Charts of the Week
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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
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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...
US MBS offers attractive yields vs corporate debt
By Carlo Ciabuschi, CAIA, CFA, Portfolio Manager, Inter Fund Management
The above charts provide a concise overview of the US mortgage-backed securities (MBS) market, based on the Bloomberg LUMSTRUU Index.
Left chart: This tracks yield to worst (YTW), duration and average coupon. Duration has dropped to 5.4 years, driven by falling yields and an increase in prepayments.
Middle chart: This compares the current 30-year fixed mortgage rate (6.15%) with the average rate on existing mortgages (3.92%). It also highlights two key spread metrics: Option-adjusted spread (OAS) at 38 bps and the current-coupon spread vs. Treasuries at 125bps.
Right chart: This contrasts US MBS OAS with US investment-grade (IG) and high-yield (HY) corporate OAS. It also shows the San Francisco Fed proxy rate and the MOVE Index, emphasizing that MBS appear cheaper than US Corporate debt.
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.
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German business confidence stuck at a red light
This morning, Germany’s Ifo Institute released August figures for its widely watched business survey – and it confirmed the nation’s economic contraction. The business climate index slid to a three-year low of -20.9.
The top pane of the chart uses Ifo’s “traffic light” configuration to compare the three-month change in reading to this measure’s historic range, which has been split into three slices: green, yellow, and red. This summer’s data points have been not just well into “red light” pessimism (the bottom 33 percent of all readings) but at the very bottom of the distribution.
The bottom pane tracks the value change versus 3 months ago – including today’s reading: a decrease of 12.9 in August.
Why the euro-dollar FX rate moves
What drives the most important currency pair? There are various factors, but conventional wisdom says rate differentials are key: when the ECB was tightening in 2008 and the US was fighting the subprime crisis, for instance, the euro soared as capital chased higher yields.
This visualisation is the result of a rolling regression model we built, attempting to find correlations that explain why EUR/USD moved at a given point in time. We tracked two swap spreads. One is a proxy for the perceived future of rate differentials; the other is for which currency is losing more value to inflation. We added Brent crude – ECB research found that pricier oil is correlated with USD weakness – and we added a MSCI spread tracking whether US or European equities outperformed.
According to this model, inflation is having little influence at the moment. But future rate differentials have a substantial negative influence: if the spread moves in Europe’s favour, the euro strengthens.
Meanwhile, spreads between equity markets have the opposite effect: if US stocks underperform their European counterparts, that tends to strengthen the dollar. This could be related to the “dollar smile” theory: consider a “risk-off” market, where a selloff in US tech stocks coincides with a global flight to safety in the form of US Treasuries and USD.
The second panel shows each factor’s contributions to weekly returns – and also indicates the generally lower volatility in 2023 versus the 2022 “King Dollar” era.
Turkish rate shocks and diminishing returns for the currency
Turkey’s central bank shocked markets on Thursday, raising rates to the highest in more than two decades. (We had recently written about President Erdogan’s new economic team, considering the prospects that the nation would return to a more economically orthodox approach to interest rates and inflation.)
The key policy rate was lifted from 17.5 percent to 25 percent – surpassing the 20 percent consensus forecast. The lira soared.
Will the currency sustain these gains? The lessons of history suggest that previous tightening episodes resulted in diminishing returns.
This chart’s first pane tracks the key policy rate. The second panel tracks TRY vs USD. The shaded areas are the periods that followed rate increases of 2 percentage points or more. (The current period groups together several such increases.)
About two years of lira strength followed the big rate hike in 2006, relatively early in Erdogan’s tenure. Later interventions had an increasingly shorter-lived effect on the currency.
Buy-and-hold didn’t work out in Japan
This chart revisits a previous theme: how long would you have had to hold a given equity index to ensure a decent chance of a positive return?
Crunching data going back to 1986, we analysed the US, Japan, Australia and various European nations’ stock benchmarks.
On a two-year horizon, you would have been best off Stateside. The chances of a positive return were about 85 percent. The first 100 percent guarantee of positive returns comes at the 12-year mark – for Australia.
Japan, due to its 1986-1991 asset bubble, is a remarkable outlier. Only the shortest time horizons had a better-than-even chance of a positive return.
Keeping an eye on global M2 money supply
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Many strategists have a favourite inflation indicator. One of them is the M2 measure of money supply, which includes cash, chequing and savings account deposits, and other short-term saving vehicles.
This chart measures the aggregate 12-month change in M2, measured in USD, across the largest central banks. Money supply grew at a record pace during the pandemic, exceeding the growth seen during the various quantitative-easing programs of 2008-15. This was followed by a record decline in 2022 as central banks tightened policy to tame inflation. (Only China posted positive money-supply growth over the entire time frame of the chart.)
(One prominent Macrobond aficionado says M2 could have helped predict the 2021-22 inflationary episode, and might tell us what is coming next.)
Sluggish construction in China
As China’s real-estate market stutters, the effects can be seen on new construction. This chart tracks construction starts (measured by floor space) across calendar years, showing the median and high-low ranges since 2010.
This year’s trajectory is currently 26 percent below the historic lows of that range.
Most BRICS are in a spiral
The BRICS nations are in the news again. At the group’s summit in South Africa, the five-nation bloc – originally just a strategist’s concept two decades ago, grouping the biggest fast-growth emerging economies – said it would invite six new countries to join, including Iran and Saudi Arabia, as it seeks to champion the “Global South.”
This visualisation uses IMF data to plot each nation’s progress over about 20 years. The X axis measures GDP per capita, relative to the US, in purchasing power parity (PPP) terms. The Y axis tracks growth rates in real terms, i.e. adjusted for inflation.
Measured this way, the five nations have been on very different paths – though all of them show a slowdown in real GDP growth terms over the decades.
Only China has made significant and consistent progress converging with US affluence. South Africa, Brazil and Russia’s spirals reflect deterioration versus the US.
Americans are hitting Vegas like it’s 2007 again
The gambling industry in Nevada continues to boom, even as the economy slows, inflation persists and Americans deplete their savings. Like demand for international travel, Las Vegas is benefiting from an extended period of deferred gratification post-pandemic.
This visualisation measures “gaming win revenue,” the income that casinos make directly from their roulette tables, slot machines and card games.
The first pane shows that this revenue source, measured as a rolling 12-month aggregate, shot through the long-term trend line in 2021. Perhaps ominously, the last time this occurred was the run-up to the financial crisis.
The second pane shows that monthly win revenue surged to a then-record of about USD 1.3 billion in 2021, and has stayed steady around that level ever since.
Major economies dominated (or not) by their capital cities
How different are capital cities from the nations they govern? This visualisation aims to track geographic economic dispersion in several major economies.
Major urban centres are placed on the Y axis according to their GDP per capita (which is also reflected in the bubble size). The larger an urban area is, the further right it is on the X axis.
Paris and London stand out as by far the largest cities in their countries. The French capital also dominates the rest when it comes to GDP. But Britons may be surprised to learn that there are a few cities with higher economic activity per capita than London. (Fast-growing Milton Keynes, home to head offices and manufacturing plants, tops the ranks.)
Germany is notable for the relative economic weakness of its capital. Though Berlin's tech scene and real estate have boomed in the two decades since its former mayor called the city "poor but sexy," its per capita GDP remains well under the national mean.
The US is a truly decentralised economy when compared to the Europeans: it has by far the biggest dispersion in both incomes and city size. Metropolitan Washington, DC, home to defense companies and well-paid government workers, is well above the national mean – but several areas are considerably richer when measured by the per-capita-GDP metric.
Americans’ pandemic-era savings dwindle
US households built a substantial stock of excess savings during the pandemic. Inflation and higher interest rates are rapidly depleting that stockpile.
This chart tracks savings trends pre- and post-pandemic, with the top pane breaking down different contributory factors. The government’s massive fiscal support, in orange, was key, more than offsetting falling income (in dark blue). “Outlays and personal consumption expenditure,” in green, is another important but somewhat idiosyncratic category: in normal times, it’s a drag on savings, but it entered positive territory in 2020 as people slashed their spending.
As the second pane shows, at the 2021 peak, excess savings represented more than USD 2.3 trillion. The savings stockpile is down more than 60 percent since then.
Today, while incomes are rising, PCE is a significant drag – and Americans are making up the difference by running down their savings.
US credit-card arrears hit pre-pandemic levels
While running down their savings, more Americans are also running up unsustainable credit-card debt – especially with cards issued by aggressive regional banks.
This chart tracks delinquency rates on consumer credit cards, making a distinction between cards issued by the 100 largest US banks (in green) and the rest (in blue).
The global financial crisis appears to have changed big banks’ risk tolerance in this segment. Post-2010, the top 100 maintained a historically low delinquency rate – below 3 percent.
For the small banks, delinquencies hit a record high, surpassing 7.2 percent in the first quarter.
The much lower delinquency levels seen during the worst of the pandemic were likely the result of that excess savings cushion from our previous chart.
Intra-year S&P 500 volatility through history
The chart above displays the S&P 500’s calendar-year returns, alongside the low point – or maximum intra-year decline – for each of those years.
Except for 2008 and 2022, stocks had a tendency to rebound from the point of maximum pessimism. Returns were positive in 12 out of 15 years.
Gloomy leading indicators in Europe
On August 16, Eurostat released updated figures for GDP in the eurozone. The positive news: the region avoided a technical recession in the first quarter, thanks to growth of 0.01 percent quarter-on-quarter. Second-quarter growth was 0.25 percent.
However, data points with a track record of being leading indicators are looking more negative for the eurozone – particularly S&P Global’s composite purchasing managers index (measuring sentiment at manufacturing and services companies) and the Economic Sentiment Indicator (ESI), published by an arm of the European Commission.
This visualisation charts quarter-on-quarter real GDP growth rates against the normalised trends for composite PMI and ESI. The past correlation is bearish for economic growth.
A positive-purchasing-power era for British workers?
This visualisation tracks the UK labour market since 2016 in “3D” – enabling us to not only see when workers were beating inflation or not, but when the job market was in a low- or high-vacancy era.
The X axis assesses year-on-year percentage change in average weekly earnings, while the Y axis measures inflation*. The diagonal line, therefore, divides months that saw workers make real wage gains from periods when any gains were more than offset by the cost of living.
Finally, the bubbles are colour-coded by year – and their size reflects the level of unfilled job vacancies.
The extraordinary effects of the pandemic are clearly visible, as is the 2016-19 “old normal” cluster. The tiniest dots in the lower left reflect the worst moments of lockdown in 2020: very few job vacancies and wages in absolute decline – meaning real wages were falling even though inflation was very low.
The fat dots of the labour shortage era of 2021, 2022 and 2023 also stand out. While in 2022, workers were being pummeled by inflation, we moved into real wage growth this year.
Chinese exports decline almost everywhere but Russia
This table tracks the year-on-year change for Chinese exports to various economies and regions. Demand is faltering around the world, except for the Russian market. Amid Western sanctions on Russia, the two economies have stepped up their trade.
The world’s “early hiker” central banks mostly dodged a recession
When inflation alarm bells started sounding in 2021, some countries – mostly emerging markets – acted more quickly than others. Some hiked rates a year earlier than their developed-market peers did.
This heatmap examines nine of these countries, gauging how they have fared since becoming “early hikers” and whether they have avoided recession.
We chose several criteria: 1) whether the average quarter-on-quarter annualised GDP growth for the past two quarters is below zero; 2) whether unemployment grew by more than 0.15 percentage points over three months; 3) whether the three-month moving average of manufacturing PMI is below 45; and 4) whether average quarter-on-quarter annualised industrial-production growth is below zero for the past two quarters. Wherever these criteria are met, the values have a red background shading.
Most of these economies appear to have been robust enough to absorb the tightening by inflation-hawk central bankers. Only Hungary faces a likely recession.
Repeated nonfarm payroll revisions show a weakening trend
US employment numbers for July showed nonfarm payrolls grew by 187,000. That was slightly less than market expectations, but still in line with a soft-landing scenario. (Two of our users generated forecasts in line with this data release: read about how they did it here and here.)
However, equally newsworthy were the revisions to the May and June NFP figures: they were both reduced. Indeed, NFP is revised at least twice by the Bureau of Labor Statistics, so expect the July number to change as well (and for June to be revised again).
In this chart, we track two years of revisions, calculating the difference between initial numbers released and the latest estimate. So far, every payroll number published in 2023 has been revised downwards. The cumulative revisions since the beginning of the year represent a loss of 245,000 jobs.
Signs of a producer price inflation rebound in China
This chart tracks raw materials purchase prices for the manufacturers’ Purchasing Managers Index (PMI) for China. It also shows the historic correlation with producer price inflation (PPI)– which measures the average change in price of goods and services sold by producers and manufacturers in the wholesale market. (PPI is often a leading indicator for consumer price inflation.)
As PMI prices leave negative territory and climb toward the neutral line of 50, PPI’s year-on-year deceleration is also easing. Given China’s role in the global economy, inflation hawks will be watching.
Foreign direct investment in China declines
China also published its second-quarter balance-of-payments figures this month.
Direct investment liabilities, a proxy for inward foreign direct investment, fell to USD 4.9 billion, a historic low.
The S&P 500’s probability curve for positive returns
This chart crunches historical data to examine the chances of making money from the S&P 500, depending on how many years you’ve been invested.
There’s a steep curve at the beginning. If you’ve been invested for a week, your chance of a positive return is 56 percent. If you’ve been invested for a year, it’s 68 percent. And over two years, your probability of making money rises to 78 percent.
Allocating assets with vigilance (and momentum)
Vigilant Asset Allocation (VAA) is an aggressive strategy designed to take advantage of changing trends. It’s a “momentum” play: you invest in asset classes that have recently performed well, based on the long-observed tendency for such assets to keep rising. (Academics attribute this phenomenon to human behavioural biases, such as herding.)
For the purposes of this chart, we created a VAA strategy that calculates a momentum score for seven different “offensive” and “defensive” ETFs.* It then allocates the entire portfolio to the winner every month.
We then compared VAA to returns for a traditional 60-percent-stocks, 40-percent-bonds allocation. Since 2005, VAA has generally outperformed overall, as the top pane shows. The second pane tracks drawdowns, i.e. the decline from the last record high. VAA generally also posted smaller drawdowns, especially during the global financial crisis, suggesting that higher returns came with lower risk.
Interestingly, this is not the case since 2021; VAA has underperformed.
Tracking inflation’s breadth in the eurozone
This chart visualises the breadth of price increases in the 20-nation eurozone over the past four years.
It does this by looking at annualised quarter-on-quarter inflation rates and then “bucketing” every nation into one of four segments: less than 2 percent in green, 2 to 4 percent in amber, 4 to 8 percent in red, and greater than 8 percent in dark red.
The difference between the pre-pandemic era and the inflationary episode that began in 2021 is stark. Up until April of 2021, the norm was that 70 percent of the nations in the eurozone were probably experiencing very little inflation.
By the spring of 2022, all of the nations in the currency bloc were in the two most inflationary buckets.
While 2023 has seen a broadly disinflationary trend as tighter monetary policy takes hold, inflation hawks will note the renewed spike that occurred in April and May.
Global PMI: comparing manufacturers in different regions
The Purchasing Managers Index (PMI) is one of the world’s key economic indicators. Manufacturing executives are polled to get a sense of whether economic activity is contracting or expanding.
This chart looks at the contributions of the world’s various regions to global-level manufacturing sentiment, aiming to assess the more optimistic and pessimistic geographies.
It assesses PMI from 34 major countries and re-centres them at zero. Next, these time series are weighted by their country’s share of value added in global manufacturing. Finally, they are aggregated into their respective regional territories.
For the most part, Asia-Pacific, the EMEA region and North America have seen PMI sentiment move in unison – from a post-pandemic resurgence through late 2020 and 2021 to a shift to negativity in mid-2022. EMEA has been notably negative in recent months, while Asian manufacturers have reported intermittent flickers of optimism.
Satellites are watching the sluggish activity at Amazon’s logistics centres
Amazon reported better-than-expected earnings this week, with CNBC calling the figures a “blowout.” The e-commerce and cloud computing giant returned to double-digit sales growth, while indicating its core online retail division is recovering.
For most of 2023, the Amazon story had been one of cost cutting and warehouse closures after consumers’ pandemic spending boom faltered.
This chart aims to get a sense of real-time activity at Amazon’s US logistics centres using data from SpaceKnow, which uses algorithms to analyse satellite images. The series used here, CFI-S, is a daily aggregation of the area in square meters that changes between two consecutive satellite images – i.e. vehicle movements.
Activity has been dwindling over the course of 2023 – remaining steadily below the average annual trajectory since 2017.
British firms are filing for bankruptcy
A growing number of companies are filing for bankruptcy in the UK. In the second quarter of 2023 alone, 6,342 companies were declared bankrupt – the highest level since the global financial crisis.
What’s going on? The unsettled, inflationary, post-Brexit economy can’t be helping. But this is also likely a delayed impact from the pandemic, worsened by ever-increasing interest rates. To preserve employment, government subsidies and loans kept many businesses afloat through 2020-21 (as this chart shows).
The burden of repaying these loans has resulted in “zombie” companies, and operators and creditors appear to be pulling the plug.
As our chart shows, the largest contribution (shown in green) is Creditors’ Voluntary Liquidations, a process that is typically applied when debt-burdened, insolvent companies liquidate their business – but involve their creditors in the process to reduce losses. (There are currently relatively few administrations, which occur when there’s the perceived chance of saving a business, or compulsory liquidations, when creditors ask the courts to step in.)
Yield curve control loosens in Japan
The Bank of Japan is the last major central bank to maintain ultra-loose monetary policy. Markets have been watching for signs that a true tightening cycle will begin, given that inflation is running hot.
As our chart shows, the yield curve control (YCC) range – the shaded grey area – was widened at the start of this year, which we wrote about in January. The YCC allows the BOJ to control the shape of the government bond market’s yield curve, keeping short- and medium-term rates close to its 0 percent target.
Recently, the BOJ unexpectedly adjusted YCC again. The 0.5 percent “cap” on 10-year JGBs was watered down; yields will be allowed to move closer to 1 percent.
As our chart shows, the 10-year yield has jumped outside the band. But for now, the BOJ is downplaying the prospects for an “exit” from monetary easing.
India’s stock market is running hot
India’s equity market has rallied to all-time highs, attracting attention from global investors.
This chart uses data from FactSet aggregated by Macrobond to dive into fundamental valuations, comparing Indian equity sectors’ price-earnings ratios with post-2007 norms (as represented by the 5-95, 10-90 and 25-75 percentile bands). The broad market is also included.
As the green dots indicate, 6 of the 10 sub-sectors are trading at PE multiples above the 75th percentile – indicating a richly valued market. The healthcare and non-cyclical consumer sectors have shot above their 95th percentile.
The telecom sector is an interesting laggard on a relative basis, trading near its historic average. This segment also has by far the most volatile historic range.
Visualising US voters’ unhappiness
This chart uses polling data from RealClearPolitics to visualise the proportion of Americans who thought their country was on the “wrong track” at any given moment.
We have tracked this metric over the course of the four-year presidential terms since 2009.
Strikingly, Joe Biden has faced much more voter dissatisfaction in the second and third years of his term than Donald Trump did in his, as the chart shows. Unemployment was low in both 2018 and 2022, but the current president has faced a much higher inflation rate.
The “wrong track” numbers shot up in Trump’s last year, 2020 – touching 70 percent at the start of the pandemic and also at the very end of his term, when the incumbent disputed his election defeat.
Interestingly, voters appear to be so polarised that the “wrong track” number only briefly dipped below 50 percent for a short time – under Obama.
For stock investing, your local currency has rarely mattered more
When investing in equities outside your home market, you’re also trying your hand at a bit of currency speculation, at least in the short to medium term. This has been even more the case over the past 12 months. First, the “King Dollar” period saw the greenback crush almost all competition; this was followed by a retreat.
This chart examines the returns for a hypothetical US investor’s non-American stocks this year. Performance is split into stocks’ return in local currency (in blue) and the currency effect (in green). These net out to a total return represented by the purple dots.
Japan has had a hot equity market this year – but the weak JPY is working against you if you’re measuring your performance in USD. By contrast, US-based investors’ European stock returns have been boosted by EUR strength – and this is even more the case for investors with exposure to Latin American equities and currencies.
Visualising volatile commodities and their moves in tandem
Commodity volatility is a well-known phenomenon. But it can be interesting to visualise how different commodities often trade in unison.
This chart tracks the percentage share of different commodities that were posting a positive monthly return at a given moment over the past four and a half years. Purple represents agricultural commodities, metals are in blue, and energy is in green.
The crash during the outbreak of the pandemic, famous for its negatively priced oil, is clearly visible. Most commodities snapped back after that initial shock.
The unified swoon in mid-2022 is also interesting. The market was unwinding the price shock that followed Russia’s invasion of Ukraine; meanwhile, concerns about rate increases were beginning to weigh on perceptions of US demand. China’s still locked-down economy remained sluggish.
Changing perceptions in the Fed funds futures market
In the wake of the Federal Reserve lifting its key interest rate to a 22-year high this week – and another GDP print that was stronger than expected – this visualisation shows how the elusive “pivot” to rate cuts has been pushed further out, at least as far as futures markets are concerned. (Remember that in May, the market expected a lengthy “pause” through 2023.)
The columns represent five upcoming Fed meetings. The large blue bar indicates the probabilities that are seen today. For the September meeting, futures estimate that there’s a roughly 75 percent chance of the key rate staying in its current range of 5.25 to 5.5 percent; there’s a 25 percent chance of a hike one step up.
The smaller bars represent the market’s perceptions two weeks and a month ago. Interestingly, the market seems to have become more convinced of a Fed “pause” this fall, rather than one or even two more rate hikes.
The market is pricing a very small chance of a pivot in December and somewhat larger probability for cuts in January or March.
Disinflation isn’t a thing in Argentina
Disinflation is spreading around the world, but there are a few exceptions. One is Argentina, Latin America’s third-biggest economy and a nation with grim experience of historic episodes of hyperinflation.
Earlier in 2023, year-on-year inflation soared past 100 percent for the first time in 30 years. In June, the annualised inflation print reached 115 percent.
This chart visualises the change in consumer prices as a steady progression over the course of various calendar years. Last year was an record outlier in recent history, and this year is even worse.
Bitcoin crash cycles
Now that cryptocurrencies have been around for more than a decade, grizzled veterans of the space can say they’ve experienced four different crashes: 2011, 2013, 2017 and 2021.
This chart tracks Bitcoin and compares the lengths, in days, of these four episodes’ drawdowns and recoveries.
The 2011 crash (in blue) was unlike the others: it was the deepest, and also had the quickest recovery to its pre-crash level – 625 days.
The current, post-2021 cycle (in orange) also just hit 625 days. A repeat of the post-2013 and 2017 cycles would see Bitcoin take two more years to climb back to its previous peak.
China’s youth unemployment
Youth unemployment in China has stayed well above pre-pandemic norms following the dismantling of zero-Covid restrictions, even as overall urban unemployment is improving.
Joblessness among 16-to-24-year-olds reached 21.3 percent in June, nearly double that cohort’s level in June 2019.
The seasonality in the chart is notable, showing the effects of new graduates entering the workforce in the summer.
Chinese real estate, city by city
As global real estate comes under pressure from higher interest rates, this dashboard examines residential real estate prices in China’s 70 biggest cities.
This breadth is important given that declines have largely been seen in second-tier markets. By contrast, Beijing, Shanghai and Chengdu, for example, are in much better shape.
The first and last columns track the year-on-year percentage change reported for June (which drives the top-to-bottom ranking) and six months earlier, respectively.
The middle graph aims to visualise how trends have evolved since mid-2022 – and how the distress appears to be stabilising. The blue bars show the latest year-on-year price change; the green dots represent that figure’s value six months earlier, which was worse (i.e. further to the left) for most cities.
A cooling US inflation heatmap by sector
This heat map examines the cooling trend in US inflation from a new angle. It breaks down different sectors using the statistical deviation (or Z-score) from the normal rate of change.
As the “legend” column indicates, bright blue indicates year-on-year growth in CPI that is far below the norm. Bright red indicates inflation in that sector was running much hotter than usual.
As the “all Items” overall reading for June shows, headline CPI is finally cooling down – driven by the transport, medical care and education sectors. Inflation is still running hotter than the historic norm for food, housing – and especially recreation, where price growth is 2.6 standard deviations above the average.
Revisiting US inflation scenarios for 2024
Despite positive signals of disinflation, this visualisation (which revisits an analysis we published almost a year ago) shows just how much of a journey it would take for inflation to flatline completely.
These scenarios chart the potential evolution of year-on-year inflation figures, assuming different month-on-month trends.
A “Goldilocks” soft-landing scenario for Chairman Powell might be the blue line, or something just below it. CPI growth of 0.25 percent month-on-month for the next 12 months would result in the year-on-year inflation print receding to about 2.6 percent, approaching the Fed’s long-term target.
The scenarios represented by the yellow line, and the lines below it, indicate a situation where Powell might have hit the monetary brakes too hard.
On the other hand, if month-on-month CPI stays at 0.5 percent or higher, the year-on-year figure will be even higher than it is today.
Anti-corruption peaks and valleys in the EU
This visualisation uses an index of perceived public-sector corruption compiled by the Social Progress Imperative, a US non-profit organisation, to measure European Union countries.
A higher score indicates that a country is perceived as more “clean.” Predictably, the Nordic nations of Denmark, Finland and Sweden score the best, with little difference from a decade earlier.
What’s interesting is how trends have changed in many other nations since 2011. Italy, Greece and the Baltic states appear to have made notable progress in cleaning up corruption.
Scores for Hungary and Cyprus, meanwhile, are deteriorating.
(Macrobond users can toggle between this visualisation and an alternative “candlestick” chart.)
Brazilian currency volatility, from Lula to Bolsonaro and back
This double-paned visualisation explores volatility and the exchange rate for Brazil’s currency under different presidential regimes.
The top pane tracks weekly percentage change in the real’s exchange rate against the dollar. A notable spike is seen around the global financial crisis of 2008, as one might expect. However, the sustained BRL-USD volatility since the outbreak of the pandemic is remarkable.
The second pane tracks the exchange rate against the dollar. Over a 15-year period, the broad story is depreciation – but higher prices for Brazil’s commodity exports coincide with a stronger real, as we saw during much of President Lula’s first stint in office.
Post-2020, as the world learned to cope with coronavirus, President Bolsonaro’s Brazil was a global monetary policy outlier, as we wrote last year – hiking rates earlier and harder than most, making the real one of the few currencies to appreciate against King Dollar.
Notably, volatility has been receding since Lula returned to office this year.
Rainfall relief in southern India
As we have previously written, El Niño is back. This phenomenon can result in droughts for some Asia-Pacific nations and heavy rain in others. (In May, we wrote about how Thailand’s rice crop was threatened.)
This chart tracks South India, which experiences a monsoon period from June to September every year. The nation’s meteorological department recently confirmed that South India had its hottest, driest June in more than a century.
This chart’s Y axis tracks the positive and negative percentage rainfall difference from the historic average over the calendar year. It tracks both 2023 and the highs and lows from 2020-22. The line for 2023 indeed shows the lower-than-average rainfall in June, while also showing a return to the historic average so far in July.
This visualisation also shows the power of Macrobond’s granular, regional data. Users can access even more local micro-geographies if needed.
US mega-stocks defy gravity
In May, we studied how the largest companies in the US – especially Big Tech – were almost solely responsible for gains by the S&P 500.
This visualisation tracks 3 ½ years of performance by the 10 biggest US stocks by market capitalisation: Meta, JPMorgan, UnitedHealth, Berkshire Hathaway, Tesla, Nvidia, Alphabet, Amazon, Microsoft and Apple.
After swooning through 2022, their combined market cap is almost back at its all-time high. The outperformance by Meta, Microsoft and Apple since January is particularly notable.
Some might say the present period has parallels with the early 1970s “Nifty Fifty” bull market. These were viewed as can’t-miss, buy-and-hold, blue-chip equities, and investors piled into them even after valuations became stretched. (They subsequently underperformed.)