Economy

This article is an on-site version of our Unhedged newsletter. Sign up here to get the newsletter sent straight to your inbox every weekdayGood morning. This week will bring a string of post-meeting Fedspeak, culminating with Jay Powell talking at the IMF on Thursday. We expect opinions on the economy to diverge widely. “This is a point of minimum — rather than maximum — confidence,” as Joseph Gagnon of the Peterson Institute told the FT last week. If your confidence is at a maximum, lay an opinion on us: [email protected] and [email protected] the good times last?It causes Unhedged real anguish to praise the work of other financial journalists. But we will endure the pain when a reputable publication makes itself hostage to fortune, presenting an unambiguous prediction and arguing for it with gusto. This the Economist did late last week, in their leader “Too good to be true”. It states plainly that high rates will ensure that “today’s economic policies will fail and so will the growth they have fostered”. For people who are not in the foresight business, a publication simply stating what it thinks is going to happen may not appear impressive. Those of us who are in the business (willingly or unwillingly) know that the urge to hedge or conditionalise a prediction can be irresistible. Hence the name of this newsletter, which is meant to admonish its authors, and only occasionally works.The Economist’s argument is that (a) households’ excess savings will soon be exhausted, and when they are, higher rates will bite (b) companies are already feeling the pain at the margins, as rising bankruptcies show (c) house prices will fall before long (d) banks will have to backfill the hole higher rates have opened in their balance sheets and (e) higher rates will make current levels of fiscal largesse impossible to maintain. It would make better copy if we flatly disagreed with this argument, but we don’t. Our central forecast, like theirs, is that “the higher-for-longer era kills itself off, by bringing about economic weakness that lets central bankers cut rates without inflation soaring.” That is why, for example, we have argued (however tentatively) for taking on duration exposure in fixed income.But we think there is more room for optimism than the Economist allows. They have argued, to simplify somewhat, that the hard landing is inevitable; for recession delayed not recession avoided. We think there is still a path to the soft landing. There is a smattering of evidence, we’ll admit at the outset, that the pessimistic view is already coming true. Friday’s jobs report showed payroll growth slowing and, more troublingly, the unemployment rate rising to 3.9 per cent, from a recent nadir of 3.4 per cent. That isn’t recessionary, but it is a discouraging development. The Sahm rule says that every recession has historically begun with the three-month average unemployment rate rising 0.5pp above the baseline of the past year. Today’s three-month unemployment trend is 0.33pp above the baseline. Some other data looks downbeat too. The latest ISM surveys of manufacturing and services activity are weakening. Consumer confidence is falling again.Interest rates could indeed bite harder next year. Corporate debt was termed out in 2020-21, but not to infinity. The amount of corporate debt maturing will rise from $525bn this year to $790bn in 2024 and over $1tn in 2025, according to Goldman Sachs. Student loan repayments will create a small but lasting drag on consumption. Interest payments already are. The share of total spending taken up by personal interest payments has risen 40 per cent year over year, to nearly 3 per cent of consumption.Yet we still think there is space for growth to continue through next year and beyond. Here is how we respond to points (a) through (e): Excess savings will soon be exhausted. The concept of excess savings is too imprecise and too vulnerable to measurement issues to help call a turning point in the economy. Aggregating excess savings glosses over crucial distributional differences. By all measures we have seen, excess savings were mostly accumulated by higher-income households. Some lower-income households may already have run out of savings, as evidenced by rising subprime auto delinquencies and scattered signs of stress among companies and lenders that cater to the low end of the income/wealth spectrum. And, as we’ve noted, the household savings rate does seem to be falling. It is hard, though, to tell stress from normalisation following the post-pandemic boom. And in any case the news isn’t all bad. The national data on wages and household balance sheets is encouraging. The Fed’s latest Survey of Consumer Finances, based on data from 2019 through the end of 2022, found “broad-based improvements in US family finances”. Net worth has surged and non-real estate debt fell, except in the lowest wealth quintile, where it is flat. It is precisely this additional wealth that the Economist thinks will still dissipate. Perhaps; but households will still have stronger real incomes. Mean real income rose modestly over the period, and the already rich did best; but all sorts of people experienced gains, rich and poor, young and old, city and country, and across ethnic groups (lack of a college degree, unfortunately, remained a barrier to wage gains). And this increase in real wage gains has continued into 2023. In short: savings are not everything. Incomes matter too, and they appear to be on sound footing. Companies are already feeling the pain. Admittedly, we are American provincials here at Unhedged; this is a US-focused newsletter by design. But from where we’re sitting, companies, especially bigger ones, look to be in fine shape. It would be very odd if interest rates rose by 5 percentage points and no over-indebted companies hit the rocks, but looking at current trends, what is notable is how small the increase has been to date. Bankruptcies will be high this year, on current trends, but not disastrous. Chart from S&P Global, through September:Part of the reason for this is that companies are making money. Large, public companies are not a representative sample, necessarily, but with four-fifths of the S&P 500 reporting third-quarter results, both revenues and earnings are growing in the low single digits against strong results a year ago, according to FactSet. Yes, companies’ targets for the next quarter have been a bit cautious, but given the vibes management must be picking up from volatile markets, one can’t blame them.  Real house prices will fall before long. The Economist asserts this will happen “because they depend mostly on buyers who borrow afresh, and therefore face much higher costs”. This ignores supply, which is severely constrained in the US (among other places). Blame a decade of under-construction and high rates locking people into low-rate mortgages. The result has been that even though mortgage affordability is by some measures the worst on record, US house prices have risen 6 per cent this year after a mere seven months of decline. That is twice as fast as headline inflation. The better way to think about the effect of high rates is as a lid on housing demand, as analysts at Bridgewater have argued. Even at 8 per cent mortgage rates, housing demand still exceeds supply, but the gap would be still larger if rates were cut. What could reduce house prices are forced sales, in the event that a weaker labour market pushes up the foreclosure rate. Short of that, falling prices could also be caused by overbuilding in boom towns like Phoenix. But both of these are about supply, not demand.Banks will have to raise capital or merge. From the point of view of American banks, we are not particularly worried about this. We had a massive interest rate risk fire drill in March, where every balance sheet in the industry was checked for unbearable mark-to-market losses on long term, fixed rate assets. A few banks failed the test and are gone. A larger number are now recognised to have a long-term earnings drag from unsaleable assets that earn below-market rates. Bank stocks are correspondingly cheap now, and this makes sense. But barring another very big step up in long rates, a major round of capital raising seems unlikely (regulators may ask for bigger capital cushions, especially from the largest banks, but that is a separate issue). If the worry is loan growth, demand for bank credit may be a bigger constraint than banks’ weak balance sheets; non-bank lenders with billions to put to work are panting for loans to buy.    Fiscal largesse must end soon. We are not politics reporters, but the barriers to some sort of fiscal consolidation in a divided congress during a presidential election seem formidable. We agree that urgency is building to raise taxes and cut spending, but it may not come to fruition soon enough to matter to this cycle.Our point is that it is still possible to repeat the key intellectual mistake of the past 18 months: underrating the US economy. (We were guilty of this, too!) Again, we don’t want to exaggerate our disagreement with The Economist. What we see is a substantive chance of a soft landing, not a likelihood of one. History says when rates leap, recessions tend to follow. And the global outlook indeed seems dimmer than the US one. But, especially if the next few inflation reports show further cooling, so the Fed can call it quits now or after one or two more rate increases, recession can be avoided. (Armstrong & Wu)One good readA defence of active fund management.FT Unhedged podcastCan’t get enough of Unhedged? Listen to our new podcast, hosted by Ethan Wu and Katie Martin, for a 15-minute dive into the latest markets news and financial headlines, twice a week. Catch up on past editions of the newsletter here.Recommended newsletters for youSwamp Notes — Expert insight on the intersection of money and power in US politics. Sign up hereChris Giles on Central Banks — Your essential guide to money, interest rates, inflation and what central banks are thinking. Sign up here More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.This article is an on-site version of our Europe Express newsletter. Sign up here to get the newsletter sent straight to your inbox every weekday and Saturday morningGood morning. I’m just back from a whirlwind trip to Kyiv with European commission president Ursula von der Leyen, days before a crucial report on Ukraine’s EU accession bid. Here, I’ll explain how she walked the expectations-management tightrope, while our Seoul correspondent hears how commission trade chief Valdis Dombrovskis received a ticking off in South Korea.Tomorrow, I’ll be in discussion with Dombrovskis, who is also the commission’s executive vice-president, and vice-president Margaritis Schinas at the FT-ETNO Tech & Politics Forum. Join us in Brussels or online, as industry CEOs, policymakers and thinkers debate topics including digital ecosystems and sovereignty.Tough loveVon der Leyen’s assessment that Ukraine had “already completed way over 90 per cent” of its required steps to open EU accession negotiations summed up the double-edged message of her Saturday visit to Kyiv: impressive job, but not there yet.Context: the president made an unannounced visit to Ukraine four days before her commission releases a report into the country’s progress in seven reform areas. That assessment is crucial in how the 27 member states will decide whether to open formal accession talks next month.The “way over 90 per cent” remark, made in her speech to the Ukrainian parliament, encapsulates the central dilemma around Kyiv’s status: while at war it is doing a scarcely believable job in reforming its state — but a vast amount of work remains to be done.Thus, while some more enlargement-sceptic EU capitals will be surprised to hear that Kyiv is so close to receiving full marks in the assessment, parts of Ukraine’s government were instead stung by what they saw as a patronising comment.“This kind of messaging is generally negative. Even 99.9 per cent is negative messaging to Ukraine, you know, because we’re talking about existential transformations of the country,” said Olha Stefanishyna, deputy prime minister in charge of EU integration.“It just sounds like ‘you have done 90 per cent and you [only] have three days to deliver on the rest’,” she said. “The more we are delivering, the more issues we’re raising . . . this will inevitably, impossibly, in no way lead you to 100 per cent.”Von der Leyen followed that remark by saying she was “confident that you can reach your ambitious goal” of starting accession negotiations this year.That rhetorical leap underscored the delicate tightrope in managing expectations that von der Leyen deftly walked while in Kyiv. She could neither afford to undermine the official publication of Wednesday’s assessment, nor anger member states with whom the final decision rests. However, she also needed to encourage Ukraine’s exhausted government at a moment when they fear the Israel-Hamas war will leave them neglected.“They’ve done amazing things,” said one senior EU official. “But they can’t ease off now. I think there’s enough respect and understanding between us for some tough love.” Chart du jour: Unlevel playing fieldYou are seeing a snapshot of an interactive graphic. This is most likely due to being offline or JavaScript being disabled in your browser.EU state aid has more than trebled over the past eight years as the bloc tries to compete with China and the US. This has undermined competition between businesses and the “level playing field” once guarded as the central pillar of the single market. Practise what you preachValdis Dombrovskis has been a vocal critic of US subsidies for green technology. But on a trip to South Korea, he received a taste of his own medicine as his hosts complained about state aid to European companies — particularly in France, writes Christian Davies.Context: Dombrovskis has railed against US president Joe Biden’s $369bn green stimulus package, describing the Inflation Reduction Act as “discriminatory” against EU-based companies not least because it cuts them out of a tax credit for electric vehicles.France has responded with its own subsidies for electric vehicles, including tax credits calculated in part on carbon emissions across a vehicle’s entire supply chain, including those generated at its place of production. South Korean trade minister Ahn Duk-geun raised concerns that this could disadvantage EVs produced by Hyundai and Kia in Asia.“The topic was raised by minister Ahn during today’s trade committee,” Dombrovskis told the FT after the meeting last week. But he defended the French measures as having “clear environmental objectives, to take into account the total environmental impact of electric vehicles sold in France”.Lee Hang-koo, executive adviser at the Korea Automotive Technology Institute, said the French move by itself would have a limited impact on Hyundai and Kia sales in the country. “But if the policy is extended to the rest of Europe, this could be a problem.”But Lee also acknowledged that a proliferation of similar measures across Europe would force the Korean carmakers to produce more EVs in the region, mainly in central Europe. “They will gradually increase the proportion of their EV production in their Czech and Slovak plants,” he said. What to watch today EU ambassadors meet for their annual conference in Brussels.Nato secretary-general Jens Stoltenberg hosts Jordan’s King Abdullah II.Now read theseRecommended newsletters for you Free lunch — Your guide to the global economic policy debate. Sign up hereTrade Secrets — A must-read on the changing face of international trade and globalisation. Sign up hereAre you enjoying Europe Express? Sign up here to have it delivered straight to your inbox every workday at 7am CET and on Saturdays at noon CET. Do tell us what you think, we love to hear from you: [email protected]. Keep up with the latest European stories @FT Europe More

The prospect of interest rates staying higher for longer is having powerful ripple effects across the economy; companies large and small are struggling to refinance debt, while governments are seeing the cost of their pandemic-era borrowings rise. This series examines the impact across businesses, governments and economies around the globe More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.The quick ascent of short-term interest rates since 2022, amid high inflation and resilient economic growth, has put borrowing costs in developed markets at multi-decade highs. This has put pressure on the balance sheets of a broad array of leveraged companies that have borrowed heavily using variable-rate debt.The number of companies exposed to rising borrowing costs has grown over the past two decades as more corporate borrowers have turned to the loan market to raise floating-rate debt — rather than issuing bonds that would fix their borrowing costs for years, or decades.This trend has accompanied the rise in private equity-owned companies, which tend to borrow from the broadly syndicated loan market and collateralised loan obligation (CLO) funds — or, increasingly, from private lenders such as Blackstone Group, Apollo Global, and Ares Management.Since the global financial crisis, the size of the market for CLOs has grown almost fourfold: to nearly $1tn, according to Bank of America. It “has grown in step with the bank loan market and expanded at a quicker pace than other credit market sectors”, points out research from Guggenheim Investments. Analysts at Morgan Stanley predict that the private debt market will more than double in size by 2027, to $2.3tn globally.This rise in loan use has mostly come during an era of low interest rates, which has long since ended — creating challenges for many borrowers, particularly those carrying single B debt ratings or lower. These pressures are mitigated, however, by a loosening of creditor protections over the past decade, which has given companies more flexibility to operate through short-term economic challenges. But those loosening covenants have also allowed many borrowers to avoid buying hedges to insure their floating-rate debts against rising rates — a decision that may now prove costly.“People went into this interest rate rise unhedged — and hedging is expensive,” says Tim Hynes, global head of credit research at Debtwire. “Ultimately, some companies are going to have a difficult time.”The rise in interest costs has hit most sponsor-backed companies, but has had the greatest impact on lower-quality borrowers by eating away at the cash flows they use to service debts.Moody’s analysts have warned that, by the end of this year, more than half of single B minus rated US companies will not be generating enough cash to cover their capital expenditure while servicing their debt. That means those businesses will be forced to dip into their cash reserves to cover their spending.The interest coverage ratio for these companies — the extent to which operating earnings cover interest payments — could reach 0.91 by December, from 1.32 at the end of 2022, according to Moody’s, and could fall further still. A figure below 1 indicates that earnings are not sufficient to cover interest costs.“Once your capital structure is cash flow break-even, it becomes very vulnerable to any reductions in earnings from the business,” says Chaney Sheffield, an investment partner at credit investment group Canyon Partners. “Rates matter a lot and many capital structures that were conceived with SOFR [the floating interest rate benchmark] near zero are significantly stressed.”This is expected to lead, eventually, to a rise in defaults after a wave of ratings downgrades were issued earlier in the year. Rating agency S&P Global has forecast that, by June 2024, corporate default rates in the US will rise to 4.5 per cent, up from 1.7 per cent at the start of 2023.Resilient economic growth has alleviated some of the pressure on leveraged companies, by helping them to manage more expensive debt burdens and the impact of inflation on salaries and other inputs, such as raw material costs.John Fekete, head of capital markets at Crescent Capital, an alternative investment group that manages $40bn in assets, says private equity-owned companies have generally outperformed expectations over the past year. He adds that the US Federal Reserve has had success in taming wage inflation, which is proving to be a new tailwind for profit margins.Fekete acknowledges that a wall of forthcoming debt maturities will prove expensive for many borrowers, who are likely to see their overall financing costs rise. But he says most companies should be able to refinance their debts.Roughly 10 per cent of the loan market faces refinancings in 2025 and a further 16 per cent the following year. However, the vast majority are single B rated or double B rated borrowers, who should have access to capital. Lower-rated companies, however, may struggle with refinancing. Companies rated single B and below have about $1.1tn maturing between 2024 and 2028.And, while most investors and analysts believe the interest rate shock has largely passed, a slowdown in the economy could present new challenges.“The bigger question of ‘higher for longer’ isn’t necessarily about today, it is whether the overall rise in interest rates will slow the economy down,” says Fekete. “When the economy slows and we are in a higher rate environment, that’s when we will see a real rise in defaults.” More

Unlock the Editor’s Digest for freeRoula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.Weaker economic data and a more dovish Federal Reserve this week helped bolster the battered US bond market. But some analysts warn that real relief may be limited, as higher interest rates are here to stay. Fears that the Fed would keep interest rates “higher for longer” in October drove yields on Treasury bonds to their highest levels in 16 years. The yields on Treasury bonds are sensitive to interest rate expectations, and traders were betting that the strength of the US economy — even in the face of the highest interest rates in a generation — would force the Fed to keep monetary policy tight. Those fears began to dissipate on Friday after the labor department reported that US employers added 150,000 jobs last month — fewer than forecast by economists at Bloomberg, and roughly half the number added in September. Helped by a dovish-sounding Fed on Wednesday, and the announcement of a slower increase in government borrowing, yields on Treasury bonds fell to their lowest level in over a month.These falling yields were accompanied by a shift in interest rate expectations. Moves in the futures market on Friday morning suggested that traders had all but eliminated the chance of another interest rate increase this year, while also fully pricing in a rate cut as soon as June. Before the new jobs figures were published, forecasts had been for a cut in July.But the Fed has explicitly said it will approach each policy decision on a meeting-by-meeting basis, with its deliberations driven by data. And much of that data still shows an economy that remains hot. Inflation has accelerated in recent months thanks to higher petrol prices, and the US economy expanded at a whopping 4.9 per cent in the third quarter. What’s more, the Fed, while likely to cut interest rates in the event of a recession, may not cut interest rates back to zero, as it did in 2008 and 2020. Analysts suggest differing views over a return to zero interest rates may be contributing to a broader disconnect between the market and the Fed over rate expectations.“Another way of saying higher for longer is ‘not zero’,” says Torsten Sløk, chief economist at Apollo Global Management. “We’re not going back to zero.”At its meeting in September, the Fed released its latest Summary of Economic Projections — its so-called dot plot, which reflects members’ forecasts for where interest rates, inflation, and growth will be in the years to come. Official expectations for interest rates were higher than the previous survey in June.Crucially, the Fed’s estimates for interest rates in the longer term are higher than the market’s — and higher than its own prior estimates — suggesting that officials see a higher “neutral” rate ahead.  This neutral rate — also referred to as R-star — is the Fed’s “Goldilocks” rate: the interest rate that, in the absence of inflationary or deflationary pressures, neither stimulates economic growth nor hampers it. When the neutral rate is in alignment with the actual market interest rates, the economy typically operates at its full potential.In practice, the neutral rate is an ambiguous number that is hard to pin down. But the Fed’s shifting expectations about long-term interest rates suggest officials see the neutral rate moving higher. And, if inflation persists above the central bank’s 2 per cent target, and officials see the neutral rate at a higher level, the Fed may be less likely to cut interest rates to zero in the event of a recession. At its meeting in September, the “central tendency” of the Fed survey — which excludes the top and bottom three responses — showed officials saw long-term interest rates in a range of 2.5-3.3 per cent, which was significantly higher than the June projection of 2.5-2.8 per cent.This is all dramatically different from the period between 2008 and 2019 when the US economy was recovering from the great financial crisis. Interest rates had been cut to near-zero, but inflation remained low, with core PCE (personal consumption expenditures) — the Fed’s preferred gauge of inflation — below its 2 per cent target. And unemployment was high.“If you really think about why rates were so low from 2008 to 2018, that was because the unemployment rate was very, very high for many, many years,” says Sløk. “It took a long time for the Fed to get to full employment again after the financial crisis in 2008.”But the state of the US economy today is radically different: the country has recovered from the Covid-19 pandemic far faster than anyone expected; fiscal spending is higher; inflation has been above target, despite the highest interest rates in a generation; and unemployment has stayed low. “There’s good reason to think that we are no longer in a zero interest rate world,” argues Eric Winograd, director of developed market economist research at AllianceBernstein. “Persistently more expansive fiscal policy probably argues for higher rates, all else equal — both nominal and real. To me, the new normal, whenever the dust settles from this cycle, probably does involve higher interest rates.” More

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TOKYO (Reuters) -Most Bank of Japan board members saw no need for additional tweaks to yield curve control and agreed to continued monetary easing to meet inflation and wage growth objectives, minutes of its September meeting showed on Monday.The comments were made before the BOJ’s October meeting last week, at which it further loosened its grip on long-term interest rates by tweaking its bond yield control, taking another small step towards dismantling its controversial monetary stimulus.At the Sept. 21-22 meeting, the BOJ stuck to its easy money settings and its pledge to support the economy until inflation sustainably hits its 2% target, suggesting it was in no rush to phase out its massive stimulus programme.Board members shared the view that long term interest rates were moving in line with its market operation policy following the central bank’s decision in July to make yield control more flexible, the minutes from the September meeting said.”At that time, U.S. long term rates had not yet shot up so the minutes suggested that the measures the BOJ adopted last week were not expected until recently,” said Naomi Muguruma, chief bond strategist at Mitsubishi UFJ (NYSE:MUFG) Morgan Stanley Securities.At the September meeting, the BOJ turned positive about its view on price growth, although central bank board members remained cautious about policy tweaks, Muguruma added.Several members said abolishing a negative rate and yield control policy would have to be discussed together with any successful achievement of the BOJ’s 2% inflation target. More

LONDON (Reuters) -U.S. manufacturers reported an unexpectedly widespread fall in business activity in October, postponing the sector’s exit from the prolonged downturn that began in late 2022.Industrial energy consumption appeared to be steadying over the summer but the anticipated rebound will now be pushed back into 2024.The Institute for Supply Management’s manufacturing purchasing managers index slipped to 46.7 (14th percentile for all months since 1980) in October down from 49.0 (24th percentile) in September.In points terms, the decline was the largest since June 2022, and came after the index had risen in each of the three previous months, encouraging expectations that the sector’s downturn was nearing an end.But the fall has left the index below the 50-point threshold dividing expanding activity from a contraction for 12 months running since November 2022.The forward-looking new orders component of the index implies the downturn is likely to last for several more months.The new orders sub-index slumped to 45.5 (9th percentile) in October down from 49.2 (20th percentile) in September.Chartbook: U.S. manufacturing and energy useIn duration, the current downturn already has more in common with a cycle-ending recession than with a mid-cycle slowdown.Since 1948, recessions have lasted for 11 months or more, while mid-cycle slowdowns have tended to last for eight months or fewer.If the current downturn proves to be a mid-cycle slowdown, it has already lasted longer than any other since the Second World War.But the downturn has also been unusually shallow and accompanied by the barest slowdown (if any) in the much larger services sector.NOT JUST AUTO STRIKESSome of the decline in manufacturing is probably attributable to industrial action at the three largest automakers in October.Strikes at car and truck plants are likely to have a widespread impact on manufacturing activity given their large supply chains. Even so, they probably cannot explain the scale and breadth of the sudden slowdown in October.Thirteen different industrial sectors reported contraction last month, including: printing, textiles, electrical equipment, machinery, fabricated metals, wood products, computers, furniture, paper, primary metals, chemicals and miscellaneous products, as well as transport equipment.Only two sectors reported growth: food and drink, and plastics and rubber.EXPANSION POSTPONED?The sudden weakness in manufacturing came after activity had appeared to be nearing a cyclical trough in the third quarter, after sustained weakness in the first and second quarters.Energy consumption by industrial users steadied over the third quarter, which was consistent with the worst of the manufacturing downturn being over.The volume of diesel and other distillate fuel oils supplied to the domestic market rose marginally in three months from June to August compared with the same period a year earlier.More than three-quarters of all distillates supplied are used in freight transport and manufacturing so distillate use is closely correlated with changes in the industrial cycle.The volume of distillate supplied increased in the three months between June and August 2023 for the first time since the three months from September to November 2022.Sales of electricity to industrial customers continued to decline in the most recent three-month period from May to July, but also at some of the slowest rates since the three months from September to November 2022.The stabilisation of both diesel and industrial electricity sales in the summer was consistent with manufacturing activity steadying ahead of a renewed expansion.Because the industrial downturn has been long but shallow, distillate inventories remain well below the long-term seasonal average.Return to expansion would likely cause diesel stocks to deplete rapidly and put upward pressure on industrial prices quickly.Tight energy supplies have been a major source of inflation risk and one reason interest rate traders have expected the Federal Reserve and other major central banks will have to keep overnight rates higher for longer.But the renewed softness in manufacturing evident in October is likely to push back both the expected recovery and re-emergence of inflation.Related columns:- U.S. manufacturing rebound will stretch diesel supplies(October 5, 2023)- Global diesel shortage boosts prices (September 13, 2023)- Prolonged U.S. manufacturing slowdown barely dents energy use (September 5, 2023)- U.S. diesel prices surge anticipating a soft landing (August 11, 2023)John Kemp is a Reuters market analyst. The views expressed are his own. Follow him in X: https://twitter.com/JKempEnergy More