Charts of the Week

US dollar weakens against Asian currencies as Fed begins rate cuts

What the chart shows

This chart displays the year-to-date (YTD) performance of the US dollar (USD) against a range of global currencies. It ranks currencies from the largest YTD appreciation to the largest depreciation.

Behind the data

As the US labor market has been showing signs of softening and the Federal Reserve (Fed) has started its easing cycle with an oversized rate cut, the USD’s strength has begun to unwind. While the US Dollar Index (DXY) has remained above 100, the dollar has depreciated significantly against several Asian currencies, including the Malaysian ringgit (MYR) and Thai baht (THB), with drops of 7-9%. Conversely, the USD has appreciated the most against Latin American currencies like the Mexican peso (MXN), as well as the Turkish lira (TRY). As the Fed continues its dovish policy, the USD may face further downward pressure.

US labor market weakens as majority of states face rising unemployment

What the chart shows

This chart tracks unemployment trends from January 2019 to August 2024 for all 50 states in the US as a group. It highlights whether their unemployment rate has increased, decreased or remain unchanged compared to the previous month. According to the latest data recorded, 31 states experienced an increase in unemployment, five saw a decrease, and 14 had no change.

Behind the data

The US jobs market is showing signs of softening. The national unemployment rate has climbed from a low of 3.4% in 2023 to 4.2% as of October 2024. This increase has not been spread evenly across states. Rhode Island, South Carolina and Ohio have seen the largest increases in their unemployment rate over the past year, each climbing by more than a percentage point. Conversely, unemployment rates have fallen in Arizona, Mississippi, Connecticut, Wisconsin, Iowa, Maine, Tennessee, Arkansas and Hawaii.

Given that promoting maximum employment is one of the Fed’s dual mandates, continued labor market deterioration could prompt more aggressive interest rate cuts from the Federal Open Market Committee (FOMC).

Chinese 10-year bonds show low sensitivity to global macro factors

What the chart shows

This chart illustrates the sensitivity of the 10-year Chinese government bond (10y CGB) to various global macro factors including GDP growth, inflation expectations, central bank policies, credit markets, and commodities, based on data from Quant Insight. Sensitivity coefficients show how many basis points (bp) the bond yield could change for each one standard deviation (s.d.) shift in a macro factor, with data spanning the past ten years.

Behind the data

Overall, the 10y CGB shows low sensitivity to global macro factors, with yield fluctuations typically within ±1 bp for a one s.d. shift. However, certain factors have had more pronounced impacts recently. For example, iron ore prices and expectations of quantitative tightening by the Bank of Japan (BoJ) have been linked to positive effects on the bond yield, while copper prices and European Central Bank (ECB) rate expectations have contributed to more negative consequences. These insights could be useful for positioning Chinese sovereign bonds.

Global trade under pressure as shipping rates soar amid port strikes

What the chart shows

This chart compares global trade growth with key shipping rate indices to highlight the relationship between global trade activity and fluctuations in shipping costs, which can serve as a key indicator of supply chain pressures.

Behind the data

Shipping has become a major issue in recent years, impacted by events such as the pandemic, the Suez Canal blockage, and now the latest concern: the International Longshoremen’s Association (ILA) strike. Nearly 50,000 ILA members have walked off the job, halting operations at ports along the East and Gulf Coasts. This disruption has affected the flow of a wide range of goods, from perishable items like bananas and European alcohol to cars, furniture and industrial parts, potentially leading to shortages and price hikes. While many holiday goods have already been shipped, continued delays could drive up prices for perishable products and other imports, further straining supply chains and fueling inflation.

Energy stocks strongly correlate with crude oil prices but not with other sectors

What the chart shows

This chart displays the daily return correlation over the past year between MSCI US and European sectoral indices and crude oil prices (WTI and Brent). It highlights sector sensitivity to oil price movements and shows how crude oil may impact sector performance in the US versus Europe.

Behind the data

The results show strong positive correlations between energy sector equities and crude oil returns in both the US and Europe, with coefficients ranging from approximately 0.5 to 0.6. In contrast, other sectors exhibit relatively low correlations with crude, with some showing small positive or negative coefficients. While crude prices play an important role in energy stock valuations, they appear to have little influence on most other sectors.

Hedge funds lag global equity benchmarks

What the chart shows

This table presents a heatmap comparing the year-to-date (YTD) and recent performance of various hedge fund strategies – such as absolute return, multi-strategy, systematic diversified, market directional, multi-region, and fundamental growth equity – against global equity benchmarks.

Behind the data

The heatmap reveals that these hedge funds have generally underperformed stock benchmarks like the S&P 500, MSCI World, and MSCI EM indices, possibly driven by factors such as the rise of AI, the resilience of the US economy amid recent softening, continued Fed’s accommodation, and renewed stimulus from China.

So, despite being exposed to higher risks, hedge funds did not necessarily outperform equities during this period.

PBoC stimulus counters manufacturing contraction amid mixed PMI signals

What the chart shows

This table provides a detailed breakdown of China’s Purchasing Managers’ Indices (PMIs) from both the National Bureau of Statistics (NBS) and Caixin, covering composite, manufacturing and services sectors. It also includes components of the NBS PMI indices. All are heat-mapped based on their percentile ranks across all available historical data.

Behind the data

The People's Bank of China (PBoC) has announced monetary stimulus that includes cutting the reserve requirement ratio (RRR) by 0.5 percentage points. It also plans to implement further interest rate reductions and inject approximately 1 trillion yuan of long-term liquidity into the economy. This move has helped alleviate concerns about economic activity, as indicated by discrepancies between the NBS and Caixin PMIs and deteriorations in several official PMI components shown in the table.

The Caixin PMI has recently shown expansion. However, the official PMIs reported by the NBS have indicated contractions in manufacturing, despite slight expansions in non-manufacturing. Across various components, contractions can be observed across the board, except for business expectations, which remain in expansion.

China’s growth target at risk

What the chart shows

This chart depicts China’s real GDP growth from 1994 to 2024, along with two measures of potential growth rates: one calculated using the Hodrick-Prescott (HP) filter – which extracts a trend from economic cycles – and another based on a post-global financial crisis (GFC) exponential trend projected into the next 12 months.

Behind the data

Despite the government’s 5% economic growth target, China’s economy has been encountering challenges in real estate, post-COVID activity recovery, the labor market and other areas. These issues suggest that the target may not be attainable.

Additionally, the country’s potential growth rates support this concern: The HP filter indicates a potential growth rate of 4.5%, while the post-GFC exponential trend projects growth falling below 4% in the next 12 months.

Russia and Japan buck trend of global rate cuts

What the chart shows

This table presents the key interest rates of central banks from G10 countries, China and Russia, along with the percentage of inverted spreads for each economy based on term spreads between 1-year to 10-year government bonds. Most central banks have begun their rate-cutting cycles, with exceptions being Australia, Japan and Russia. Notably, Russia and Japan have implemented rate hikes in recent months. Interestingly, while the Russian yield curve is fully inverted – indicating that all spreads between short-term and long-term bonds are negative – Japan's yield curve shows no inversion at all.

Behind the data

The widespread initiation of rate-cutting cycles among central banks reflects a global shift toward monetary easing in response to slowing economic growth amid inflation concerns. The inversion of yield curves in several economies, such as the US (46.7% inverted spreads), the UK (53.3%) and various euro area countries, signals market expectations of future economic slowdowns and potential further rate cuts. Russia's fully inverted yield curve, despite recent rate hikes, may indicate that investors expect future rate reductions or harbor concerns about the country's long-term economic prospects. In contrast, Japan's lack of yield curve inversion, even after rate hikes, suggests that the market anticipates steady economic conditions or aligns with the central bank's optimistic outlook.

US yield curve gradually dis-inverting in 2024

What the chart shows

This chart analyzes the US yield curve from 2015 to 2024, focusing on the percentage of the curve that is inverted. The different colors depict various types of term spreads.

Behind the data

The data reveals that throughout 2024, the US yield curve has been gradually dis-inverting, indicating a shift toward a more normal yield curve structure. In the early part of the year, the proportion of spreads inverted by more than 50 basis points remained steady, suggesting sustained investor concerns about economic slowdown or later rate cuts. However, more recently, even these deeply inverted spreads have begun to decrease. This movement toward upward sloping—where longer-term yields exceed shorter-term yields—reflects growing market optimism about future economic conditions. The dis-inversion across the yield curve may signal expectations of stronger economic growth or a change in monetary policy stance by the Federal Reserve.

Quant Insight data reveals euro’s valuation gaps against global currencies

What the chart shows

This chart showcases Macrobond’s newly integrated Quant Insight dataset, offering a detailed analysis of currency sensitivities against the euro. Macro sensitivities are interpreted such as that a one standard deviation change in a macroeconomic factor will result in an x% change in the currency pair’s exchange rate.

Behind the data

This analysis of the euro's valuation against 22 different currencies reveals that euro vs. Malaysian ringgit is the most undervalued pair, with a -4.5% gap from fair value, suggesting potential appreciation of the euro against the ringgit. Conversely, the euro is most overvalued against currencies like the Russian ruble and Mexican peso, indicating possible future depreciation relative to these currencies.

By using this dataset, we can identify trends and relationships in key drivers such as commodity prices, credit risk indicators and market volatility.  

S&P 500 maintains growth amid moderate volatility

What the chart shows

This chart displays the S&P 500's annual return growth, VIX intra-year highs, and maximum drawdowns, from 1990 to the present.

Behind the data

Although markets have experienced some selloffs and uncertainties due to recurring recessionary fears, the data shows that markets are still far from extreme pessimism.

The S&P 500's year-to-date return growth remains positive. The VIX index, although spiking occasionally, closed highest at 38.6% during this year, notably lower than its significant highs. Meanwhile, the year-to-date maximum drawdown is -8.5%, which seems typical compared to previous norms.

Are recession fears overstated?  

By Simon White, Macro Strategist, Bloomberg

The market is now considering a recession as its base case. Secured Overnight Financing Rate (SOFR) options, which assume a hard landing to be likely and a Federal Funds Rate of 3% or below by next June, now see a downturn as having a 50% probability. However, that's too pessimistic a view based on the data, which show a low chance of recession over the next three to four months.

Recession risks amid payroll trends and Sahm Rule signals  

By: Ashray Ohri, Senior Lead, Macro Research, Fidelity International

The US labour market has moved to the forefront of monetary policy decision-making after being on the dormant side of the debate for over a year. The triggering of the Sahm Rule has prompted market participants to price in recession risks and raised concerns that the labour market is nearing an inflection point, beyond which further weakening could lead to a compounding increase in unemployment. This could create a negative feedback loop of job losses, declining income and reduced spending that further accelerates job losses.

Our view is that we are not at that critical turning point yet. The rise in the unemployment rate and the triggering of the Sahm Rule can partly be attributed to an increase in labour supply, rather than an alarming slowdown in job demand or layoffs.

Accordingly, the chart above illustrates those potential tipping points by examining non-farm private payroll numbers 12 months before and after the start of the last 10 recessions, as identified by the National Bureau of Economic Research (NBER).

On average and/or at the median (orange and yellow lines in the top chart), non-farm private payrolls have typically turned negative at the start of a recession (0 = start of recession) and go on to deteriorate incrementally for another five months before hitting a floor (average peak decline is -195,000). Payrolls then start to recover, although they remain negative for at least 11 months after a recession starts. Clearly, we are not near these levels of contraction.

While these central tendencies may not be the most cautious signals, even the highest non-farm private payrolls at the onset of the last 10 recessions was 76,000 (in the Dec 1973 recession). This suggests that we are still more than 40,000 payrolls away from entering recessionary territory, with current private payrolls at 118,000 in August.

It is important to note that exceeding these thresholds will not necessarily confirm a recession, as circumstances this time may be different. Nevertheless, these serve as simple guideposts to bear in mind as we navigate this volatile cycle.

ECB’s path to easing  

By James Bilson, Fixed Income Analyst, Schroders  

Even after the recent rally, Eurozone policy rates are priced to go only fractionally below our estimate of neutral in Europe, which is around 2%. If we see growing signs of a weakening outlook in upcoming data, more accommodation will likely be needed from the European Central Bank (ECB) to support the economy.

Given that the ECB’s September 2024 inflation forecast has inflation reaching the 2% target only in 2026, further progress in reducing domestic price pressures will be needed for the central bank to speed up its cautious start to the easing cycle.  

Semiconductor sales strong despite SOX slowdown

By Takayuki Miyajima, Senior Economist, Sony Financial Group

The SOX index is a leading indicator of global semiconductor sales. So does the recent decline in the SOX index signal a future slowdown in global semiconductor sales? At this point, I don’t see any significant change in the semiconductor cycle.

The chart compares the SOX index with year-over-year (YoY) growth in WSTS global semiconductor sales. While both the SOX index and YoY growth have slowed in recent months, growth remains strong. Hence, there is a large probability that WSTS global semiconductor sales will continue to maintain double-digit growth for the time being, and there is no reason to be concerned about the cycle peaking just yet.

Loosening financial conditions may delay rate cuts

By Diana Mousina, Deputy Chief Economist, AMP

The Goldman Sachs Financial conditions index is a measure of overall financial conditions using market-based indicators, with different weights across countries depending on the structure of their economies.

An index above 100 indicates that financial conditions are tighter than long-term “normal” for that country, while an index below 100 indicates conditions are looser than “normal.” In the current environment, despite significant tightening in monetary policy across major economies such as the US and Australia, financial conditions have not tightened considerably relative to historical levels. And more recently, conditions have loosened again, driven by lower market volatility, rate cuts priced in by financial markets, and better equity performance.

This recent loosening in financial conditions could argue against significant interest rate cuts from central banks in the near term. But bear in mind that while financial conditions indicators are a good gauge of market conditions, they are less of a guide to actual economic conditions.

Restaurant slump signals rising pressure on US consumer spending  

By Enguerrand Artaz, Global allocation fund manager, La Financière de l'Echiquierv (LFDE)

Far from the post-Covid euphoria that saw leisure consumption soar, the US restaurant sector is now in the doldrums. According to the National Restaurant Association index, activity in the sector has fallen sharply since the start of the year. This illustrates a phenomenon seen in other survey data, namely a refocusing of consumer spending on the most essential items.

From a forward-looking point of view, it is interesting to note that restaurant activity has generally correlated with, and even slightly led, trends in retail sales. At a time when the job market is weakening, US household consumption seems to be under increasing pressure.

Bond prices remain below their historical averages

By: Kevin Headland and Macan Nia, Co-Chief Investment Strategists, Manulife Investment Management

Over the last month or so, there has been much debate concerning the Federal Reserve’s path for rate cuts. As the market started to price in the first rate cut and then the potential for more than 25 bps per meeting, yields across the Treasury curve fell, resulting in solid performance for fixed-income investors.  

That raises the question of whether the window for bonds is now closed. We believe that’s not the case and that there are still attractive opportunities. The fixed-income market is deep and diverse, offering pockets of opportunity for astute active managers, not only from a yield perspective but also from a capital gains perspective. Despite some increases in price, many fixed income asset classes remain below their post-global financial crisis average.

History suggests more aggressive rate cuts ahead

By Jens Nærvig Pedersen, Director and Chief Analyst, FX & Rates Strategy, Danske Bank

The Fed decided to go big this week by starting its rate-cutting cycle with a 50bp cut. Now the market is left wondering what comes next. Will the Fed deliver more big rate cuts and how low will it go? The market expects over 100bp of cuts over the next four meetings, suggesting the possibility of further significant reductions.

At first glance, this may seem aggressive, but history tells another story. In half of  the previous six cutting cycles, the Fed ended up cutting rates more than the market initially expected. In the other three instances, the Fed delivered cuts in line with expectations.

Yield has been a good predictor of future returns

By Niklas Nordenfelt, Head of High Yield, Invesco

A notable feature of the high yield market is that longer-term total returns have closely aligned with the starting yield.  

Chart 1 shows rolling 5-year and 10-year total returns alongside the starting yield at the beginning of each period since 2005.  

While the fit is not perfect, Chart 2 shows a strong relationship over an even longer period. It plots the starting yield to worst (YTW) on the X-axis and the subsequent 5-year annualized return on the Y-axis, showing a correlation of 0.68 between the 5-year annualized return and the starting yields.  

Always be prepared for a return of volatility

By George Vessey, Lead FX & Macro Strategist – UK | Market Insights, Convera

Currency volatility has been in the doldrums since most central banks paused monetary tightening in 2023. But this calm across markets contrasts with elevated macro and political uncertainty.  

A big question is how long this low-volatility regime can persist. We’ve witnessed such extended periods of low volatility in GBP/USD only a handful of times over the past two decades, each followed by a shock that reignited volatility. One could argue that the longer the slump, the bigger the eventual jump...

Long-term corporate bonds set to outperform as Fed easing looms

By Brian Nick, Managing Director, Head of Portfolio Strategy, NewEdge Wealth

In light of the approaching Fed easing cycle and recent softening in macro data, I examined the changing relationship between stocks and bonds.  

Investors have grown accustomed to viewing duration as a drag on their portfolios, but it's important to highlight that longer-term corporate bonds have significantly outperformed cash and cash-like instruments over the past year. Historical patterns during rate cuts and economic downturns suggest this outperformance is likely to continue.

Balancing act for Bank of England as markets race ahead

By: David Hooker, Senior Portfolio Manager, Insight Investment

With the easing cycle just beginning, the housing market is already starting to show signs of increased activity and firmer prices. Long-term yields have declined in anticipation of future rate cuts, dragging down mortgage rates and easing financial conditions. This underscores the complex challenge the Bank of England faces: preventing markets from running far ahead of what is likely to be a gradual decline in rates.  

Against a backdrop of still elevated service inflation and high wage growth, don’t be surprised if the BoE maintains a hawkish tone in its statements as it attempts to temper market enthusiasm.

Taylor rule signals potential Fed rate cuts

What the chart shows

The above table illustrates scenarios for the Federal funds rate (FFR) based on the Taylor rule (1993), a traditional monetary policy reaction function that responds to inflation and output gaps, with the unemployment gap serving as a proxy through Okun’s law. The US inflation and unemployment rates analyzed in the chart range from 1.5 to 3.5% and 3.5% to 5.5%, respectively, with the shades of blue and red indicating possible rate adjustments.

Behind the data

With the Federal Reserve's (Fed) dual mandate of stable prices and maximum employment, the Taylor rule provides a valuable framework for justifying potential Fed decisions in the coming months and years under varying economic conditions.

Given the recent Personal Consumption Expenditures (PCE) inflation rate of 2.5-2.6%, and an unemployment rate of 4.2%, the Taylor rule suggests an FFR of  5.0-5.1%, implying the need for one to two 25-basis-point rate cuts. This aligns with market expectations of a 25-basis-point rate cut at the upcoming Federal Open Marketing Committee (FOMC) meeting on 17-18 September, lowering the FFR from 5.25-5.5% to 5.0-5.25%, with additional cuts anticipated in Q4 2024.

If inflation moderates by 0.5 percentage points, the Taylor rule points to a 4.2% FFR. If the jobless rate rises by 0.5 percentage points, the rule indicates a target of 4.5-4.6% FFR. Should inflation decline and unemployment increase by these margins, the rule suggests an FFR of 3.7-3.9%. These scenarios underscore the Fed’s probable paths depending on shifts in economic data, reinforcing the model’s usefulness in projecting policy responses.

Job security fears surge among US workers

What the chart shows

This chart presents recent findings from the New York Fed's labor market survey, highlighting  Americans' concerns about job security. The data is segmented by key demographic categories, with each displaying the percentage of employees fearing job loss. The column on the far right provides a visual context of the data distribution over time from 2014 to the present.

Behind the data

Recent disappointing nonfarm payroll figures have exacerbated anxieties around job security. The survey conducted by the New York Fed found that more than 4% of US employees currently fear losing their jobs, the highest level since 2014. The data reveals a notable gender disparity: 6.5% of women are worried about job loss compared to 2.5% of men, highlighting persistent gender inequality in the labor market.

The survey also identifies workers without higher education and those earning less than $60,000 per year as the most vulnerable groups, with heightened concerns about job security. These findings show the uneven impact of economic uncertainty across different demographics.

China faces deflationary risks amid investment hesitation

What the chart shows

This chart illustrates China's inflation trends from 2000 to the present using multiple measures, including the GDP deflator, headline Consumer Price Index (CPI), Producer Price Index (PPI), and the M1-M2 growth gap (which indicates changes in money supply dynamics to signal future inflationary pressures) leading by two quarters. The chart includes decade averages for the GDP deflator and CPI to provide historical context and highlight longer-term trends.

Behind the data

With slower economic growth trends and ongoing recovery challenges, China is experiencing inflation levels below historical norms. The decade averages of the Chinese GDP deflator and headline CPI have been trending downward, reflecting subdued price pressures across the economy.

In addition, the persistent negative M1-M2 growth gap since H2 2018 – where M1 represents readily accessible demand deposits and M2 includes less liquid short-term time deposits – suggests prolonged corporate reluctance to invest. This monetary dynamic may put downward pressure on inflation, as depicted by its positive relationship ahead of PPI, signaling that reduced liquidity and investment appetite can suppress producer prices over time.

Overall, these patterns highlight structural deflationary risks in China, pointing to challenges in reviving domestic demand and price stability.

‘September effect’ weighs on global stocks

What the chart shows

This heatmap depicts the seasonality of average monthly returns and the probabilities of positive returns for major global stock indices. Blue shades indicate a likelihood of more than 50% for positive returns and red shades indicate a probability of less than 50% to provide a clear visual representation of seasonal trends in stock market performance.

Behind the data

Concerns over the ‘September effect,' coupled with softening macroeconomic conditions globally, have triggered sell-offs in risk assets this month. Empirical evidence supports these concerns, as average seasonal returns and the probability of positive returns are typically lowest in September, often turning negative and falling below 50% across several major equity markets. This pattern highlights September as a consistently weak month for equities, reinforcing the 'September effect' as a pessimistic seasonal factor in the markets.

Balancing risk and reward: S&P 500 variants reveal winning strategies over time

What the chart shows

This chart offers insights into style investing by ranking variants of the S&P 500 index based on their Sharpe ratios, a key metric for evaluating risk-adjusted returns. This visualization highlights which index variants have historically delivered the highest returns relative to their risk levels, helping investors identify outperforming strategies over time.

Behind the data

Historically, growth stocks and the so-called Top 50 stocks, which represent some of the largest and most influential companies in the S&P 500, have consistently delivered strong performance due to their market dominance, strong financial results and broad investor appeal. In contrast, pure growth stocks – typically perceived as having exceptional potential for rapid expansion – have underperformed relative to these top-tier companies. This suggests that purely growth-focused stocks may require more selective investment strategies.

High-beta stocks, characterized by their greater volatility and higher risk, have generally achieved higher Sharpe ratios, reflecting strong performance during market upswings due to their heightened sensitivity to market movements.

However, in times of economic downturns or crises, such as in 2018 and 2022, low-volatility stocks have proven their worth. Despite offering lower overall returns, these stocks provide stability and downside protection, making them an attractive option for investors looking to minimize risk during turbulent market conditions.

FTSE 100 thrives amid moderate inflation

What the chart shows

This chart illustrates the year-over-year performance of the FTSE 100 under various employment and inflation scenarios, categorized into historical tertiles to provide a view of how the index performs across different economic conditions.

Behind the data

The FTSE 100 tends to perform better in environments with strong employment or moderate inflation. Recently, as inflation moderated around 2%, the index showed resilience amid weakening jobs. This underpins that moderate inflation can support equity performance, achieving average year-over-year growth of over 10% regardless of labor market situations. However, if inflation deviates significantly – either rising sharply or falling below moderate levels – the index’s performance could deteriorate, particularly in scenarios of low inflation combined with weak employment, which may signal broader economic contraction and increased downside risk for equities. 

The Great Rate Divide

For much of the post-World War II era, whenever the Federal Reserve began to cut its policy rate, long term interest rates quickly followed suit and saw declines in yields, leading to strong returns across fixed income markets especially in longer duration bonds. With the Federal Reserve expected to start cutting rates this month, a question arises: will longer-term interest rates behave similarly this time?

Fed cuts have typically coincided with periods when the U.S. was heading into or already in a recession. This cycle seems to be different. While U.S. economic data suggests softening growth, the probability of a recession according to Bloomberg economists stands at only 30%.

Secondly, the yield curve has typically been either slightly inverted or flat when the Fed began cutting interest rates, with short- and long-term interest rates aligned. This time around there is a very visible divergence between the level of the Fed’s policy rate and the 10-year U.S. Treasury yield. 

While longer-term treasury bonds have historically been a safe bet for investors anticipating post-rate-cut rallies, today's economic (and inflationary) context paints a more complex picture. The significant yield curve inversion and low odds of a recession complicate the outlook for long term yields unless the U.S. economy deteriorates more than currently expected.

Seasonal Instability

Summer is typically a period when financial markets experience a lull, as many investors and market participants step away from their desks to recharge. This year followed the usual seasonal patterns of low equity volatility until mid-July, when risk assets sold off and volatility surged, reaching a peak in the first week of August. Contributing to this event were weaker than expected economic data such as a disappointing June jobs report, higher than expected initial jobless claims, and a poor reading from the ISM manufacturing PMI, which gauges the strength of the U.S. manufacturing sector. These factors triggered fears the Federal Reserve was ‘behind the curve’ by maintaining a restrictive monetary policy even as the economy softened and inflation cooled.

This rapid unwinding of leveraged positions contributed to the CBOE Volatility Index (VIX), which measures market expectations based on the S&P 500 index options, spiking to an intraday high of 65, a level only seen during the Global Financial Crisis and the start of the pandemic in March of 2020.

August and September Typically Perform Poorly

Seasonal analysis of S&P 500 monthly performance shows that equities tend to sell-off in August and September. On average, the S&P 500 is down a cumulative -1.5% in August and September.

Interestingly, the August/September instability in equities may set the stage for stability in the following months. Since 1990, the period from October through December has consistently been the strongest period for stock performance with average monthly returns of +1.7% (+20.1% annualized). Equity volatility typically peaks around late September, and drifts lower in the fourth quarter. Enjoy the rest of summer, but keep in mind that September can be a turbulent month. But do not fret as the turbulence is usually short-lived.  

A ‘New Normal’ in Office Occupancy

This chart shows the average office occupancy for the top ten cities tracked by Kastle Systems, a provider of office building security solutions. Based on daily security key card swipes at office buildings across the country, office use today is less than half of the pre-pandemic level.

Strikingly, there has been slight increase in office usage over the past year, which is well past the pandemic era, implying that we may have reached a new equilibrium in how American businesses utilize office space. Of the ten cities tracked by Kastle, the Austin metro area has the highest office usage at 60.6% of the pre-pandemic baseline while San Jose metro area has the lowest at 40.3%. A notable feature for both metros is that like the nationwide numbers, office usage is unchanged compared to 2023.

BOJ Outpaces Fed at Bond Buying

Today the Federal Reserve holds $4.45 trillion U.S. Treasuries on its balance sheet, a whopping 550% increase over the past 20-years. While this may sound like a stark increase, and it is, the Fed’s holdings of U.S. Treasuries have not kept up pace with the increase of U.S. Treasury debt outstanding which has surged more than sixfold during the same period. Of the $27 trillion of marketable U.S. Treasury debt outstanding, the Fed now holds nearly 17%, down from the 25% peak reached at the end of 2021, and surprisingly to most, in line with the pre-global financial crisis (GFC, 2002-2007 average) era.

This chart highlights the divergence of Fed and Bank of Japan (BOJ) policies as it relates to government debt purchases. Up until 10 years ago, the Fed held a larger share of government debt outstanding, but that flipped in July 2014.

What has been the cost of such extreme monetary policies and indirect monetization of government debt in Japan? Since peaking in 2011, the Japanese yen has depreciated over 50% vs. the USD. In gold terms, the value of yen is down 68% over the same period. Shockingly, inflation in Japan has averaged less than 1% over this period, indicative of the structural deflationary forces at play.

From Surge to Stability

This chart shows the number of consecutive months when the headline CPI YoY inflation rate has been 3.0% (rounded to the nearest 0.1%) or higher. The recent streak of over 3% ended in July, marking a 39-month battle with inflation. As the chart shows, the recent streak was the fourth longest in the U.S. since World War II. The U.S. has not seen a series of high inflation prints like this since the early 1990s. Amazingly, since the streak started in April 2021, CPI is up 18.2%.

In a more benign inflation regime, such as the one we experienced between October 1991 to March 2021, the average inflation rate was 2.2%, and bonds performed well as interest rates declined. This time might very well be no exception. If U.S. inflation continues to cool as expected in the coming months, this should give the Fed continued confidence to initiate its well-anticipated policy-rate cutting cycle. History suggests that the U.S. Treasury yield curve tends to steepen as front-end yields decline more than long-end yields, and Treasuries tend to perform well overall during policy-rate cutting cycles.

High-stakes election: Swing states hold the key

What the chart shows

This chart visualizes the betting odds for US presidential nominees across all 50 states on Polymarket, a decentralized information market platform where users can bet on the outcomes of future events. States are color-coded based on the likelihood of each party winning: dark blue indicates a “safe” Democrat lead, dark red indicates a “safe” Republican lead and shades in between represent varying degrees of lean towards either party.

Behind the data

This election cycle has been marked by extreme unpredictability, driven by extraordinary events such as the attempted assassination of Republican candidate Donald Trump and the last-minute decision by the Democratic Party to replace Joe Biden with Kamala Harris. These developments have disrupted traditional election forecasting models, leaving both parties scrambling to adjust their strategies.

The chart underscores the importance of key swing states—Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania and Wisconsin—in determining the outcome of the election. These battleground states are likely to see intense campaigning from both parties as they are crucial for either candidate to reach the required 270 electoral votes to win the presidency.

Toss-up states hold key to tight election

What the chart shows

This chart, based on betting odds from Polymarket, shows the projected number of electoral college votes, from a total of 538, that each party is expected to win in the upcoming election. A party must secure a majority of 270 votes to win the presidency. States are categorized by their likelihood of voting for either the Democratic (blue) or Republican (red) party. A “safe” state is where one party has at least a 90% probability advantage over the other. For example, Arkansas is considered a safe Republican state with a 98% chance of voting Republican versus a 2% chance of voting Democrat, resulting in a 96% spread. “Likely” states have a spread between 25% and 90%, “leaning” states have a spread between 10% and 25% and “toss-up” states have a spread of 10% or less.

Behind the data

The election is shaping up to be one of the tightest in recent history. With 36 electoral college votes currently classified as “toss-up”, these contested states could likely determine the outcome. With such a close race, there is mounting pressure on American institutions to ensure a fair and secure process, especially amid growing concerns about potential international interference and voter fraud. This environment also underscores the importance of each vote in these pivotal states, where even a small shift in voter turnout or preference could tip the scales.

Stocks surge early under Democrats, gain more over full term with Republicans

What the chart shows

This table examines the performance of the Dow Jones Industrial Average and S&P 500 index during each US president’s first year in office and across their full four-year term, starting with Rutherford B. Hayes (1877). The first column lists the presidents and their political affiliations while the second and third columns show the Compound Annual Growth Rate (CAGR) of both indexes during their first year and full term. The table also includes the mean and median CAGRs for each party, offering a comparative view of market performance under different administrations.

Behind the data

The data reveals a tendency for the stock market to perform better during the first year of a Democratic presidency, with a median return of 16.2% for the Dow Jones and 15.1% for the S&P 500. In contrast, Republican presidencies have a median first-year return of -0.6% for the Dow and 3.5% for the S&P 500. This trend remains over a full four-year term. Democratic presidencies show a higher median return of 9.1% for the Dow Jones and 5.8% for the S&P 500, whereas Republican presidencies see a median return of 5.3% and 4.7%, respectively. This suggests that the market may favor a Democratic leadership, both initially and over the full terms.

Sector performance shows how stocks react to presidential elections

What the chart shows

This chart illustrates the relative performance of various S&P 500 sectors compared to the benchmark index during US presidential election years. The years in which each sector underperformed the S&P 500 are shown on the left and those in which it overperformed are shown on the right, with the colors representing the political party of the sitting president during that year (blue for Democrat, red for Republican.) This visualization helps identify patterns in sector performance that may correlate with different political administrations.

Behind the data

Historically, the Energy, Consumer Discretionary, Financials, and Communication Services sectors have shown a tendency to consistently outperform the S&P 500 during election years.  However, the most notable observation from this chart is the clear correlation between sector performance and the political affiliation of the elected president. The Consumer Discretionary and Communication Services sectors have shown strong outperformance in all years when a Democratic president was elected, while the Financials sector has reliably outperformed during elections that resulted in a Republican president. This pattern suggests that different sectors may react positively to the anticipated economic policies of each political party.

US dollar remains strongest since Reagan era but faces downward trend

What the chart shows

This chart breaks down the performance of the US Dollar Index (DXY)—which tracks the value of the USD against a basket of six major currencies—since the start of each presidential term. The X-axis represents the days since each president’s inauguration while the Y-axis shows the percentage change in the DXY.

Behind the data

As the chart shows, the current strength of the US dollar has only been surpassed once—during Ronald Reagan’s presidency, when emergency tax increases, heightened defense spending, and a Fed funds rate above 11% bolstered the dollar. Earlier this year, the dollar gained some strength amidst uncertainty in current Federal Reserve policy and the decline of the Japanese yen, but it is  now on a downward trend.

Republican sweep leads betting odds for 2024 but split government remains a strong contender

What the chart shows

The balance of power in the US government is determined by the outcomes of the presidential, House and Senate elections. The chart above shows the current Polymarket betting odds for all eight possible combinations of these outcomes. A Democratic sweep indicates that Democrats win the presidency, Senate and House, while a Republican sweep means Republicans win all three. Red-shaded areas represent scenarios where Donald Trump wins the presidency, while blue-shaded areas represent scenarios where Kamala Harris is the victor.

Behind the data

Among all possible outcomes, a Republican sweep is currently the most likely, with about a 30% probability. A Democratic sweep is also relatively likely, with odds of around 24%. Together, this suggests that in more than 50% of scenarios, one party is expected to control all three branches of government. The balance of power is crucial because a sweep enables a party to more easily pass its legislative agenda. However, with a nearly 46% chance of a split balance of power, we could see significant gridlock in the American government.

Spike in Misery Index reflects post-pandemic economic struggles

What the chart shows

The Misery Index is a measure of economic distress, calculated by adding the seasonally adjusted unemployment rate to the inflation rate. This chart tracks the Misery Index from 1950 to 2024, highlighting its levels during each US presidency from Truman to Biden. Each president’s term is color-coded, with red for Republicans and blue for Democrats. The grey line represents the unemployment rate over time while the red line shows the Misery Index. The area between the two indicates the portion of economic distress attributable to inflation.

Behind the data

Before the pandemic, Americans were experiencing an almost historically low misery index; the country was near full employment and inflation rates were close to the 2% target. However, at the start of the pandemic during Trump’s presidency, the index surged to 15 before easing slightly to 12.5 under Biden. From a historical perspective, the US saw spikes in both inflation and unemployment during much of the 1970s and 80s, as well as in 1991 and 2011.