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After a long, steep fall in rates and now a summer lull, hopes are rising for some sort of modest peak season in air freight – one that won’t be either too hot or too cold for markets, but just right

The quiet summer period continued in air freight markets during July, with TAC Index data showing the overall Baltic Air Freight Index (BAI00) up 2.9% in the final week of July, leaving the index up 1.2% on the month – though some 46.2% lower than the previous 12 months.

Regional variations included a strong final week in Hong Kong (BAI30), with a gain of 2.9% driven by continued robust e-commerce in southern China, leaving it only slightly lower, by 1.3% MoM, and putting the YoY change there at -42.6%. Outbound Shanghai (BAI80) also edged up, 0.2% WoW, to complete a stronger July with a gain of 3.6% MoM, leaving it down 47.7% YoY.

In Europe, the market bounced late in the month, with outbound Frankfurt (BAI20) rates jumping 9.7% WoW, to leave a meaty gain of 11.8% MoM, trimming the YoY decline to 46.4%. London (BAI40) also gained, 4.8% WoW, to put the change at -1.9% MoM, leaving the YoY change at -51.4%.

The main exception to the upward trend late in the month was in North America, with the index of outbound Chicago rates (BAI50) off 2.8% WoW, to leave the MoM change for July at -7.1%, taking its YoY change to exactly -50%.

Just how much the market has fallen this year was illustrated by Kuehne & Nagel results for the first half, which showed turnover of its air logistics unit down some 44% from the previous year.

Despite no strong signs yet of a bounce in rates, market sources are increasingly optimistic some sort of uptick is coming soon – based not least on major product launches, which should stimulate demand by September.

With air cargo capacity also being cut by various carriers from FedEx to JetOneX, this is also making players cautiously optimistic that there will be some sort of peak season spike – unlike last year, when it simply failed to occur.

This was partly because capacity had been increased so much following Covid – which some had perceived as a broader paradigm shift for the whole sector. Now that capacity is being gradually reduced again, it seems logical to conclude ‘normalisation’ of the market should also lead to a more normal cycle – including peak season.

From a macro perspective, some evidence is gathering that might back up this more optimistic scenario, including a sharp fall in inflationary pressures in the US and, to a slower extent, in Europe. Indeed, some are now saying it is still just possible we could arrive at a so-called ‘Goldilocks scenario’ – where higher interest rates cool growth, but only to a limited and desired extent, just enough to quell inflation but avoiding much, if any, recession.

Against that, there are also at least three risk factors that could make the outlook more bearish: US markets already looking expensive; growth in Europe continuing to look weak, if not anaemic; and China not enjoying anything like as strong a post-Covid recovery as many were expecting.

To look at this in more detail:

In the US, inflation has been falling steeply. It was down to only 3% in June, with the medicine applied by the Federal Reserve – in the form of sharply higher interest rates – appearing to do the trick.

Despite higher interest rates, the US economy has continued to show tremendous underlying resilience – due, to some extent, to consumers running down savings. The US labour market has, thus, stayed strong, with unemployment remaining low, although many analysts expect it must rise eventually.

All that said, there is also an increasingly strong argument to suggest that most, if not all, the good news is already ‘priced-in’ to US markets, with US equities rebounding about 20% from lows of last October by the halfway point of 2023.

In Europe, inflation has also been falling – though at a slower pace. During June, it was still more than 6% in the Eurozone and nearly 8% in the UK – and with little if any real economic growth.

That sort of stagflation is not surprising following the energy shock sparked by the Ukraine conflict, since when European economies have suffered, although they’ve also proven more flexible and robust than might have been expected.

Another disappointment in global markets this year has been China, where growth slowed to only 0.8% in Q2, which is still pretty fast compared with western economies, but slower than recent history – and than many expected following the reopening after Covid.

The Chinese economy has been held back by various factors, not least geopolitical tensions with the US – which has led, among other things, to tariff measures in sectors like semiconductors.

Markets have also started to worry about something else in China – its real estate sector. This is seen by some as being in a bubble in some parts of the country – the biggest so-called Tier 1 cities, where housing costs have now reached highs in relation to average earnings that, by some calculations, exceed even Tokyo in the late 1980s. At the same time, there are worries about weak markets and high vacancy rates in many smaller Tier 3 and Tier 4 cities. The extent of that problem is difficult to quantify, as there is little or no data.

As a result, some now suggest that developers (and banks that lend to them) and local authorities (which raised a lot of easy money through selling land during the boom) could soon be in trouble – and will need bailing out.

How that plays out – and its wider effects – remains to be seen. A major problem in Chinese real estate might spook markets. On the other hand, swift and decisive action from the Chinese government to address the issue might restore calm and provide a powerful reinjection of confidence.

Thus there is a narrow path for the world economy to reach that ‘Goldilocks scenario’ of falling inflation and continued growth – which any sudden rise in air freight rates may indeed indicate.

On the other hand, it could be the three bears that await.

By Neil Wilson
Source: theloadstar.com