Macro Moments Weekly: Markets face supply chain challenges

In the week following the US Supreme Court decision invalidating a wide range of US President Trump’s tariffs, one might be forgiven for expecting a strong market reaction. But, once again, financial markets have absorbed this news—as well as the president’s announcement of new 10% tariffs (claiming authority under a different statute) and then an increase to 15% a day later—with a shrug of the shoulders. (For an excellent review of the tariff decision and its impacts, Franklin Templeton Institute’s Stephen Dover and Lawrence Hatheway authored a written piece, ‘Quick Thoughts: US Supreme Court strikes down Trump tariffs’, and Stephen hosted a webinar, ‘SCOTUS on Tariffs’ with a panel discussion.) 

Equally, the markets have calmly watched the buildup of US naval forces in and near the Persian Gulf. It is another sign that the important issues for markets involve economic and corporate developments. This was, after all, the week Nvidia reported earnings. And while the reaction to Nvidia’s strong set of numbers was also muted, it remains the trendsetter.

The speed at which artificial intelligence (AI) is developing is now giving rise to a number of bottlenecks. From gas turbines to DRAM chips, shortages exist throughout many supply chains. Shortages are likely to slow the speed of roll-out and advance of AI and, for short-cycle products, this is likely to drive prices. In a world of shortages, the highest bidder gets the supply. How would car manufacturers react to memory-chip shortages? Can they pass the price increases on to consumers?

This raises another issue: Can AI move the inflationary dial? Will the shortages created by AI actually register in the Consumer Price Index (CPI)? I am unaware of subscriptions being a component of the CPI, but cars, laptops and phones are.

We might see the real impact through energy prices. Logically, one would not build a data centre without having a long-term energy supply agreement in place. In the industrial past, a steel or chemical works might see interruptions of energy or water supplies during a period of high demand in order to favour the consumer or other critical users. Do these clauses exist for data centres today? Think of an insurance company: How can it rely on running a call centre using AI during a major weather event if the data centre has had its energy supply cut? The United States is much in advance in grappling with these questions. It appears the real answer is for data centres—which are heavy ‘industrial consumers’ of energy and water—to be ‘off grid’ by supplying themselves.

But in the interim, overdevelopment could be inflationary via energy costs, and that will sit badly with a consumer (and voter) whose real wage growth has long stalled.

In the United Kingdom, voter anger has taken a seismic turn. In a Manchester by-election for a parliamentary seat that the Labour Party has held for over 100 years, Labour didn’t just lose but came in third. They didn’t lose to their right-wing foe, Reform, but to the Greens, who are significantly to the left of the Labour Party. The traditional blue-collar worker voters left Labour in the post-Brexit election of 2019, and now the urban young and minority voters are leaving as well. The Labour strongholds of Liverpool, Manchester and London can no longer be assumed as safe. The centre ground of British politics had already shrunk as the right departed; now the left is departing, too.

It looks like an impossible equation for the current centrist prime minister, and it appears either he now must move toward the left or be replaced. The local elections in May will likely confirm that picture. Economic policy will also likely follow, and uncertainty must rise. The next election is not due until 2029, but with tax rises scheduled for summer 2028, logically it has long been clear that the election would actually be in May 2028. The premium for UK assets will not be falling soon, and the risk of an early election has risen as much as the uncertainty of its outcome.

Parting shot

The Winter Olympic Games have just concluded. Norway has topped the medal table again, as it has done since 2010 when, in Vancouver, the home team, Canada led in gold medals.

When the games were last in Italy, in 2006, Norway won just two golds, but since then they have won more golds at every Winter Olympics, and they captured 18 in Milan. While a 9x return doesn’t match the 15x return that Microsoft stock has returned over the same period, it’s not bad for a country of 5.6 million people.