Charts of the Week

US bank loans at a time of stress

Amid a spate of US bank failures, we’ve examined prospects for a potential credit crunch from several different angles.

This chart breaks down trends in the value of loans extended by US domestic banks.

The second-quarter turmoil amid the collapse of Silicon Valley Bank resulted in shrinking loan supply, a trend that bottomed out in April. The flow of commercial real estate and C&I (Commercial & Industrial) loans decreased for four consecutive weeks during that period. 

These segments bounced back by May after the additional support provided by the Federal Reserve. Since the collapse of First Republic a month ago, increases have eased.

‍Chinese trips to the shopping mall are leveling off

We’ve added data from SpaceKnow, which combines satellite imagery with proprietary algorithms to generate data about human activity in almost real time. We’ve applied this unique data provider to shine a light on Chinese consumers’ activities.

We’ve written extensively about China’s great reopening and the boost it has given global growth. But will this rebound be sustained?

SpaceKnow offers an indicator that tracks parking activity close to Chinese shopping malls. We’ve charted it against national statistics about urban retail trade. The correlation is high (above 0.7).

While the latter indicator has shown a steady pickup in growth, the satellite data – which is effectively a more recent “nowcast” – shows a sharp slowdown in the year-on-year increase in the number of parked vehicles around shopping centres.

Are consumers returning to online shopping after post-lockdown splurges at bricks-and-mortar shops, or does the satellite data herald a broad slowdown in consumer spending? 

Drought and the US agricultural heartland

We recently wrote about how drought threatened Thai rice production. As the world continues to grapple with food inflation, a lack of rainfall is also hitting the US grain belt. 

This year, drought has compounded difficulties with a winter wheat crop that was already damaged by extreme cold. (Farmers in Kansas normally plant a wheat crop in the autumn that grows during the winter and early spring, with the grain harvested in the summer.)

Our chart tracks the percentage of fields with conditions described as “poor” or “very poor.” The line is well above the last decade’s 25-75 percentile range, let alone the average.

The USDA recently said that farmers in Kansas, the No. 1 US state for wheat production, will likely abandon about 19 percent of the acres they planted last autumn. That’s an increase from 10 percent last year.

All of this has implications for supply in the world wheat market – especially if the UN-brokered deal on Ukrainian shipments through the Black Sea is derailed by Russia.

The UK’s surprising resilience

Defying the Bank of England’s previously ultra-pessimistic outlook, the UK economy was surprisingly resilient in recent months. The IMF recently said it expects the UK will escape recession in 2023, helped by a return of stability after Liz Truss’s brief prime ministerial tenure.

Indeed, while GDP growth has been basically stagnant for four straight quarters, the only period that dipped into negative territory was the third quarter of last year.

The chart above assesses consumer and business confidence surveys and tracks Z-scores, a statistical term describing the variation from the norm. Historically, a drop below 1 standard deviation from the mean has been a sign of recession.

While the average Z-score decidedly dipped below 1 for a time, it did not stay there for long and is rebounding. This indicator did not come close to the depths seen in the 2008 or pandemic recessions.

‍‍Visualising China’s trade partners by deficits and surpluses

This visualisation ranks China’s major trading relationships. 

As the world’s factory, China runs a trade surplus with the economies highlighted in green. The list is led by the United States: China’s exports to its largest trading partner have reached USD 555 billion, about triple the level of imports.

The nations in red are those where China has a trade deficit. They’re generally known for producing the inputs demanded by China’s industrial machine. The list includes commodity exporters Australia and Brazil, as well as Taiwan, the world’s dominant semiconductor producer.

The growth-value pendulum no longer swings in unison for China and the US

Last week, we noted how the rebound in tech stocks was driving the S&P 500 as energy shares faded, a reverse of trends seen in 2022. 

This week, our chart breaks down global equities in a different way – showing how “value” and “growth” stocks (as defined by MSCI indexes) are diverging in different economies. A reading above zero indicates growth was outperforming value, and vice versa for a negative number.

Growth stocks get their name from perceptions of their future earnings potential, while value stocks offer more predictable business models at cheap valuations. 

With tech stocks usually considered “growth” and energy usually considered a “value” play, it’s no surprise that a growth strategy outperformed in both the US and EMs including China during the pandemic year of 2020. 

The US and China have been more divergent over the past year. In China, value is still outperforming growth as local tech shares lag behind their US counterparts.

Real wage erosion finally stabilises in Europe

In 2022, we highlighted how inflation was ravaging wages in Europe, more than wiping out any pay increases. Workers will be happy to learn that they are starting to catch up – or, at least, see their purchasing power erode more slowly.

Wages tend to suffer a time lag before they adjust to inflation spikes. As our chart shows, that adjustment is finally occurring. Adjusted for inflation, wages in the eurozone are down 2.6 percent year-on-year. In late 2022, they were shrinking by more than 7 percent on that basis.

Discrepancies are wide across the region. The Netherlands is posting outright real wage growth, while Italy is lagging behind. But the pattern is very similar across the EU’s member states. 

Should this trend continue, central bankers may begin to worry about the dreaded “wage-price spiral.” Wages in the eurozone increased at a record year-on-year pace in the last quarter of 2022, according to Eurostat.

(It’s notable that the recessions of 2008 and 2020 appear to have been good for real wage growth – assuming you kept your job and were able to take advantage of the cheaper cost of living.)

S&P winning sectors rotate in 2023

This chart revisits our “checkerboard” visualisation in December, which ranked winning and losing industry groups in the S&P 500 for every calendar year.

Adding the year-to-date performance in 2023, the winning and losing sectors have almost reversed. Energy was the only sector with positive returns in 2022; it ranks last so far this year. This year’s top three performers were the three worst laggards of 2022. 

Amid a surprisingly resilient global economy, communications services, technology and consumer discretionary stocks are leading the gains.  

Hard, soft and crash landings through history

The Fed is in search of a “soft landing.” These aren’t mythical, but they are relatively rare.

Our chart aims to classify the time periods before, during and after various US recessions as “hard,” “soft” or “crash” landings. We assess three indicators – the unemployment rate, nominal GDP and inflation-adjusted real GDP – and chart their moves.

Current Fed estimates call for a two-quarter, soft landing recession that begins at the end of this year. We’ve charted this accordingly. Historic precedents include 1970-71, 1960-61 and the early 2000s downturn after the tech bubble popped.  

As for crash landings, the pandemic episode of 2020 is in a class by itself. Perhaps unsurprisingly, the GFC was second worst.

Will this recession be more like the hard landings of the mid 70s and early 80s? The CEO of Apollo Global Management is expecting a “non-recession recession,” where the pain is felt more in asset prices. (The 2001-02 popped dotcom bubble period could be categorized this way.)  

‍Previous Fed rate-hike pauses were in much more positive environments

We wrote recently that high-profile investors think the Fed is done hiking rates. Inflation has slowed for a tenth straight month, and financial stress is elevated after high-profile bank failures. Markets are pricing in rate cuts later this year, but if inflation stays high and the economy is resilient, the Fed could “pause, not pivot” for some time.

In 1985, 1995, 1997, 2006 and 2018, the Fed eased off tightening when the economy was in good shape. Stocks rose. We characterize these as “good pauses.” The current environment is quite different. 

As our table shows, industrial production is stagnating, the Conference Board’s composite of leading economic indicators is sliding, the yield curve is sharply inverted, and banks are tightening their industrial lending standards significantly.

It might be counterintuitive to have the highest unemployment rate in positive green and the current tight labour market in red – but from a central bank’s perspective, this reflects the “buffer” effect, or slack, that high unemployment has to absorb an inflationary spike.

The current inverted yield curve is not a bullish indicator for stocks. Far from a “good” pause, the bright red may be telling us that rate cuts will come soon and a sharp recession is ahead.

‍European consumer confidence is a positive outlier in our economic cycle clock

This is a version of various “clocks” that visualise business cycles through an upswing, an expansion, a downswing and contraction. This clock tracks the business climate for various economic sectors in the European Union over the past two years, and its methodology is based on this research paper. 

Consumer confidence stands out. It took a major swing into contraction from January 2022, even before Russia’s invasion of Ukraine sent energy prices surging. However, it was already in the upswing quadrant by November, and has continuously improved since. 

Persistent inflation and interest-rate hikes pushed most other business sectors into the downswing quadrant. There appears to be light at the end of the tunnel, however, as they move toward expansion; retail trade is already there. Construction, however, remains depressed, and hasn’t started to make a positive turn. 

Steadfast US stock investors defy bearish consumer sentiment

Historically, as the US consumer became bearish, individual investors pulled money from the stock market. That relationship has broken down, as our chart shows.

This visualisation tracks the results of a survey by the American Association of Individual Investors (AAII), which measures the proportion of portfolios that are positioned in stocks. The divergence with the University of Michigan’s consumer sentiment index began in 2020 – a year that saw the pandemic hammer the economy while tech stocks surged. 

The second panel reflects a statistical measure of correlation. For decades, the 5-year rolling correlation spent most of its time above 0.4, approaching 0.7 several times. Recently, that correlation has sunk to zero. 

As consumer sentiment remains in the doldrums, the AAII says its members continue to position more than 60 percent of their portfolios in stocks. 

‍Russian energy revenues slide

This chart tracks Russia’s energy- and non-energy-related government revenue for the first four months of each calendar year. The effects of volatile oil prices can clearly be seen.

Moscow appeared to derive a perverse benefit from invading Ukraine last year; oil prices surged and so did energy revenue.

However, a year later, revenue has tumbled – even though Moscow’s April oil exports rose to the highest since the conflict began.

While international oil prices have come down, sanctions are making a difference too; with the EU banning Russian oil imports, Russia is selling crude at a discount elsewhere. 

‍A tourism recovery across Asia

International travel is steadily resuming across Asia. As our chart of tourist arrivals shows, we well on the way back to pre-pandemic norms. 

We track destinations ranging from the urban bustle of Singapore to the beaches of Thailand (a favoured destination for Chinese tourists) and Fiji (especially popular with Australians and New Zealanders). The top of the chart – 100 on the y axis – represents a nation’s all-time high.
Except for Hong Kong, which reopened later than the rest, tourist arrivals are more than halfway back to former peaks.

As one of our guest bloggers wrote earlier this year, this should provide a significant boost to GDP. 

‍‍Forecasting Case-Shiller house prices with Indicio

Indicio is a machine-learning platform that lets the Macrobond community easily work with univariate and multivariate time-series models to forecast macroeconomic and financial data. (Read more about our partnership with Indicio here.) Indicio aims to combine different modelling approaches, potentially creating a super-forecast that can outperform any single model.

With global real estate in focus as interest rates rise, we’ve used Indicio to generate a forecast for one of the best-known measures of US house prices: the S&P Case-Shiller index. Ahead of the March figures, which will be released on May 30, our model predicts the coming 12 months for a composite index of 20 major metropolitan areas.

Indicio allows us to create a broad range of univariate and multivariate models. We opted to keep 24 multivariate models, using stepwise RMSE (a measure of historic accuracy) to weight each input model. 

Our forecast is quite bearish. It calls for the Composite 20 index to have entered negative territory in March (-1.28 percent year-on-year in the weighted model) and keep dropping from there. 

(For a deeper dive into the methodology of using Indicio, read a longer article about how we forecast US payrolls here.)

Manufacturing gets hit when credit crunches take hold‍

We’ve previously explored worries about a credit crunch in the US. This week, we turn to big business – showing the historic link between tightening loan conditions and manufacturing output.

This chart compares the Federal Reserve’s Senior Loan Officer Opinion Survey (SLOOS) with the Institute for Supply Management’s purchasing managers index (PMI), the well-known survey of manufacturing executives. 

PMI readings below 50 indicate economic activity is contracting. For the SLOOS series, which tracks Commercial & Industrial (C&I) loans, the inverted axis shows the net percentage of bankers reporting tightening credit standards. (I.e., a negative reading is good news, as it means more loan officers are reporting that standards are easing.)

The simultaneous troughs in previous recessions are clearly visible – as is the tandem move today; PMI has shown contraction for six months.

‍The French are economising on food as inflation bites

As French food inflation surged, recently accelerating to an annualised 15 percent rate, households coped by imposing spending discipline unseen in recent history. (Emmanuel Macron’s government, meanwhile, moved to cap retail prices for staple foods in March.)

This chart shows monthly food consumption in constant 2014 prices, removing inflation from the equation. As households broadly grew more affluent, the real household spend increased gradually from 1980 to the late 2010s. After spiking as consumers hoarded food at the start of the pandemic, this measure of spending has plunged almost 19 percent from its peak, as the second panel shows.

While this trend undoubtedly reflects consumers opting for discount retailers, swapping big brands for private labels and choosing cheaper cuts of meat, it’s also reasonable to see the decline as a proxy for a shrinking volume of food consumed.

‍Decade by decade, inflation and rates hit bond investors differently

This chart visualises the environment for buyers of French bonds over the decades, assessing the interplay between interest rates and the inflation that erodes real returns. 

Our chart shows the evolution of real 10-year yields (subtracting inflation from the absolute yield), as well as month-by-month divergence from the decennial average.

The disinflationary 1980s and 1990s were a golden era for fixed-income investors in many countries; after inflation, French bonds yielded well over 4 percent for the better part of 20 years.

The current environment is even tougher than the famously inflationary 1970s. That decade saw real 10-year yields average little more than zero – while since 2020, the average real yield is well into negative territory. 

The Dollar Index and the euro’s rebound

We wrote repeatedly last year about King Dollar: the greenback was rising against almost every other currency in the world.

This year, that trend has reversed.

Our chart breaks down the 2023 performance of the Dollar Index (DXY) – a benchmark that measures the greenback against the currencies of major US trading partners.

In recent weeks, only the yen is depreciating against the global reserve currency. 

The biggest contributor to DXY’s drop has been the rising euro. While many observers of the Fed think that Jerome Powell has finished with rate hikes, the European Central Bank is perceived to have a relatively hawkish bias. That’s the reverse of 2022, when the Fed hiked aggressively, the ECB was slower, and the euro slid to parity with the dollar as funds flowed to the higher yields available in the US.  

‍Thailand’s drought threatens global rice stocks

With the El Nino climate phenomenon back in the news, severe heat is hitting southeast Asia. Thailand is preparing for one of its driest years in a decade, and that’s important as the world grapples with rampant food inflation.

As our chart shows, since March, precipitation in the southeast Asian nation has been well below the average since 2013. It’s also been well below the 20-80 percentile range.

Thailand is the world’s second-biggest exporter of rice. It usually grows two water-intensive crops a year of this dietary staple. This year, the government has asked farmers to grow only one rice crop. The resulting drop in output has the potential to drive up global food prices more broadly.

‍The Italy-China trade conundrum

Europe’s economy is sluggish. China’s reopening has been disappointing to some. But somehow, Italian exports to China are undergoing a massive boom – even as Prime Minister Giorgia Meloni threatens to pull out of a trade deal with Asia’s biggest economy.

As our chart shows, recent monthly figures have broken from the recent trend. One might suspect surging Chinese demand for Italian luxury goods, given how that narrative has lifted France’s LVMH.

However, when breaking down the sectors, we see that the subcategory “Chemicals & Related Products,” which includes pharmaceuticals, is the overwhelming driver. 

As Bloomberg News recently reported, one theory is that China’s consumers are buying a generic liver drug that’s dubiously believed to be effective in preventing Covid-19.

Other theories speculate that medicines produced elsewhere in the European Union are being routed through Italy for re-export.

Even amid financial stress, banks are leading earnings growth in Europe

It might be counterintuitive in a year that has seen a series of US bank failures and the demise of 166-year-old Credit Suisse – but banks are driving earnings-per-share growth in the basket of large-cap European stocks tracked by Macrobond and FactSet.

As the sectoral breakdown in our chart shows, aggregate EPS is up 12.5 percent. Industrials are the second-biggest contributor to that gain after financial stocks. Energy is the largest negative contributor. 

The end of the zero-interest rate era means banks are making more spread on their core lending business. ING of the Netherlands became the latest big European bank to beat profit forecasts this week. 

And as Bloomberg News recently wrote, smaller European banks have been more tightly regulated; larger banks have mostly been cutting their US exposure; and European banks don’t face the same level of deposit competition from money-market funds as US banks do. So far, Credit Suisse is seen as an idiosyncratic one-off.

‍A dashboard for the 60/40 portfolio (versus going all-in on stocks)

Traditionally, financial advisers recommended that investors with a moderate risk threshold put 60 percent of their money in equities, with the rest in bonds. Over the long haul, most academic research agrees that stocks outperform bonds, but a healthy slice of fixed income was recommended to provide downside protection and income.

Post-2008, this so-called “balanced” portfolio would have done well; tech stocks surged, and bonds benefited from ultra-low interest rates. But in 2022, 60/40 had one of its worst years ever.

Our dashboard explores how different blends of equities and fixed income would have performed since 2020, including last year’s annus horribilis. For stocks, we chose the S&P 500; for bonds, we chose the US 10-year Treasury.

Damage from last year’s bond rout means that to have generated any kind of absolute return over the past 3 ½ years, investors would need to have been at least 40 percent invested in stocks. A 60-40 portfolio would have made an average of just 3.5 percent per year, roughly in line with inflation.

If we’ve seen our last rate hike, history suggests upside for equities

The Fed recently hiked rates to a 16-year high. Well-known bond fund manager Jeffrey Gundlach decreed this week that “the Fed will not raise rates again.” 

If Gundlach is right, history suggests that stocks have upside from here. 

As our chart shows, the S&P 500 has risen an average of 12.2 percent in the 12 months that follow an end to a tightening cycle. The 25-75 percentile range includes cycles where the benchmark rose from about 12 percent to almost 30 percent. 

This updates a previous chart, in December, to overlay the stock benchmark’s performance over the past year, assuming that this month’s rate increase was indeed the peak. 

‍Federal Reserve rates tend to peak rather than plateau

This chart tracks the mean and median Fed funds rate in the days before and after final rate hikes in historic tightening cycles. 

When the Federal Reserve stops tightening monetary policy, stocks tend to rise. 

This might seem obvious. But part of this performance might be due to the historic tendency of the Fed to start cutting rates soon after it stops hiking them, as the chart shows. 

Put another way: the Fed generally doesn’t hold rates at a high “plateau” for long. Is this time different? One camp in the inflation debate has long believed that the Fed is more likely to “pause – not pivot” to quick rate cuts.

‍Foreigners steer clear of Turkish debt

Turkey’s voters go to the polls on May 14. Recent surveys suggest that after two decades in power, President Recep Tayyip Erdogan may be headed to defeat.

Reuters recently characterised the choice as “Erdogan's vision of a heavily-managed economy and its repeated bouts of crisis against a return to liberal orthodoxy under opposition challenger Kemal Kilicdaroglu.”

Indeed, Erdogan’s unconventional economic policies have dissuaded foreign investors, as our chart shows. Just 1 percent of Turkey’s government bonds are held by foreign investors – the lowest proportion in more than 15 years. Just five years ago, that figure was closer to 20 percent. 

Foreign investors began divesting in 2018 after Erdogan began publicly pressuring the central bank not to raise interest rates to control inflation. The lira has tumbled almost 60 percent over the past two years, reaching record lows against the dollar.

The internationalisation of China’s renminbi

Two weeks ago, we explored the “de-dollarisation” debate. Returning to this theme, we measure the progress China has made in promoting international use of its currency.

This chart tracks use of the CIPS (the Cross-border Interbank Payment System). The value of receipts and payments in renminbi (or yuan) terms has been gradually rising; transactions using CIPS have surpassed 1 million per quarter.

China introduced CIPS in 2015 after Russia was sanctioned by the US and EU following its annexation of Crimea, complicating the use of the dollar in Russian oil exports. CIPS can be viewed as an alternative to the SWIFT platform, the messaging system that banks use to transfer funds across borders. (Major Russian banks are banned from SWIFT.) 

Our second panel tracks the Renminbi Globalisation Index. The RGI, compiled by Standard Chartered, measures the overall growth in offshore yuan use. (Its methodology can be accessed here.) After declining in the first two years after CIPS was created, the RGI has steadily moved higher since 2018.

‍Brazil’s debt burden to grow as Lula targets scrapping a spending cap

Brazilian President Luiz Inacio Lula da Silva defeated the conservative incumbent, Jair Bolsonaro, last year. Lula pledged to revoke the nation’s public spending cap, aiming to bolster spending on infrastructure and social benefits. 

A congressional vote is expected soon on the cap, which Lula’s critics consider a pillar of fiscal credibility.

As our chart shows, the IMF projects that Latin America’s largest economy will see its ratio of public debt to gross domestic product gradually creep higher, approaching 100 percent by 2028. 

By contrast, debt-to-GDP ratios are set to be broadly stable for Colombia, Mexico, Chile and Peru – and this measure of indebtedness had been falling sharply for Brazil during 2020-2022, despite the pandemic.

‍Betting on bullion paid off for Japanese and British gold bugs

This table shows the performance of gold since 2000. In most years, and in most currencies, bullion prices were either stable or rose. (As the bright red bar shows, 2013 was the big outlier; economies were recovering from the financial crisis, and the Fed was withdrawing stimulus. Money flowed out of gold funds.) 

Given that gold is priced in dollars, returns from investing in the metal can vary significantly depending on your home currency. As British and Japanese investors saw the pound and yen sink against the dollar, gold returned 13 percent in GBP and 15 percent in JPY – versus a flat performance in dollar terms in 2022. 

The post-FAANG mega-caps are driving the US stock rally

The biggest stocks are leading this year’s stock rally.

Our visualisation breaks down the year-to-date gain by the S&P 500, showing how the 10 biggest names by market value are overwhelmingly responsible for the rally – especially since March, when bank failures dented confidence in much of the rest of the equity space.

Most of these names are in Big Tech, evoking the “FAANG” surge that drove the 2010s. (That’s Facebook, Amazon, Apple, Netflix and Google – before a few name changes made that acronym obsolete.)

Today, the top 10 are Apple, Microsoft, Amazon, Nvidia, Alphabet (counting both stock classes as a single company), Berkshire Hathaway, Meta, UnitedHealth, ExxonMobil and Tesla. ‍

The great global growth surprise of 2023

One of the positive surprises for 2023 is how resilient global growth has been, despite a record monetary tightening cycle. (China’s reopening likely has something to do with it.)

This chart uses measures of the purchasing managers index (PMI), which surveys executives about prevailing trends in their industry, to track the outlook in nations around the world. Readings below 50 indicate contraction. 

It seemed that we were headed towards a broad recession in the second half of last year. But PMI is back above 50 for most economies. 

Inflation in Gulf nations has been no big deal – and sometimes nonexistent

There’s a place in the world where inflation has not been particularly rampant over the past year: the oil-producing nations of the Gulf Cooperation Council (GCC).

As our chart shows, annualised inflation is running at about 3.3 percent for the GCC as a whole, much slower than the rate in the US and eurozone. The year-on-year comparisons are enlightening, as well. While Saudi inflation has picked up, Oman and Kuwait have experienced disinflation since January 2022; Bahrain is in outright deflation.

Five of the six GCC economies peg their currencies to the dollar, which can help keep inflation in check. Governments have also tended to use their oil wealth to proactively manage food and energy prices using subsidies.

Interestingly, booming Dubai, whose role as a global hub makes its economy quite different from the rest of the region, is experiencing the steepest pickup in inflation.

‍What’s in the news? Measuring perceptions of trade, war and pandemic

Economic Policy Uncertainty (EPU) is an academic group that uses newspaper archives to create indices relating to policy challenges ranging from budgets to geopolitics. 

Effectively, by tracking headlines, EPU shows us the issue, or “dominant uncertainty,” that was top of mind at a given moment for the media, and, by extension, for the policy-making class.

We’ve previously charted their overall geopolitical risk index. This time, our chart examines EPU’s subindexes for the US, highlighting the issue that had the greatest risk perception over 20 years.

National security was top of mind in 2003, during the US invasion of Iraq, and again in the first half of 2022 as Russia invaded Ukraine. Europe’s sovereign-debt crisis rears its head in 2011-12. As the Trump and Biden administrations grappled with pandemic support and stimulus, “entitlement programs” are prominent in 2020-21.

Interestingly, Donald Trump’s 2018-19 trade war with China provoked a higher risk perception than any other issue tracked by EPU.

‍‍‍More Americans struggle with credit card debt again – relatively speaking

As interest rates go up and the economy slows, figures from the New York Fed show us that more Americans – especially younger ones – are struggling with debt burdens. 

This chart tracks the percentage of credit-card balances transitioning into “serious delinquency.” This figure jumped by 2.5 percentage points for the 18-29 age bracket in 2022.

However, a longer-term perspective shows that credit-card struggles are only just returning to their pre-Covid levels – after extraordinary levels of subsidy to consumers and businesses through the pandemic. 

Monetary tightening and falling unemployment

Intuitively, one might expect to see unemployment shoot up when policy makers stamp on the monetary brakes. But as our chart shows, that confuses the cause-and-effect relationship in real time. 

History shows that tightening cycles usually progress as an economy gathers pace and sometimes overheats. I.e.: the labour market strengthens, unemployment falls, the Fed hikes. In 1980, 1995 and 2007, the unemployment rate stopped falling or crept higher only as the Fed came to the end of a round of tightening.

The present cycle stands out; with the Fed hiking rapidly during a time of post-pandemic labour shortages, US unemployment did not have that much lower to go.

Sell in May and go away? Only in Europe

A hoary stock-market cliché effectively advises investors to take the summer off. The theory goes that limited liquidity and slow news flow means there will be fewer bids for equities until most market participants return to their desks.

Using the Macrobond Investment strategy function, we examined the returns since 1990 for a hypothetical investor that exited the markets between May and October each year. We applied this test to the S&P 500 and the Euro Stoxx 50. 

“Sell in May and go away” allegedly dates to the old-time London markets. If this strategy ever paid off on Wall Street, our chart suggests that it hasn’t since at least 1990. But in the EU, taking more time off isn’t just a cultural tradition; it can be profitable too.‍

Assessing country-by-country recession in the EU

This table measures quarter-on-quarter economic growth for the 27 nations in the European Union. Green means expansion; red means contraction. And a standard definition of recession is two consecutive quarters of negative growth.

As first-quarter 2023 figures trickle in, Lithuania has entered recession, joining Finland, Estonia and Hungary. Interestingly, some nations have already rebounded from recessions in 2022, such as the Czech Republic and Latvia.

Will more nations start flashing red as the ECB continues to tighten monetary policy? Christine Lagarde, who raised rates yesterday, signaled that there may be "more ground to cover" to control inflation.

Hedge funds are taking a strongly negative view on Treasuries

This chart tracks bets by hedge funds with regards to 10-year Treasuries, as reported to the Commodity Futures Trading Commission. They have steadily built up a record net short position, even after 2022 was a historically catastrophic year for bonds and 10-year yields have stayed below last year’s peak (as the second panel shows).

As investors debate prospects for a Federal Reserve “pivot,” rate cuts and recession, some hedge funds may be staking out an unambiguous view: Treasury yields will stay high. 

As Bloomberg News recently noted, the short position may be also related to so-called basis trades, when hedge funds buy cash Treasuries and short the underlying futures. 

Saudi Arabia’s more diversified economy

Saudi Arabia recorded the highest GDP growth among G-20 nations in 2022. Surging oil prices in the wake of Russia’s invasion of Ukraine obviously helped, but by at least one metric, the nation has made progress diversifying its economy over the years. 

Our chart breaks down the contributions to the year-on-year GDP growth rate in current prices by different sectors. 

The blue bars represent net exports. This is where the positive effect of higher oil prices can be seen. But the strong performance of the orange bars in recent quarters is also notable. This includes private consumption and private investment. 

With growth expected to slow in 2023 as crude prices stabilise at lower levels, these non-oil activities are expected to support the economy. 

‍Global currency reserves and the de-dollarisation debate

The “de-dollarisation” debate is in the news.

“Why can’t we do trade based on our own currencies?” Brazilian President Lula da Silva recently remarked. China has been promoting the use of the renminbi in settling cross-border trade. Some nations view US sanctions against nations like Russia as “weaponising” the dollar, given the global reserve currency is so crucial for paying oil import bills. 

By at least one measure, reliance on the dollar has been steadily declining: its share of global foreign-exchange reserves held by central banks. As our chart of IMF data shows, the dollar remains by far the main currency of choice, but its share has dropped to 58 percent from 70 percent over the past 20 years. 

Holdings of Chinese yuan have been increasing from a tiny base, and now stand at 3 percent.

The euro’s share grew in the 2000s before retreating; it’s back at about 20 percent. The “other” category, including Australian, Canadian, South Korean and Scandinavian currencies, is also gradually inching higher. IMF economists posit that these currencies are considered to be “safe” but offer higher returns than the greenback.

‍The dollar share of SWIFT transactions remains stubbornly high

Dollar reserves might be falling at central banks, but the greenback’s share of international transactions has barely budged. 

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) is the messaging network that executes worldwide payments for banks. This chart tracks different currencies’ share of global SWIFT payments over time. 

The dollar accounts for 40 percent of the value of transactions, about the same as a decade ago. The euro and pound have seen their proportions shrink. Starting from a low base, China’s renminbi grabbed an increasing share in the mid-2010s, but that trend has leveled off.

A high-profile recent impasse shows how sticky the greenback is – even for nations hostile to the US. Russia has long counted on India as a key market for its military equipment, but New Delhi risks running afoul of US sanctions if it pays Moscow in dollars. The Russians are refusing to pay in rupees, citing depreciation against the ruble.

‍European banks face TLTRO repayments at a stressful moment

For European banks, a pandemic-era rescue bill is coming due at a time that might prove inconvenient.

As our chart shows, analysts surveyed by the ECB expect lenders to start stepping up repayment of the central bank’s program of targeted longer-term refinancing operations (TLTRO). Final repayments are due in December 2024. 

TLTROs were launched to support lending in the aftermath of the debt crisis in 2014. After their revival in 2020 – charted in the second panel – they became the ECB’s largest-ever infusion of liquidity. 

TLTROs offered longer-term loans to banks at a favourable cost, and helped banks exceed liquidity requirements, but the most attractive terms of the program ended in June 2022. 

As our chart shows, after further ECB changes in October, voluntary repayments initially accelerated, but then flatlined. The most recent ECB survey was in February, and systemic stress has worsened since then amid high-profile bank failures. 

Banks must balance preserving their liquidity, tapping more expensive sources of funding and repaying their central bank.

‍European CPI scenarios and the base effect

With at least one more rate increase expected from the ECB, stubbornly high inflation remains in focus. New figures are expected next week.

This chart shows different scenarios for year-on-year growth in the core consumer price index for the eurozone, which excludes food and energy prices. While headline CPI has started to slow, core CPI is still accelerating in many regions.

One phenomenon worth watching is the base effect. This refers to volatility in the CPI 12 months earlier (the base month) when making a year-on-year comparison of inflation rates. Put another way, month-by-month price trends are important, but it’s worth being mindful of an outsized surge or drop a year earlier. And we are more than a year into the era of elevated inflation.

As our chart indicates, even steady core CPI growth of 0.25 percent month-over-month will mean a long-term slowdown in the year-over-year figures. And looking closely, even a 1 percent increase for April will result in a falling year-on-year trend – due to the base effect a year earlier.  

The unleashed Chinese consumer is splashing out on jewelry and cars

The Chinese consumer is spending again. Last week, we charted the services rebound after the nation reopened its economy. This week, we show how sales of goods in different sectors have rallied from locked-down doldrums.  

In March, China reported 10.6 percent year-on-year growth in retail sales of consumer goods. Jewelry stands out, surging 37 percent. Automobiles and clothing both jumped over 10 percent. 

A few categories are still stagnating, with home décor and household appliances in negative territory. This may well be related to the struggling real estate market. 

Economic and inflation surprises are bullish for China and hawkish for Britain

With the release of every economic data point, markets compare the figure to analysts’ expectations and react accordingly.

Citigroup maintains an economic and inflation surprise index, which we have charted to show how various nations are faring.

There are four quadrants. The “stagflation surprise” quadrant of higher-than-expected inflation and disappointing growth includes New Zealand and Sweden, whose woes we examined last month. 

Given the gloomy news flow in the UK, Britons might be surprised to learn that they are experiencing the greatest “hawkish surprise.” The worst inflation in the group is combined with GDP figures that were recently revised upward.

China is in the sweet spot. Growth is surging after the country’s great reopening, while it appears that slack in the labour market has kept inflation in check.

There are no “dovish surprises” of weak growth and tumbling inflation to be seen yet, even though economists forecasting a central bank “pivot” certainly expect nations to start moving into that quadrant.