ARTICLE | 3 MIN | VIEWS FROM THE FLOOR

Inventories Flash Red

August 9, 2022

This material is intended only for Institutional Investors, Qualified Investors, and Investment Professionals. Not intended for retail investors or for public distribution.

Rising inventories signal a slowdown; and why investors shouldn’t rely on the Fed.

Inventories Flash Red

Inventories are rising at their fastest-ever rate. In a post-pandemic world, this shouldn’t come as a surprise: deprived of alternatives during lockdowns, a great deal of consumer spending was directed towards durables. This effectively sucked demand forward in time, leaving those who thought that pandemic-era purchase levels were the new normal badly caught out, and even those who expected demand to revert to pre-pandemic volumes carrying too much inventory.

Aside from being inefficient for the firms themselves, rising inventories bode ill for the economic cycle. The level of wholesale inventories reliably leads ISM Manufacturing PMI declines by around six months (Figure 1). The latter metric is regarded as a barometer of economic activity, and the economy is thought to be in recession when it falls below 45.

Where the ISM goes, earnings tend to follow (Figure 2), all of which makes deeply uncomfortable reading for equity managers. If inventories stay high, it may be another sign that far from being technical, we will be experiencing a full-scale US recession close to year-end or early next year.

Figure 1. Rising Wholesale Inventories Have Presaged Weaker ISM Readings

Source: Bloomberg, Man GLG; as of 2 August 2022.

Figure 2. Lower ISM Levels Have Been Associated With Lower Earnings

Source: Bloomberg, Man GLG; as of 2 August 2022.

The Fed Doesn’t Have Your Back

The market is now pricing a materially different policy environment from even a few months ago (Figure 3). The SOFR futures curve now anticipates continued hikes up to around 3.25%, and then a series of cuts back down to 2% beginning in early 2023. Three months ago, fewer cuts were anticipated, with rates staying closer to 3% than 2%. This in part reflects the hiking cycle already underway, but the fact that the market seems to be assuming that rates stay above 2% implies to us that expectations of a soft landing are widespread.

Given the inventory overhang described above, we are sceptical that demand will be robust enough to support earnings, which would be a point in favour of more accommodative policy.

But this argument fails to consider the vexed question of the Federal Reserve’s credibility. Our understanding is that 1974 is etched in the FOMC’s consciousness – blinking in the face of a recession saved the cycle in the short-term, but fomented an environment of high and volatile inflation, culminating in CPI peaking at 15% and policy rates at 22%. No Fed chair wants to be Arthur Burns, but all venerate Paul Volcker, which suggests that such a dovish pivot is really not very likely.

One other consideration bothers us: if the Fed is to be pushed towards a true dovish pivot at some point, it will require a materially worse growth and earnings outlook than is currently envisaged. As explained in the section above, we think such a scenario is entirely possible, but are under no illusions that getting there will be a comfortable path for markets. World equities more than 12% off their lows and going higher in the face of the Fed reiterating their intention to tackle inflation suggests real complacency.

Figure 3. SOFR Futures Curves

Source: Bloomberg, Man GLG; as of 2 August 2022.

With contribution from: Ed Cole (Man GLG – Managing Director, Discretionary Investments)

For further clarification on the terms which appear here, please visit our Glossary page.

This information is communicated and/or distributed by the relevant Man entity identified below (collectively the "Company") subject to the following conditions and restriction in their respective jurisdictions.

Opinions expressed are those of the author and may not be shared by all personnel of Man Group plc (‘Man’). These opinions are subject to change without notice, are for information purposes only and do not constitute an offer or invitation to make an investment in any financial instrument or in any product to which the Company and/or its affiliates provides investment advisory or any other financial services. Any organisations, financial instrument or products described in this material are mentioned for reference purposes only which should not be considered a recommendation for their purchase or sale. Neither the Company nor the authors shall be liable to any person for any action taken on the basis of the information provided. Some statements contained in this material concerning goals, strategies, outlook or other non-historical matters may be forward-looking statements and are based on current indicators and expectations. These forward-looking statements speak only as of the date on which they are made, and the Company undertakes no obligation to update or revise any forward-looking statements. These forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those contained in the statements. The Company and/or its affiliates may or may not have a position in any financial instrument mentioned and may or may not be actively trading in any such securities. Unless stated otherwise all information is provided by the Company. Past performance is not indicative of future results.

Unless stated otherwise this information is communicated by the relevant entity listed below.

Australia: To the extent this material is distributed in Australia it is communicated by Man Investments Australia Limited ABN 47 002 747 480 AFSL 240581, which is regulated by the Australian Securities & Investments Commission ('ASIC'). This information has been prepared without taking into account anyone’s objectives, financial situation or needs.

Austria/Germany/Liechtenstein: To the extent this material is distributed in Austria, Germany and/or Liechtenstein it is communicated by Man (Europe) AG, which is authorised and regulated by the Liechtenstein Financial Market Authority (FMA). Man (Europe) AG is registered in the Principality of Liechtenstein no. FL-0002.420.371-2. Man (Europe) AG is an associated participant in the investor compensation scheme, which is operated by the Deposit Guarantee and Investor Compensation Foundation PCC (FL-0002.039.614-1) and corresponds with EU law. Further information is available on the Foundation's website under www.eas-liechtenstein.li.

European Economic Area: Unless indicated otherwise this material is communicated in the European Economic Area by Man Asset Management (Ireland) Limited (‘MAMIL’) which is registered in Ireland under company number 250493 and has its registered office at 70 Sir John Rogerson's Quay, Grand Canal Dock, Dublin 2, Ireland. MAMIL is authorised and regulated by the Central Bank of Ireland under number C22513.

Hong Kong SAR: To the extent this material is distributed in Hong Kong SAR, this material is communicated by Man Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong.

Japan: To the extent this material is distributed in Japan it is communicated by Man Group Japan Limited, Financial Instruments Business Operator, Director of Kanto Local Finance Bureau (Financial instruments firms) No. 624 for the purpose of providing information on investment strategies, investment services, etc. provided by Man Group, and is not a disclosure document based on laws and regulations. This material can only be communicated only to professional investors (i.e. specific investors or institutional investors as defined under Financial Instruments Exchange Law) who may have sufficient knowledge and experience of related risks.

Switzerland: To the extent this material is made available in Switzerland the communicating entity is:

  • For Clients (as such term is defined in the Swiss Financial Services Act): Man Investments (CH) AG, Huobstrasse 3, 8808 Pfäffikon SZ, Switzerland. Man Investment (CH) AG is regulated by the Swiss Financial Market Supervisory Authority (‘FINMA’); and
  • For Financial Service Providers (as defined in Art. 3 d. of FINSA, which are not Clients): Man Investments AG, Huobstrasse 3, 8808 Pfäffikon SZ, Switzerland, which is regulated by FINMA.

United Kingdom: Unless indicated otherwise this material is communicated in the United Kingdom by Man Solutions Limited ('MSL') which is a private limited company registered in England and Wales under number 3385362. MSL is authorised and regulated by the UK Financial Conduct Authority (the 'FCA') under number 185637 and has its registered office at Riverbank House, 2 Swan Lane, London, EC4R 3AD, United Kingdom.

United States: To the extent this material is distributed in the United States, it is communicated and distributed by Man Investments, Inc. (‘Man Investments’). Man Investments is registered as a broker-dealer with the SEC and is a member of the Financial Industry Regulatory Authority (‘FINRA’). Man Investments is also a member of the Securities Investor Protection Corporation (‘SIPC’). Man Investments is a wholly owned subsidiary of Man Group plc. The registration and memberships described above in no way imply a certain level of skill or expertise or that the SEC, FINRA or the SIPC have endorsed Man Investments. Man Investments Inc, 1345 Avenue of the Americas, 21st Floor, New York, NY 10105.

This material is proprietary information and may not be reproduced or otherwise disseminated in whole or in part without prior written consent. Any data services and information available from public sources used in the creation of this material are believed to be reliable. However accuracy is not warranted or guaranteed. © Man 2025