in a fairly narrow range again in August, as the traditionally quiet summer period continued.

The overall Baltic Air Freight Index (BAI00) was lower by some -0.4% in the week to 4 September, leaving it down -2.0% over the previous four weeks and -44.4% over 12 months.

While the market overall was flattish, as is often the case in the quiet summer period, sources reported continued strong e-commerce business out of southern China – including intra-Asia as well as to the US and Europe.

That was reflected in the outbound Hong Kong (BAI30) index outperforming the overall index – it was flat over the month to leave it at -38.2% YoY.

Air cargo rates out of Shanghai (BAI80) actually edged up over the month by some +0.7% – though still lower by -45.1% YoY.

Out of other regions, the market was weaker. From Europe, the outbound Frankfurt (BAI20) index was -9.1% on the month, leaving it at -45.9% YoY. London (BAI40) was also lower by -8.8% over four weeks – to leave its YoY figure languishing at -56.2%.

Out of the Americas, while rates were rising from many locations in late August, outbound Chicago (BAI50) had also fallen -3.0% MoM to take its YoY drop to -49.4%.

Despite the flat to weakish tone overall, looking ahead some sources still foresee a rise in rates given significant product launches coming up, starting in September – and hence some sort of peak season this year.

That would be a welcome improvement on last year, when the traditional peak in rates ahead of the Thanksgiving and New Year holiday season simply failed to occur at all.

Others, however, remain nervous about ongoing weak demand and continuing over-capacity despite recent cutbacks in services announced by carriers.

So, for the time being, cargo rates have continued bouncing along the bottom. With jet fuel prices spiking again by over 26% in the month to 25 August, according to Platt’s data, that would appear to put a renewed squeeze on profitability for carriers – especially for operators of dedicated freighters with older, less fuel efficient planes.

On the other hand, passenger traffic has also been very high over the summer – which has probably made the volume of bellyhold cargo less important for many airlines.

In the background, macro developments have included what one commentator dubbed the ‘bear extinction phase’ in equities, with the MSCI World index gaining a further 3% in July despite the murky economic outlook.

Nevertheless, as we mentioned last month, developments in China including property market problems have since been weighing on markets.

In August, some of those problems started to deepen, with the huge property developer Evergrande filing for bankruptcy protection in the US.

According to Financial Times reports, Evergrande has a massive $340 billion in debts, including $19 billion owed overseas. And it is not the only Chinese developer in trouble – with others like Country Garden and Zhongrong also being late on repayments.

The Chinese authorities have vowed to take decisive action to bolster the property sector, but the market has been underwhelmed by the action so far to support beleaguered local government financing vehicles.

In the meantime, a decision to halt the release of statistics on youth unemployment – which had been climbing uncomfortably high – has also done little to boost market confidence.

Not surprisingly, equity markets have thus started to give back some of their gains of the previous nine months. Global equities were heading for a fall of some 4-5% overall at some points in August before rallying in the final few days to leave the MSCI World index just over 2% down for the month.

Until recently, western markets have remained surprisingly robust – especially in the US, driven by the strength of the top half dozen or so tech stocks.

Demand has been keeping up well in the US, though driven it seems mostly by consumer borrowing after the savings accumulated during Covid lockdowns have finally been running dry.

Commentators are increasingly convinced spending levels must start to diminish soon – given the impact of higher interest rates. An inverted yield curve – such as we have now not just in dollars, but also in euros and sterling – nearly always presages a recession.

Meanwhile, European markets remain weakened by the ongoing Ukraine conflict, which shows little sign of abating soon.

In the past month, there have also been some interesting developments in Japan. First was renewed weakness in the yen – given the caution of the Bank of Japan, the central bank, in raising interest rates compared with other big economies – which has further boosted the competitiveness of the corporate sector.

Then, in late July, the BoJ made a small move to allow rates on longer-term 10-year bonds to start to rise. Some market participants think that may start to have significant implications for the many players who deploy the so-called ‘carry trade’ – borrowing at very low rates in yen and then investing into higher yielding currencies and assets.

But, not surprisingly, market attention continues to be focused most heavily on China – the engine of global growth in recent decades – to see if it can get back on track towards its 5% GDP growth target for the year.

The continued strength of e-commerce business out of China is one encouraging sign. Some sort of peak season bounce in air freight would be another.

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