What shipping rates in Shanghai can tell us about US inflation amid further disinflation

Time to move away from tech?

What the chart shows

This chart visualizes the relative strength (x-axis) and momentum (y-axis) of four S&P sectors against the S&P 500 Index over a specific three-month period. 

Sectors on the right side of the vertical axis (value of 100) have higher relative strength compared to those on the left. Sectors above the horizontal axis (value of 100) have increasing momentum, while those below have decreasing momentum.

This means that sectors in the top right quadrant have high relative strength and positive momentum and are expected to outperform the benchmark. The inverse is true for sectors in the bottom left. 

Sectors in the bottom right quadrant have high relative strength but declining momentum – which means they may start to underperform soon. Those in the top left quadrant may therefore start outperforming soon. 

Behind the data:

Information Technology (purple line) has been the highest performing S&P sector so far this year, reflected in its position in the Leading quadrant. But momentum appears to be declining as it heads into the Weakening quadrant. Could IT soon underperform? 

Conversely, the Financials sector has emerged from the Lagging to Improving quadrant, displaying low relative strength and rising momentum, possibly indicating the cusp of recovery. 

US instantaneous inflation trends bolster probability of rate cuts

What the chart shows

This chart shows the trends in US core Consumer Price Index (CPI) inflation rates from 2021 to the present using three different measures: year-over-year (purple line), month-over-month annualized (green columns), and instantaneous (blue line), which is calculated with a parameter to indicate to what extent more recent observations are more heavily weighted, i.e., weighing between year-over-year and month-over-month inflation.

Behind the data

Inflation is crucial for monetary policy stances and decisions, particularly those of the Federal Reserve. Conventional inflation measures depict yearly and monthly trends. However, these can exhibit biases due to outdated data and short-term noise, respectively. As such, {{nofollow}}instantaneous inflation could be a sensible indicator that balances data noise with the accuracy of immediate price changes.

In 2023, instantaneous core CPI inflation in the US was relatively lower than the annual changes, suggesting continued moderation driven by lower monthly changes. Conversely, in early 2024, the surge in instantaneous core inflation above the annual rate likely indicates more persistent inflation risks. However, thanks to the recent softening of monthly underlying prices in the US, including the May-June 2024 CPI reports consistently {{nofollow}}falling short of expectations, the instantaneous core CPI inflation fell below the yearly rate again. This supports the increasing likelihood of the Fed’s rate cuts, especially in the upcoming September 2024 meeting.

Rising Shanghai freight rates signal potential upside risks for US inflation

What the chart shows

This chart shows the relationship between the Shanghai Containerized Freight Index (SCFI), China Producer Price Index (PPI) and the US CPI. 

In the top pane, we see how changes in Shanghai’s shipping rates precede China’s PPI by about six months. Since the global financial crisis (GFC), the correlation between the two indexes is 0.78, indicating a strong positive relationship.

In the bottom pane, we then see how changes in China’s PPI could be a leading indicator of the US CPI by about six months. The post-GFC correlation here is 0.60, indicating a moderate positive relationship, plausibly via global supply chain and global trade. 

All this suggests that changes in shipping rates in Shanghai can predict future inflation trends in China and the US. 

Behind the data

China’s CPI inflation rose by 0.2% in June 2024 from a year ago – lower than the {{nofollow}}anticipated 0.4%. Meanwhile, 0.8% YoY PPI inflation {{nofollow}}aligned with consensus forecasts. 

Amid {{nofollow}}ongoing geopolitical tensions in the Red Sea, global and Shanghai freight rates have shown an upward bias, although recent weekly prices suggest some signs of peaking. 

Consequently, China’s PPI inflation, which follows the shipping costs by several months, continues to be under upward pressure.

This, in turn, suggests that, from the supply side, US CPI may experience increased inflationary pressures in the coming months.

UK inflation hits Bank of England target as main components ease

What the chart shows

This chart provides a detailed view of year-over-year inflation rates for major subcomponents of the UK’s CPI as of June 2024. 

The large dots denote the figures for June 2024, while the small dots represent the figures for the previous month. 

The arrows show the direction of change between the two. 

The chart also shows the relative weights (Y-axis) of each subcomponent in the overall CPI to illustrate the relative importance of each category in the inflation measurement. 

Behind the data

UK inflation hit the Bank of England’s (BoE) 2% target in May 2024 for the first time in three years following the worst inflationary surge in a generation. 

The following month, headline and core CPI inflation measures {{nofollow}}remained at 2% and 3.5%, respectively.

With headline inflation finally at target, pressure appears to be mounting on the BoE to reduce the policy rate by 25 bps to 5% at the next meeting on 1 August albeit elevated core inflation. 

The moderation over recent months in main components such as recreation and food suggests a potential easing in inflationary pressures, supporting arguments for a rate cut. 

Divergent investment trends in developed markets: equities gain and bonds struggle

What the chart shows

This scatter chart compares year-to-date (YTD) total return performance of large-cap stocks with government bonds of all maturities across various developed markets since 10 July. 

Each data point represents the intersection of a country’s stock market and bond market performance; the position of each point shows how its stocks and bonds have performed relative to one another. ‍

Behind the data

The chart highlights the diverse performance of stocks and bonds in developed markets for 2024, underscoring how different economic conditions and policy decisions across countries can impact the returns of these asset classes. 

The widespread negative performance of bonds in most economies is a cause for concern. The situation is particularly worrisome in France, Japan and the UK.

In contrast, the equity market presents a more optimistic picture. Denmark's strong performance is driven by Novo Nordisk's weight-loss drug Wegovy, while the US stock market is buoyed by Nvidia, the leading technology company whose chips are powering the AI boom.

The declines in equity performance in Portugal and New Zealand indicate that not all markets are benefiting equally. 

Rising S&P 500 ratio sparks bubble concerns amid AI investment boom

What the chart shows

This chart displays the ratio (blue line) of the S&P 500 market-cap weighted index to the S&P 500 {{nofollow}}equal weight index from 1990 to July 2024, highlighting the performance of larger companies relative to smaller ones within the S&P 500. When the ratio is above 1, larger companies are outperforming smaller companies. When it’s below 1, the inverse is true. 

The shaded bands represent the different standard deviations around the trend line to provide context for the ratio’s historical volatility and the range within which the ratio has fluctuated.

The green line shows the long-term trend of the ratio. 

Behind the data

US stocks and the S&P 500 Index, largely propelled by AI narratives, have raised {{nofollow}}questions about possible bubbles as their valuations have been increasing in light of further AI prospects. One method to gauge such potential bubbles is by comparing the index to its diversified version, i.e., its equal weighting.

The ratio of the SPX market-cap-weighted index to the equal-weighted has been on the rise since the COVID-19 pandemic. It hovered around only +1 standard deviation (s.d.) from the long-term trend from 2020 to mid-2023, reflecting a relatively balanced performance. 

However, starting in mid-2023, the ratio began to climb more noticeably, exceeding +2 s.d. in June 2024. This surge suggests that larger companies are outpacing smaller ones, raising concerns about overvaluation, especially in sectors heavily influenced by AI. 

Still, it appears the ratio still has some room for growth compared to the dot-com bubble period in 2000-2001, when it surpassed +3 s.d. before plummeting.

Overall, the chart implies that while the current market shows signs of a potential bubble, it has not yet reached the extreme levels observed during the dot-com era.