Charts of the Week

A potential green light for stalled economies

China was in the headlines in 2023 for an underwhelming rebound, and Britain’s travails post-Brexit are well-known. But according to the OECD, these two nations have improving economic momentum – relative to their own past five-year experience, that is. 

This chart tracks the OECD’s Economic Composite Leading Indicator for 17 major economies. In the OECD’s words: it’s “designed to provide early signals of turning points in business cycles,” using future-sensitive economic data points that measure early-stage production and respond rapidly to changing circumstances.

Readings are divided into red, yellow and green based on their percentile over five years. We also added smaller dots to show the six-month trajectory. (We published a similar “traffic light” visualisation for the US in February.)  

Worryingly for the world economy, a plurality of nations are in the red zone, suggesting their best recent days are behind them. Deterioration over six months is noted for Germany, Turkey and South Africa. But the indicator shows improvement for the US and Japan.‍‍‍‍‍‍‍‍‍‍‍

Exploring the spikes in global stock markets

This chart has a global take on equities, examining mid- and large-cap stocks in 76 countries. Our analysis counts how many countries’ equity markets have reached a rolling 52-week high (in blue) or low (in red). 

The resulting “stalagmite and stalactite” visualisation provides an insight into the current, more subdued equity dynamics when compared to the global financial crisis in 2007-09, as well as the panic that followed the outbreak of Covid-19. The two US recessions are highlighted in grey.

The red “stalactites” are spikier than their blue counterparts – suggesting that moments of pessimism are global, but optimism is more local.

Geopolitical events and oil prices

Oil prices jumped immediately after Hamas attacked Israel. As the war escalates, threatening to involve more players in the oil-rich Middle East and potentially complicating energy trade routes, our chart analyses the short-term effects of previous geopolitical events on Brent crude.   

Saddam Hussein’s invasion of Kuwait in August 1990 had the most notable effect on oil markets. Less than two months later, prices had doubled. 

9/11 saw a very short-term spike, but oil prices quickly began tumbling amid concerns that a recession driven by the attacks would reduce demand.

Will either pattern repeat itself this time? At the time of writing, this week’s oil-price spike was fading. Traders will be considering the interplay between a weaker global economy alongside the spectre of a wider conflict – as well as OPEC’s determination to cut production. 

Curbed enthusiasm from the IMF

We’ve written several times about the International Monetary Fund’s forecasts. Early this year, it boosted its 2023 outlook on optimism about China’s reopening. But in April, we noted that the IMF had a history of reducing its medium-term forecasts.

In an atmosphere of slowing global growth, the IMF updated its World Economic Outlook (WEO) again on Oct. 10. In the chart above, the right side displays the new GDP growth expectations for various nations in 2023. The left side measures the (mostly downward) revisions compared to the IMF’s previous outlook published in April.

India is forecast to post the strongest growth, at 6.3 percent. Germany and Sweden are notable: they’re among the few countries to receive upward revisions, but the IMF predicts a recession for both.

A fatter savings cushion Stateside

In August, we looked at the stock of excess savings US consumers had accumulated since the beginning of the pandemic. It appeared that this cushion was deflating quickly. 

However, the picture has swiftly changed. When US gross domestic product figures were revised on Sept. 28, statistics on savings were revised as well. Households will have more flexibility to navigate a slowing economy and higher borrowing costs than some observers had expected. 

As our chart shows, revisions increased the current stock of excess savings by 350 billion USD. (This was mainly due to significant upward adjustments made to the income component, which aggregates three variables: employee compensation, proprietors’ income, and rental income.)

US yield curves over the past five years

What a difference a few years, a pandemic and an inflation outbreak can make for the bond market. 

This chart visualises the monthly evolution of the US yield curve since 2018, bolded and highlighted in different colours every 12 months. 

Unsurprisingly, after a record rate-hiking cycle by the Fed, the current curve is at the top. Though the curve is inverted – indicating that longer-term rates are expected to be lower than their short-term counterparts – 30-year yields remain near 5 percent, indicating that the market doesn’t foresee a return to post-GFC inflation levels anytime soon.

At the bottom of our chart are highlighted curves from the worst pandemic years, 2020 and 2021 – before inflation had kicked in and policy makers around the world were vowing to keep rates low for some time.

The 2018 line, in red, might be considered the “old normal.” It’s notable that the 2019 curve, in orange, was inverted; traders were anticipating a non-pandemic-related recession in 2020. 

Countries have been overshooting their inflation targets for years

Central banks began declaring explicit, public inflation targets in the 1990s to boost their credibility. (Famously, the governor of the Bank of England is required to write a letter to the finance minister when inflation significantly overshoots.) In 2012, the Federal Reserve joined in under Ben Bernanke’s leadership, officially adopting a 2 percent target. 

With inflation proving sticky around the world, these targets are being tested like never before. 

The blue bars on our visualisation measure how long it has been since a country was within a percentage point of its central bank’s inflation target. Mexico and the US are closing in on three years. Only South Africa and Indonesia are less than a percentage point from their targets.

The orange/yellow bars, measurable on the Y axis, show the gap between the year-on-year consumer price index (CPI) increase and the inflation target. The UK has the widest gap. 

China is notable for having missed its 3 percent target on the deflationary side for seven months.

Inflation is sticky for more than 80% of Britain’s CPI basket

For a deeper dive into Britain’s inflation problem, we created a diffusion index for items in the CPI basket tracked by the Office for National Statistics. When overlap between categories is removed, we can identify 85 different sub-indices in this basket. 

The upper pane of the chart compares the percentage of these 85 categories where prices are rising more than 2 percent year-on-year (in red) with the percentage where increases are below that threshold or negative (in green).

The lower pane takes the same data but adjusts categories for their weighting in the overall inflation basket. 

The reversal since the deflationary days of the pandemic is stark: some 69 of the 85 sub-indices are in 2-percent-plus price-gain territory. When adjusted for weighting, the burden on the consumer by this metric is even worse. And worryingly for the Bank of England, the proportions have barely moved over the course of a year – in both panels.

A deep dive into German trade

We’ve written several times about Germany’s economic malaise. This visualisation takes a deeper look at Europe’s dominant exporter to show how various industries are performing.

Sifting through almost 100 market segments, our 12-month rolling analysis selects the top 15 exported and imported types of goods.

Unsurprisingly, the top export category for the home of Mercedes and BMW is vehicles. This sector is doing OK, with exports by value rising 19 percent year on year. But several other categories in the top 15 are stagnant at best.

On the other side of the trade balance, falling imports of oil and gas (presumably from Russia) can clearly be seen. ‍‍‍‍‍‍‍‍‍‍‍

Weighting the most recent CPI prints to create "instantaneous inflation"

This chart is inspired by a recent academic paper that discussed the concept of “instantaneous inflation.” Annualised monthly inflation rates are weighted to give more recent readings greater importance; this is then used to calculate a 12-month inflation rate. 

Macrobond created an instantaneous inflation model* – charted in purple – and compared it to traditional measures of the consumer price index: year-on-year (in blue) and annualised month-on month (in bars). 

Giving more importance to recent prints in this way is a method of capturing rapid price shifts. Until mid-2022, instantaneous inflation was above conventional CPI as prices increased more and more quickly each month. From the second half of 2022, the trend changes: prices increase more slowly, so the instantaneous inflation line falls below year-on-year CPI.

The latest data point shows the Fed’s dilemma: a 7.8 percent month-on-month CPI gain is pushing instantaneous inflation above annual CPI again. (The next CPI print is coming on Oct. 12.) 

Where the Fed historically had rates the last time inflation was this high‍

What was the “usual” Fed funds rate in past decades when US inflation was this high? This chart aims to compare the historic median to the present day – perhaps suggesting why more people are predicting “higher for longer.”

We selected four measures of underlying inflation: the core consumer price index (CPI) and core personal consumption expenditures (PCE), which both exclude food and energy; and the “trimmed mean” CPI and PCE, which exclude components with extreme price movements.

For August, these measures of inflation ranged between 3.9 percent and 4.5 percent year-on-year. We then calculated a Fed funds rate (FFR) median for every month since 1960 that these four measures were in a 50-basis point bucket that includes the August 2023 reading. (I.e. months when the two CPI measures were between 4 percent and 4.5 percent, and between 3.5 percent and 4 percent for PCE.)

In all cases, the Fed’s median key interest rate was above 7 percent, compared with the current range between 5.25 percent and 5.5 percent. For trimmed-mean CPI, the Fed’s median rate was almost 9 percent when inflation was as elevated as it is today. 

(Futures markets still don’t believe Jerome Powell will match such Volcker-era tightening; a peak around 5.5 percent and cuts in the second half of 2024 are priced in.)

Bond forecasters are getting it wrong in a new way

The Survey of Professional Forecasters, conducted by the Philadelphia Fed, is one of the longest-running forecasting exercises in US macroeconomics. Given this history, which stretches back to 1968, we can visualise many years of expectations versus reality.

As our chart shows, from about 2003 through the onset of the pandemic, America’s top economists frequently predicted that bond yields would rise (the dotted lines), only to see yields fall before a smaller-than-expected increase (or falling some more). Put another way, there was a long-running tendency for observers to declare premature obituaries for the 35-year bond bull market.

After the worst of the pandemic, the bond bear market finally kicked in, but rising yields surpassed forecasters’ expectations. The most recent year shows how forecasters have turned bullish, i.e. calling for yields to start falling; for now, the market is again defying their expectations.

King Dollar is back

We wrote frequently about “King Dollar” in 2022. The greenback was strengthening against almost all currencies during the Fed’s historic tightening cycle.

After those gains unwound somewhat in early 2023, the strong dollar is back as the “higher for longer” view of US rates takes hold, the economy surprises with its resilience and prospects for a pivot to looser policy recede into the future.

This chart tracks the Dollar Index (DXY), which tracks the greenback against a basket major US trading partners’ currencies. In 2022, the dollar broadly experienced more volatility than it did in 2023, as seen by the sharper weekly gains (in green) and losses (in red) in the first panel.

But the second panel highlights how, measured by a “winning streak” metric, the current surge is even more impressive. DXY is about to appreciate for a 12^th consecutive week; the last time that happened was in 2014.

US-China bond-yield spreads and the dollar-yuan exchange rate‍‍

As US and Chinese rates diverge, the yuan is declining. The renminbi reached 7.34 per dollar last month, the lowest since 2007. 

This chart plots daily observations of the year-on-year change in CNY/USD and the spread between 10-year Chinese and American government bonds. 

The last two months of observations are highlighted in the oval (steady year-on-year depreciation and wide spreads). These readings coincide with the growing acceptance of the “higher for longer” US interest-rate narrative as prospects for a Fed “pivot” recede into late 2024. By contrast, China has been cutting key lending rates to support the economy.

Long-term, bonds almost never outperform equities

One of the clichés about investing is that equities generally outperform bonds over time. This maxim is backed up by our visualisation. 

The relative analysis is based on the S&P 500 and 10-year US government debt, evaluating historic performance going back to 1871. Bonds and stocks are examined on a total return basis, i.e. including interest, dividends and distributions as well as capital gains. 

Even on a one-year basis, there’s only about a one-in-three chance that bonds will outperform stocks.

Euro users’ SWIFT departure

This chart tracks currencies used for transactions on SWIFT (the Society for Worldwide Interbank Financial Telecommunication). This Brussels-based network handles global interbank payments. 

It revisits a visualisation we used in a blog earlier this year on the potential for global “de-dollarisation.” 

But not only is SWIFT becoming ever more “dollarised;” proportionally, the euro’s share is plunging more than that of the greenback is rising.

Two years ago, both currencies had about 40 percent of global payments. Now, the dollar now accounts for more than 48 percent of SWIFT transactions by value, while the euro’s use has almost halved, sliding to 23 percent. Both figures are 10-year records. 

It’s not clear why these trends have gathered pace in recent months. (Slumping German exports, combined with the re-emergence of King Dollar inflating the value of transactions in the US currency, perhaps?)  

The dollar isn’t shoving everyone else aside: BRICS nations may be having some success in their efforts to increase trade using their currencies. The share of Chinese yuan and “others” on SWIFT is creeping higher.

"Higher for longer" in the Fed dot plot

This chart shows why the Federal Reserve’s latest move was called a “hawkish pause.” The “higher for longer” interest-rate scenario is weighing on markets, even as policy makers unanimously voted to hold rates steady on Sept. 20. 

To assess what policy makers are thinking, we turn to the “dot plot,” the Fed’s de facto monetary-policy forecast. Board members and regional Fed presidents are polled, resulting in 19 “dots” showing where they see the Fed funds rate at the end of 2023, 2024, 2025 and 2026.

This visualisation compares the dot plots released after the June (blue) and September (orange) Fed meetings. Broadly, policy makers are now expecting fewer rate cuts. Two outliers have removed their predictions of significant cuts in 2024; five “dots” call for rates above 4 percent in 2026, a scenario that was not being envisioned three months earlier.

The second pane tracks the median prediction to show how the dot plot has generally shifted upward. Note that it still implies one more rate hike before the end of 2023.

JPMorgan boss Jamie Dimon, one of the most public faces of Wall Street, recently mused that the Federal Reserve might end up having to hike its key rate to 7 percent to tame inflation. None of the dots in the plot are going that far for now.

(In June, we wrote about how the dot plot was already creeping toward a higher-for-longer scenario, using a different visualisation.)‍‍‍‍‍‍‍

China’s falling exports by region

Chinese exports have been falling since May. As of August, exports were down by almost 10 percent year-on-year, the fourth consecutive monthly decrease on that basis, as our chart shows.

Our chart also breaks down demand from the various regions that import goods from China. (As such, it’s an alternative to a visualisation we published in August.) 

All export markets are displaying a decrease, with the exception of Russia. The rest of Asia (in green) had been a bright spot early in 2023, but no longer.  

The travails of the EU’s biggest economy

The phrase “sick man of Europe” was coined to refer to the late Ottoman Empire. In more recent decades, commentators have applied the phrase to dysfunctional economies. In the 1970s, it was Britain; in the 1990s, it was Germany as its economy struggled post-reunification.

The German economy roared back to life from the mid-2000s, benefiting from an export and globalisation boom and spearheading European growth. But since the disruptions from the war in Ukraine, some observers are bringing the “sick man” label back as barriers to globalisation and the end of cheap gas from Russia complicate the nation’s industrial model. 

We compared Germany – using bars to make Europe’s largest economy stand out more clearly from the lines on the chart  – to the aggregate euro zone as a whole (including Germany) and other EU nations. GDP is compared to pre-pandemic levels for all countries.

Germany’s economy resisted the Covid crash much better than some of the others. But for more than a year, its performance has trailed its neighbours. Germany’s economy is barely bigger than it was at the end of 2019; even French GDP is 1.7 percent above that level, and other nations have rebounded even more strongly.

The inverted US yield curve is reaching early ‘80s proportions

An inverted yield curve – which occurs when long-term interest rates are lower than short-term ones – used to be a reliable warning that a recession was coming soon. The theory: the yields reflect how traders are predicting that higher borrowing costs will slow the economy, prompting central banks to cut rates in the future.

We have written about the inverted curve several times over 2022-23. But an inversion has become a standard feature of the market, even as forecasters backed away from predicting recession.

This chart visualises the 10-year/2-year US government bond spread over the past five decades. The spread reached severely negative territory several times in the late 1970s/early 1980s period, when Paul Volcker ran the Fed. After that, much smaller inversions preceded the early 1990s, early 2000s and GFC recessions (highlighted in gray).

The second panel tracks the number of consecutive days that an inverted yield curve lasted. We have just exceeded 300 days – the longest inversion since 1980.

As some commentators have written recently, the inverted yield curve may not be as reliable an indicator as it once was.

The slow rebound of air travel in and out of China

China's air travel market has seen a significant upturn after zero-Covid policies were relaxed this year. But the rebound is domestically driven.

As this chart shows, passenger numbers for air travel inside the country have just returned to the pre-pandemic long-term trend.

International air travel, however, remains less than halfway to that long-term trend line.

Discrepancies in measuring the US economy

This chart compares US gross domestic product with gross domestic income. GDP includes an economy’s expenditures: consumption, net exports, investment and government spending. GDI, which is more challenging to measure, comprises its income: the sum of all wages, profits, and taxes, minus subsidies. 

Since one person’s expenditure is another’s income, GDP and GDI should, in theory, be equal. However, statistical discrepancies mean there can sometimes be sizeable differences. (These discrepancies are one of the reasons why economic statistics are so frequently revised, demonstrating the importance of Revision History.)

We’re experiencing a historically large spread between these series in year-over-year terms, with GDP exceeding GDI by almost 3 percentage points. We saw the opposite extreme in 2021, where the spread was about 4 percent in GDI’s favour. But the figures were later revised, more than halving that spread. Will history repeat itself?

Given that the GDP-GDI spread widened for unclear reasons during the pandemic, this poses a challenge for policy makers assessing the health of the economy. Some observers believe that GDI is the better long-term indicator, and thus the economy is not doing so well.

Funds keep flowing into US money markets

Higher rates since mid-2022 have meant steady inflows into money-market funds, as our chart shows. Both retail investors and institutions are attracted by higher returns on their cash.

This visualisation splits the inflows into institutional and retail investors, and tracks the month-on-month change. A spike can be seen in early 2023, when the Silicon Valley Bank failure and related tensions in the banking system prompted depositors to shift funds to money markets. (Institutional investors also sought to park their cash in a less volatile corner of the market during that crisis.)

But the month-on-month, week-on-week increases have continued, especially among retail investors.

Hurricane occurrence in the United States

This ‘bubble string’ chart visualises the occurrence of hurricanes in the United States over time, categorised by their intensity and month. The data spans from June 1851 to September 2022 and comes from the National Oceanic & Atmospheric Administration (NOAA).

Each category is color-coded and labelled on the y-axis to the right. The size of the bubble size corresponds to the number of hurricanes in that category for a particular month.

A reflection on 100 editions of Charts of the Week

It’s the 100^th edition of Charts of the Week – your road map to making the most of Macrobond’s visualisations and a succinct digest of trends in the global economy. 

As we reach this milestone, we’re looking back to where it all began. 

The first COTW was published on October 1, 2021. The world economy remained deeply disrupted by Covid-19, even as governments had mostly lifted lockdown measures and rolled out vaccines. As such, half of our charts focused on the market for tourism and international travel more generally, which remained largely depressed.

This chart visualised data from the US Transportation Security Administration, measuring the number of people who passed through airport security checkpoints. The second pane showed the shortfall when compared to the 2019 average.

We’ve updated this chart to show its evolution to the present day. As you can see, US air travel slowly but surely normalised to pre-pandemic levels. 

Historical trends: The Fed's hiking cycle and timing of recessions

There has been much speculation about when the Federal Reserve will end its hiking cycle and when the next recession will hit. Our chart sheds light on the relationship between these two factors by examining how long it takes for the economy to slip into a recession after the Fed stops hiking rates.

The chart reveals a historical pattern: during the 1970s and 1980s, recessions followed closely on the heels of rate hikes. However, things have changed since then, as the gap between the peak interest rate and the onset of a recession has widened. In three out of four cases, a recession occurred more than a year after the Fed's rate hikes concluded. 

This begs the question of whether the current situation will buck this trend, or if we should prepare ourselves for the possibility of a delay of up to a year before the next recession emerges.

Asset class valuations visualised‍

Investing in US equities, particularly in the technology sector, has been a popular choice amongst investors and has generated impressive returns over the past decade. However, given the current economic climate characterised by high interest rates, inflation, and recessionary risks, other asset classes and regions are becoming increasingly appealing and may offer potentially profitable returns. 

This chart shows the "Z-Score" of different assets, based on 20-year average valuation measures. A Z-Score measures how far an asset's valuation has strayed from its mean level. A score of zero indicates that the valuation is identical to the mean and a score of 1.0 indicates that the price is one standard deviation above the mean. Negative scores indicate that it's slipped below the mean.

In this visualisation, we compare the current Z Score of several assets’ valuations vs the end of 2019. When the current valuation is higher than it was at the end of 2019, the stripe is shown as GREEN, while it is shown in RED if the valuation is lower than at the end of 2019. The stripe also shows the range that the valuation has moved between the end of 2019 and now. 

Hedge Funds beat S&P 500 in bear markets

Looking at the chart above, we see a comparison between the annual returns of the S&P 500 and various hedge fund indices from HFR Research. The chart uses conditional formatting to highlight the performance difference between the S&P 500 and the corresponding hedge fund index. Green indicates better performance for the hedge fund index.

What's interesting is that hedge fund indices tend to outperform the S&P 500 only during the years when the equity index shows negative returns. This is, perhaps due to their ability to find returns in other asset classes when equity markets are down.

Oil market faces supply squeeze as output is cut

As Saudi Arabia decided to prolong its 1 million barrel-a-day output cut until the end of the year, announced jointly with Russia reducing its oil exports, the oil market is now facing a supply squeeze.

The chart above indicates, in the current market state, supply will be short of 3 million barrels at the end of year, aggravating tensions on the oil market as consumption surges. The combined announcement will force consumers to deplete their inventories, pushing oil prices up.

Rising energy prices have adverse impact on German industry‍

The chart analyses the headline industrial production and contrasts it with the industrial production levels of energy-intensive industries in Germany. The data is recalibrated to 100 in 2015.

There has been a decrease in the share of car manufacturing, which has led to a downturn in the German industry. This has put pressure on Berlin to revive the economy. The region's industrial hub has been adversely affected by increased energy prices, higher interest rates, and reduced trade with China - its second-largest export market.

Indian foreign direct investment shows steep decline

Foreign direct investment (FDI) in India has experienced a significant decline since the beginning of the year, as evidenced in the chart above. The data reveals a decrease of nearly 50% in foreign investments compared to the same period last year, measured on a 12-month cumulated basis.

Typically, only repatriation of capital adversely affects FDI inflows, which is represented by the purple columns in the chart. However, it has been a decade since gross inflows have contributed negatively to net inflows. Several factors, such as high inflation, recent geopolitical tensions, and weak demand in the United States and Europe, have led to a depletion of inflows, primarily in the start-up sector.

The market’s take on a future ECB pivot

In a split decision, the European Central Bank lifted its key interest rate by a quarter point to 4 percent yesterday, the highest level since the institution was created in the 1990s. The ECB also cut growth projections while lifting inflation forecasts. However, analysts and markets interpreted the ECB’s guidance as suggesting this “dovish hike” is probably the last one, and the euro fell. 

To quote the central bank directly: “interest rates have reached levels that, maintained for a sufficiently long duration, will make a substantial contribution to the timely return of inflation to the target.” 

What is the futures market telling us today?

This chart looks at euro short-term rate futures as a guide to market expectations for further ECB rate moves. Indeed, there are few bets on another rate hike in the remainder of 2023. And the chart also implies that the central bank will pivot to its first rate cut in the spring. 

This chart has moved substantially over the past day. Markets had expected one more hike in 2023, but weren’t sure when it would come. Macrobond users can click through to the chart and toggle the date to see how it looked before the ECB’s meeting.‍‍‍‍‍

More American workers are striking

Given the tightness in the US job market, it should be no surprise that there are more labour disputes than there used to be. 

For the first time ever, the United Auto Workers are on strike against all of the Big Three car makers at once.. In theory, 145,000 workers could walk off the job, but for now, fewer than 13,000 workers are striking in targeted action against three plants. 

This chart measures the total number of people on strike in a given year since 1990. (Only strikes involving more than 1,000 individuals are tracked, and the breaking UAW news overnight is too fresh to be included.) The second pane creates “eras” to compare by calculating five-year averages.

Generally, the post-1990, pre-pandemic period was notable for how few labour disputes occurred. The only year to have more striking workers than 2022 was 2003, when 70,000 supermarket staff walked off the job in Southern California. Will the UAW shatter that recent record?

Shanghai commodities: precious metal bulls, nickel and fuel oil bears

This chart looks at the futures positioning for different commodities on the Shanghai Futures Exchange. Investors who are betting on price increases or declines are netted out to create an overall positive or negative position.  

The right-hand columns show the commodities’ price performance in yuan. It’s notable that investors are betting nickel has further to fall after declining more than 25 percent this year, partly due to a disappointing recovery in Chinese demand. 

Rubber and fuel oil prices, meanwhile, are up, but futures positions indicate that speculators believe these commodities will unwind their gains.

As for the biggest net long positions, they’re in silver and gold. Notably, the Chinese central bank has been stocking up on bullion throughout 2023. As for silver, it too is a precious metal, but one with more industrial applications, including emerging green-energy technologies. 

Seasons for positive or negative economic surprises in the eurozone

This chart tracks the Citigroup Economic Surprise Index – which aims to measure whether economic data is coming in below or above analysts’ expectations. 

For the euro area, Citigroup’s methodology suggests there is an interesting seasonality effect: over time, the average shows that indicators tend to beat estimates in the winter and disappoint in the summer.

For the first half of 2023, the eurozone’s Economic Surprise Index was more positive than the historic trend. Since the end of June, reality has been more disappointing than usual.

Peaks and troughs in Chinese housing

This chart takes a 10-year look at the residential real estate market for 70 major cities in China, giving some context for recent years’ slump and a short-lived rebound in 2023. 

Using monthly data, these cities were grouped into three buckets: month-on-month property price increases (red), decreases (blue) or no change (orange). 

For most of the past decade, 60 percent or more of China’s big cities were experiencing monthly price increases, as the preponderance of red on the chart shows.

The slump in 2014 is notable, as is the rebound in 2015 after the central bank lowered interest rates. 

France’s nuclear plants are back in business in time for winter

In December, we wrote about France’s ill-timed nuclear power-plant repairs. Maintenance issues required EDF to power down several reactors just as Russia cut gas supplies to western Europe and the Nord Stream pipeline was sabotaged. Electricity prices soared.

This week, we are revisiting that chart of French nuclear power output, and it’s a much happier picture. As the purple line shows, 2022 output set 10-year lows. But the line for 2023 output is in dark blue and has been steadily gaining against the 10-year average – recently surpassing it. 

This is a hopeful sign for the European electricity grid as the Russia-Ukraine war grinds on and the continent faces another winter with much less gas from its traditional source. Indeed, France overtook Sweden to become Europe’s top net power exporter recently, while Germany, which recently shut down its last nuclear plants, has moved from power exporter to importer. 

Government budget deficits close the Covid chasms

More than three years after the worst of the pandemic, governments are repairing the public finances.

This chart looks at governments’ budget deficits or surpluses as a percentage of GDP. It compares the most recent quarterly figure to the second quarter of 2020, when the pandemic was having its peak fiscal effect: populations were locked down, tax receipts were plummeting as a result, and governments were rolling out emergency support to businesses and workers whose jobs had disappeared overnight.

Norway’s oil wealth makes it a special case on this chart – running the smallest deficit in 2Q 2020 and the biggest surplus today. Australia has been smashing its earlier surplus forecasts amid a robust labour market and healthy commodity prices. 

The oil market and the US SPR

Oil has been in the news as Saudi Arabia and Russia decided to extend production cuts for the rest of the year. There is another noteworthy government player when it comes to this critical commodity: the US Strategic Petroleum Reserve. Famously, President Biden ordered that oil be released from the SPR in 2022 to cushion consumers against the Ukraine war’s impact on gasoline prices. 

This visualisation’s top pane tracks the year-on-year change in the price of Brent crude (in blue) against the year-on-year change in total US oil inventories (in green, on an inverted axis).

As the chart shows, historically, these variables are negatively correlated and the lines move in unison: when inventories go down, prices go up, and vice versa. (The post-pandemic demand snap-back is notable in late 2020: inventories plunged and prices rebounded.) 

However, the 2022 SPR episode is clearly visible as a gap opened up between the two lines. The second “inventory breakdown” pane shows why this occurred: the SPR (in purple) kept releasing oil while commercial oil companies rebuilt inventory.

While that “commercial” segment has been rebuilding reserves lately, the SPR has not: it remains at its lowest level since 1983, with the Department of Energy waiting for a cheaper refill price.‍‍‍‍‍‍‍‍‍

A closer look at India’s buoyant economy

The world’s eyes are on New Delhi, where Indian Prime Minister Narendra Modi is hosting the G-20 summit. He is presiding over a hot stock market (as we wrote about recently) and an economy whose growth has defied regional headwinds, including China’s slowdown and a spike in food prices over the past year. Amid a government infrastructure push, GDP growth in the second quarter was 7.8 percent compared with a year earlier. 

This table examines key economic indicators for various aspects of the Indian economy, with darker blue and red squares indicating readings that are notably statistically deviant from the rolling three-year average.

PMI for both services and manufacturing stand out – showing how executives in these sectors are notably optimistic about demand. 

On the negative side, slumping rail freight traffic and sales of fertiliser to the key agricultural sector are indicators to watch. 

Modeling more market momentum strategies

We’re modeling another investment strategy, following the “vigilant asset allocation” you might remember from last month.

This chart tracks the long-term results of a strategy called Composite Dual Momentum (CDM). It divides a portfolio in four, with each portion targeting a different part of the markets: equities, credit, real estate and “economic stress” (which means the safe-haven assets of gold and long-term US government bonds). 

CDM selects the best performing asset within each asset class (relative momentum) but only if their recent returns are positive (absolute momentum). If neither of these criteria is met, it invests in cash.

When comparing the 25-year performance of CDM to the traditional 60-percent-stocks, 40-percent-bonds allocation, the momentum play usually did better, especially during the GFC and the early 2010s. However, the strategy’s performance gradually eroded.

The second pane shows CDM returns as a multiple of the 60/40 since 1998, as well as the drawdown from the peak returns of both strategies. 

CDM has much smaller drawdowns, thanks to its high sensitivity to risk, but the “cash default” option has probably held back its performance lately. 

Germany’s lower confidence (and inflation)

This chart examines the interplay between business confidence and inflation in Germany. Recently, both have come down – showing how central bankers get inflation under control by raising interest rates and thus deflating “animal spirits” in the economy. 

This “clock” charts business confidence (the six-month change in the Ifo institute survey) against inflation (also expressed as a six-month-change to the year-on-year rate). 

Germany has been undergoing disinflation for most of this year, entering the bottom half of the chart. And as confidence erodes, we have headed to the bottom left quadrant – where we have added some grey dots nearby to represent readings during the global financial crisis.  

This is in stark contrast to where we started in the cycle – optimism amid relatively mild inflation in 2021. 

The Jackson Hole effect

Every August, the Kansas City Fed holds its annual symposium in the Wyoming mountain resort of Jackson Hole. Central bankers discuss economic trends, and their pronouncements regularly move markets. 

This table looks at the price performance of the S&P 500 before and after every Federal Reserve chairman speech in Jackson Hole since 1998. (We omitted 2013 and 2015 as Ben Bernanke and Janet Yellen, respectively, did not attend in those years.)

The Bernanke era was famous for hints about quantitative-easing programs delivered at Jackson: note the patch of bright blue in 2009-11 as longer-term market gains followed the Fed chair’s speeches. 

“The “win ratio” is the percentage of times that returns were positive in a given time horizon/column. It suggests a broad “Jackson Hole effect” exists – a boost for stocks after the Fed chair’s speech (fading over time without a Bernanke QE hint). Indeed, this year, markets interpreted Jay Powell’s speech as “no alarms, no surprises” and stocks went up. 

The left-most column uses Fed funds futures to show expectations of how rates were expected to evolve over the next year. Rates couldn’t go down any further in some of those Bernanke years. But in 2002, markets were pricing in a full 4 percentage points of Fed hiking after a strong recovery from 9/11 and the dotcom crash. (They were a few years early.)

US job cuts are slowing and less tech-heavy; more sectors are hiring again

As Jerome Powell attempts to cool a tight US labour market, the overall picture is mixed. Big layoffs in tech were a notable feature of early 2023. And for the first eight months of the year in aggregate, job cuts have more than tripled compared to the same period a year earlier. 

However, looking sector-by sector – and comparing the first five months of the year to the three months since then – the employment market is showing signs of resilience.

Layoffs are now more evenly distributed across sectors, and (mostly) happening more slowly. The worst-hit industry since June – telecommunications – saw a net 12,500 job cuts. (Pro-rating that sum to 20,750 for a five-month period would have put that sector in sixth place for layoffs in January-May.)

There’s also more green on the chart: about half the industries shown are doing at least some material hiring, offsetting at least part of their cuts. Energy, in particular, has been consistently adding staff and shedding a negligible number of jobs. 

A PPP model says the Swedish krona should be worth even less vs the euro

The Swedish krona is weaker than ever against the euro, stoking inflation and presenting a dilemma for the central bank. (We wrote about some of the headwinds hitting the Nordic country earlier this year.) Is the selloff in the currency overdone?

This visualisation revisits an analysis we used earlier this year for the Chinese yuan: Purchasing Power Parity (PPP) and Interest Rate Parity (IRP). We compare the spot SEK/EUR rate to theoretical exchange rates that perfectly reflect these theories*.

PPP suggests identical goods should be traded at the same price across countries – and FX movements should reflect relative inflation, which is higher in Sweden. PPP thus suggests the krona should depreciate even further – to 12.4 per euro. (Speculation that the Riksbank might intervene in the market could be preserving the currency’s value.)

IRP theory suggests SEK/EUR is closer to the right level. 

The second panel shows periods of over- and under-valuation by these metrics.