Charts of the Week

The evolution of emissions by country

The following charts show how the composition of the world’s carbon emitters has changed over the past 20 years. It’s no surprise to see that China’s industrialisation has been a game-changer; as the US, Japanese and European share shrinks on a relative basis, Asia’s biggest economy now accounts for almost a third of global emissions, more than doubling its proportion since 2003. 

India’s contribution is also of note, rising to 7 percent of global emissions from 4 percent. Overall carbon emissions have increased to 37 billion tonnes from 27 billion tonnes 20 years earlier. 

These trends highlight the importance of US-China climate talks, which resumed late last year. US climate envoy John Kerry said in Davos last week that he was hopeful about a breakthrough.

Dollar Index weakness amid speculation about a less hawkish Fed

King Dollar was one of the main themes of 2022; the Federal Reserve’s rate hikes sent the global reserve currency surging against almost all peers. 

The Dollar Index (DXY) measures the greenback against the currencies of major US trading partners. As the chart below shows, we have had a reversal this year amid increasing bets that the Fed will be less hawkish than some feared. Service and manufacturing PMI indicators are predicting recession. 

There are two notable trends in this chart: 1) before the pandemic, swings in the Dollar Index were not nearly as extreme. And 2) the Japanese yen has been a much bigger factor in the last 12 months than it was previously, when DXY reflected more of a dollar-euro dynamic. (Read guest blogger Harry Ishihara’s recent comments on the Japanese reticence to change course on monetary policy.)

‍The stock market rotates after tech selloff last year

The narrative for equity markets is also changing with perceptions of the Fed’s path this year. Indeed, markets are anticipating the next rate hike will be 25 basis points, rather than a half percentage point. Sectoral trends in the equity market are also consistent with an economy that will not deteriorate as much as some feared.

This dashboard breaks down the market by sector. Interestingly, as we head into a potential recession, traditionally defensive stocks – consumer staples, healthcare and utilities – are underperforming. 

Meanwhile, the pain has stopped, or at least paused, in the world of tech. Communication Services and Information Technology are atop the dashboard – as measured by not just recent performance, but the Relative Strength Index (RSI) and stock momentum relative to the previous 50 days. 

‍A measure of US analyst downgrades is at the highest in 30 years

To be sure, many warning signs for US markets remain. This chart tracks analyst downgrades – often an excellent leading indicator for stock-market underperformance. 

In particular, the chart measures the relative number of earnings-per-share downgrades for US equities versus global equities over the previous 100 days. 

This reflects the fact that leading macroeconomic indicators degraded more quickly in the US than elsewhere.

‍The persistent discount for Russian crude

As Russia persists with its war in Ukraine, so do the sanctions on Russian crude. 

This chart shows the price divergence between the key western European (Brent) and Russian (Urals) crude-oil benchmarks. Starting almost a year ago, when the war began, Russian oil became about $30 a barrel cheaper as the Brent price spiked. (This spread, which has stayed relatively consistent, is tracked in the bottom section of the chart and is near its widest since the start of the conflict.)  

In September, the G7 nations imposed an effective cap of $60 a barrel on the Urals price. 

In December, as the EU banned imports of Russian oil, we showed how Russia turned to India and China to find buyers for all that discounted crude.

‍‍Projecting terminal interest rates

When will central banks stop hiking rates? It’s fair to say that over the past year, that’s been the overarching question in macroeconomics. 

We have revisited this theme several times: in our recap for 2022, we showed how markets no longer expected the Bank of England to out-hike the Federal Reserve, as they did for several months in the second half of the year. (This moment can be seen where the lines on the chart below cross, in about November)

Rather than project the future interest rate curve, this chart purely shows what the market was anticipating the peak policy rate would be over time. After steady increases in tandem over most of 2022, the lines have flattened as concern about inflation eases.

Notably, as recently as a year ago, the terminal rate was seen as zero for the ECB.

‍Time traveling with pivot expectations

Here is a different visualisation of this theme. Rather than tracking how high futures markets expect the peak (or “terminal rate”) to be for various central banks, this chart tracks when markets believe the Fed, ECB and BoE will stop hiking.

Markets have consistently expected the Fed to be the first to stop hiking for most of the past year, but it was still a different world in July: markets expected the Fed would have reached its terminal rate already by now, a full year ahead of the ECB. Meanwhile, expectations that the UK’s central bank would still be hiking in 2024 have faded.

Despite what futures markets are showing, it is notable how many observers remain sceptical that the Fed will be ready to “pivot” in May, as this chart suggests.

‍‍Bah Humbug for more Christmas shoppers

It appears that the cost-of-living crisis – and perhaps concerns about a worsening economy in 2023 – prompted US consumers to hold back last Christmas, as they did the year before.

This chart tracks how December spending compared to its November equivalent over the course of recent decades. There have been surprisingly few Christmas splurges lately. 

While this chart tracks US retail sales, we have noticed disappointing figures in other countries as well.

‍Visualisation of urbanisation

The United Nations calls urbanisation one of four “demographic mega-trends,” along with population growth, aging and international migration. As a nation’s people move to cities, education, income and longevity generally improve.

The visualisation below charts wealth against the urbanisation rate for some of the world’s biggest economies. Population is indicated by the size of the bubble.

We wrote last week about India overtaking China as the most populous country. As this chart shows, India is still far behind China on urbanisation; it is the most notably rural country on the chart.

‍UK public borrowing creeps higher

British deficit spending is creeping back into pandemic-era territory, as our chart shows. (The peak months for the Covid-19 furlough spending and business-support programs are shown in the shaded area on our chart; January is notable as the month when the UK posts a surplus from tax receipts.) 

Public sector borrowing last month was GBP27.4 billion, the highest December figure since monthly records began in January 1993. 

This reflects two main macro themes of 2022: surging interest rates and the energy crisis. The UK spent more to help households with their utility bills, while interest payments to service the national debt soared. 

The rising rate environment is a key factor behind why markets reacted so strongly to former Prime Minister Liz Truss’ scrapped plan to borrow even more. 

India is poised to overtake China as the most populous country

According to United Nations figures released this week, India is probably going to overtake China by population this year.

As our charts show, both nations are currently estimated to have populations of 1.43 billion people. But the trend lines are quite different – as is the demographic breakdown shown in the two charts.

India’s death rate has fallen, life expectancy is rising, incomes have increased, and the birth rate remains high. That means the population is young: more than half of Indians are under the age of 40. The population isn’t projected to start declining (under the UN’s fertility assumptions) until the 2060s.

By contrast, China’s population is aging and has started to decline – a legacy of the one-child policy between 1980 and 2015.

Scepticism about yield curve control in Japan

The Bank of Japan is the last of its peers to maintain negative interest rates. It brought in yield curve control (YCC) in 2016; as the central bank owned half the nation’s bond market, the effectiveness of further quantitative easing was limited. YCC allowed the BoJ to control the shape of the yield curve, keeping short and medium rates close to the 0 percent target, without depressing long-term yields excessively. 

Late last year, Japan surprised markets by widening the acceptable range, as the shaded area of our chart shows, to 0.5 percent. This stirred speculation that a greater policy shift could follow, given the tightening cycle being executed by its global peers.

The YCC was in the news again this week. Amid calls to abandon the policy and restore bond-market liquidity, the Bank of Japan vowed to double down and keep buying bonds, as it had throughout 2022’s inflation-driven fixed-income selloff. The yen declined. 

As our chart shows, 10-year swap rates have started to diverge significantly from the 10-year yield, indicating that the market is questioning the sustainability of this strategy.

Cracks in the US labour market

With US tech industry layoffs in the news, our chart breaks down trends in the nation’s labour market by sector during December. 

To be sure, unemployment remains near a record low. But Fed Chair Jerome Powell is watching closely as he seeks to cool the economy. 

Indeed, as Silicon Valley scales back overly optimistic growth forecasts and some pandemic-era business models were in fact not the “new normal,” technology shed the most workers among industries last month, according to data from Challenger, Gray & Christmas.  

In the No. 2 and 3 spots are financial-services companies and insurers, paring their workforce amid speculation that higher interest rates will result in recession. Health care and energy posted the biggest job gains.  

Nowcasting Germany

Nowcast models aim to “predict” the present, given there is a lag before data becomes available, and keep investors ahead of the curve. Last week, we examined the US and presented the community with a template to examine real-time GDP. 

Now, we turn our attention to Europe’s biggest economy. This Nowcast uses a regression model based on weekly and monthly German data that have been shown to be leading indicators for headline GDP, with a significant correlation – as the chart shows.

These indicators include a truck toll mileage index, the Bundesbank’s weekly activity index, and the well-known IFO business climate survey, among others.

Macrobond users can change any of these input variables to create their own Nowcast. 

Amid Germany’s disproportionate exposure to both China’s slowdown and higher energy and food prices in 2022, our template Nowcasts that the economy shrank 1.15 percent in the fourth quarter. 

‍A scenario for shrinking US inflation that stays above the Fed’s target

This chart aims to forecast US price increases in 2023 using a selection of leading indicators to predict three components of inflation. 

For housing, we used data from Zillow, the real-estate marketplace. For food and beverages, we selected fertiliser prices as a leading indicator. And to forecast the consumer price index (CPI) excluding food and housing, we selected the Atlanta Fed’s business uncertainty survey on employment growth.  

These indicators lead the specified component by 5 to 13 months. 

Based on these historic correlations, and similar trends for the three components, our model predicts inflation will moderate – posting a 4.2 percent year-on-year increase in May 2023. This would be consistent with a recession and weaker oil prices. 

Will this result in a Fed pivot? It’s worth noting that this model shows inflation will still be well above the Fed’s 2 percent target.

‍China increases public investment to support growth

China reported that fourth-quarter GDP increased by 2.9 percent, one of the slower prints in recent quarters. Generally, the nation’s economy was hampered by the lockdowns stemming from the zero-Covid policy in 2022, as well as a property slump. 

Our first chart tracks GDP growth and its components: final consumption exposure, investment and net exports. 

The second chart shows how China has increased public investment during this slowdown to support growth; by contrast, private-sector investment in fixed assets has slowed and was nearly unchanged year-on-year in the fourth quarter.

Watch for these trends to evolve as the zero-Covid policy is relaxed. Observers will be watching whether a domestic growth rebound mitigates headwinds from a US recession.

‍US ISM clock is clearly in the contraction zone

This chart shows a “clock” tracking a year and a half of data from the US Institute of Supply Management (ISM). It presents both the ISM Manufacturing (x axis) and Non-Manufacturing (y axis) indices -- particularly key leading indicators for the US economy over the last 18 months. 

Readings below 50 for either index indicate that a contraction is expected over the next three to six months; readings above 50 indicate that expansion is expected. 

We track both the main indexes and the “new orders” subcomponent, considered the most forward-looking indicator. 

All readings are below 50 – a recessionary signal.

‍Historic trends show US home supply is in line with moderating prices

This scatter chart tracks the historically negative correlation between the supply and price of US homes. The historic average for these two variables is roughly at the centre of the diagonal line.

As one might expect, prices increased in recent years as new supply was constrained in a context of strong growth and low interest rates. 

However, the last six months – as tracked by the dashed line in purple – show how the Fed’s rate hikes are having an effect. (Back in November, we examined the impact on US homebuilding.)

Home prices have moderated sharply, despite a limited supply of homes, and we are more or less back in line with historic trends.

‍The surprisingly modest US stock valuation discount versus peers

This candlestick chart highlights equity valuations across selected markets, using a premium database from FactSet that aggregates companies. (This methodology could be easily used to analyse different equity sectors and investment styles instead.)

For the US, UK, Germany, Switzerland and aggregate measures of the developed and emerging markets, we track price-earnings (PE) ratios against historic median values and percentile ranges since 1999. 

The chart shows the US is trading at only a modest valuation discount, despite growing expectations of a recession. On the other extreme, Germany trades at a significant discount; we have previously discussed the outsized impact of China’s zero-Covid policy and the energy crisis on the European country’s export-driven economy.

‍The British food inflation season lasted all year in 2022

Our final chart measures the seasonality of food inflation in the UK since 2015. Usually, British inflation is in fact not particularly seasonal; the main trend of note is that prices seem to increase in the run-up to Christmas. 

The great exception is 2022: the year of post-pandemic supply chain disruptions, exacerbated by the UK’s departure from the EU’s customs union not long before – and the dislocation to global agricultural and fertiliser markets that followed Russia’s invasion of Ukraine.

Prices for food and non-alcoholic drinks increased for 15 consecutive months, and posted a year-on-year increase of 16.8 percent in 2022 – the biggest annual increase since 1977.

As Britain’s cost-of-living crisis persists, hitting the poorest households worst of all, there was little relief to be had at the grocery store at the end of 2022. 

The most down days for equities since the 1970s

“Worst since 2008” is an oft-used descriptor in the financial world. It might not surprise the reader to learn that, indeed, in 2022 the S&P 500 posted its steepest decline (19.4 percent) since the year of the global financial crisis. 

If we measure the bear market by the number of down days, we have a stronger superlative, as our chart shows. 

As markets digested surging inflation, a tighter tightening cycle than expected, and Russia’s war on Ukraine, the benchmark US stock index had 143 negative trading days in 2022. That’s the most since 1974 – and matches the Great Depression year of 1931.

The World Bank is more pessimistic

The World Bank cut its global economic growth forecast this week and is expecting a more stagnant 2023 as countries tighten monetary policy. As our table shows, the international institution now foresees GDP will increase just 1.7 percent, down from the 3 percent pace it projected in July. (It’s also not ruling out an outright recession.)

The World Bank became only mildly more pessimistic for 2024, perhaps indicating faith in central bankers’ attempt to engineer a soft landing. 

Nowcasting US GDP with Macrobond

Understanding what’s happening in the economy in real time is important. Nowcast models aim to “predict” the present, given there is a lag before data becomes available, and keep investors ahead of the curve. 

Macrobond provides customers with well-known Nowcasts from institutions such as the OECD and the Atlanta Fed. But why not construct your own? 

The following chart was generated from a template we constructed. It gathers time series ranging from industrial production and the labour market to business surveys and financial data. It uses built-in principal component analysis (PCA), together with a vector auto regression (VAR), to estimate real-time GDP. 

Macrobond users can change any of these input variables to create their own Nowcast.

(At the moment, our template is Nowcasting a growth slowdown for the US that stops short of a contraction.)

Growing and shrinking slices of the Eurozone inflation pie

Macrobond now offers pie charts (requires version 1.26). We have applied this functionality to analyse trends for various components of inflation in the eurozone.

Inflation remains elevated overall, posting a 9.2 percent year-on-year gain in December, though that was lower than expected and marked a slowdown for a second consecutive month.

This pie chart is a visualisation of hot and cold categories that make up the Harmonised Index of Consumer Prices (HICP). Prices for some line items in a household budget are rising ever more rapidly, while other spending categories are leveling off. (Here’s a link to a recent heatmap of inflation hotspots, as organised by sector.)

More than 46 percent of HICP components are posting price increases that are below 5 percent and decreasing (the green – and largest – part of the pie), bolstering the argument that inflation is tapering and might result in a less hawkish ECB. But the red tier – components where inflation is above 5 percent and increasing – is almost as large.

Warm winter and preparation help Europe avoid a natural gas crisis

Amid concern that Russia would weaponise gas supplies to Europe, the EU set targets for member states to fill their storage capacity to at least 80 percent by November. (Last year, we published a chart showing how Russian gas shipments were dwindling). Member states turned to the LNG market; some observers were fearful that shortages and rationing could result.

As a result of the EU’s caution and what has turned out to be an unusually warm European winter, gas storage is still above that target level in a month normally known for peak energy demand. As the first chart shows, storage levels were about 83 percent in December, higher than they were at the same point in both 2021-22 and the generally chillier 2020-21.

The second chart, tracking weekly changes to the storage levels over those winters, shows that for part of December 2022, gas storage levels actually increased.

German trade balance remains under pressure on expensive energy

This chart of Germany’s trade balance shows the importance of expensive energy imports to the world’s no. 3 exporting nation. 

The trade balance weakened in October but remained in positive territory. Key German export markets were hit by inflation and supply-chain issues. 

China was still implementing zero-Covid, disrupting trade with another key partner. As the strictness of that policy is unwound, Germany’s non-energy trade balance has potential to improve, but it still faces the possibility of a US-led global recession.

The trade deficit in energy is slowly shrinking, but remains strongly negative as the nation replaces Russian gas with pricier LNG.

Hiring is a vicious circle in the tight US labour market

The post-pandemic US labour market has stayed robust in the face of a historic tightening cycle, with an unemployment rate of just 3.5 percent as of December. 

The following “circle” tracks employers’ search for workers – and how different the trend has been since 2021. It uses CEO surveys from the Conference Board to plot quarterly data points.

The X axis shows the percentage of CEOs that think they will expand their workforce more than 3 percent. The Y axis shows the percentage who feel it is difficult to attract qualified people. 

Both figures soared compared with the pre-2021 period, but have roughly returned to historic averages recently. The resilience of the labour market will be tested in 2023.

Historic bear markets were tougher than this one

As we showed in our first chart, last year was tough for US stocks. But compared with past slumps, the S&P 500’s decline is not especially punishing – yet. Will a US recession make this bear market more historic? 

The chart below graphs the last 60 years of bear markets in terms of both depth and time. Stock markets that peaked in 1956, 1966 and 1980 fell more than 20 percent thereafter, exceeding the 19.4 percent drop in the current bear market. 

After the peak of 1968, the S&P 500 posted a decline of more than 30 percent, as it did after the 1987 and 2020 crashes. The bear markets beginning in 1973 and 2000 approached 50 percent. 

Unsurprisingly, the most extreme move was during the global financial crisis: the S&P 500 fell more than 50 percent during the 15-month bear market that started in 2007.

130 years of history also suggest a recession is not priced in to US stocks

Many observers expect a recession this year as leading indicators in manufacturing and services flash red. Both CEO and small-business confidence are near record lows. But is a recession priced into the stock market?

A historic valuation barometer that may shed some light is the Shiller price-earnings ratio, which can be measured back to 1893. Our chart graphs this historic ratio against a smoothed-out, 12-year moving average. 

One might expect a discount versus the long-term average if we were going into recession. But the latest figure shows a P/E ratio of 28 – a small valuation premium relative to the 12-year average.

Home transactions plunge as Fed hikes stamp on the brakes

As expected, the Fed’s rapid tightening is having a strong effect on the US housing market. (We considered this from multiple angles in October.) 

The effect on transaction volumes has been particularly notable.

This chart tracks home sales in different Fed tightening cycles. Transactions have taken just six months to drop 30 percent – more quickly than in any other cycle over the past 50 years.  

A measure of geopolitical risk spikes

Featured in: Charts of the Week on March 4

We first published this chart just after Russia’s escalated invasion of Ukraine in February.

It uses a measure of risk from Economic Policy Uncertainty,an academic group that creates indices relating to policy challenges ranging from infectious diseases to wars.

Their geopolitical risk index tracks newspaper archives going back decades. Peaks occurred around 9/11 and the collapse of the Soviet Union. While tensions between Russia and the West remain elevated, geopolitical tensions are generally taking up less space in the media; the index is welldown from its March peak.

The evolution of global tightening

Featured in: Charts of the Week on April 1

We were at the beginning of the tightening cycle when we first published this dashboard. Emerging markets had been most hawkish,anticipating Fed tightening. But Japan was the only major economy where inflation was significantly below target and its central bank opted to swim against the tide, repeating its commitment to keep long-term yields low via yield curve control.

Since then, many more central banks started hiking, while those that were already tightening became more aggressive. The doves that stand out in the dashboard today are China, Russia and Turkey. Asfor Japan, its key rate stayed negative – alone among central banks – but it recently shocked markets by widening the acceptable range for bond yields, suggesting a greater policy shift could follow.

Inflation rips across the Eurozone

Featured in: Charts of the Week on June 24

When this heat map was first published, inflation for the euro area was 8.1 percent year-on-year. That has worsened to 10 percent.

Since then, inflation has continued its broad advance and there are fewer cooler areas on the heat map than there were in May. The only category where prices are shrinking is communications;transport price growth “slowed” to 10 percent year-on-year from early 2022’s prints of 14 percent or more.

Inflation ravages real wages in Europe

Featured in: Charts of the Week on August 26

In the euro area, negotiated wages are falling sharply in real terms – i.e., any increase is being more than outpaced by inflation. This was the case when we published this chart, and it’s still generally true – and often even worse today, depending on the country. The Netherlands and Spain have seen a slight rebound.

European gas worries before and after Nord Stream sabotage

Featured in: Charts of the Week on September 2

We first published this chart just weeks before the Nord Stream pipelines taking Russian gas to western Europe were damaged in an act of suspected sabotage. Even before that incident, flows from Russia were shrinking, as the chart shows; Nord Stream was taken offline for repairs. That stirred concern that Europe would have trouble filling its gas reserves in time for winter.

Even in early September, some observers had warned that Nord Stream might not reopen given the tensions with the West over Ukraine. As the updated chart shows, those voices were prescient. Europe turned to the LNG market for gas supplies and has been fortunate to experience a warmer-than-usual winter so far.

Markets changed their view on whether the Fed would be out hiked by the BoE

Featured in: Charts of the Week on September 9

When this chart was first published, just four months ago, futures markets believed the Bank of England would be forced to hike rates a half-percentage point more than the Federal Reserve through 2023 in order to tame rampant inflation.

Today,that gap has reversed; as inflation persists, traders foresee UK rates peaking above 4.5 percent, but they believe the Fed is headed to 5 percent. Rate hikes are expected from the ECB too, but with a far lower peak rate.

Central bank balance sheets keep shrinking

Featured in: Charts of the Week on September 9

After the huge round of stimulus during the pandemic, central banks’ balance sheets started shrinking in 2022 amid a major tightening cycle to combat inflation. The shrinkage has continued since we first published this chart.

Comparing oil shocks in the wake of the Russian invasion of Ukraine

Featured in: ‍Charts of the Week on March 11 

We published this chart as markets reacted to Russia’s invasion of Ukraine. As crude prices increased sharply, we drew parallels with famous oil shocks (and recessions) dating back to the famous OPEC embargo crisis of 1973. 

Since March, oil prices have fallen back below their long-term trend, but all eyes are on prospects for a recession in 2023.

The credit impulse wanes from US to China

Featured in: Charts of the Week on March 25 

The ‘credit impulse’ represents the flow of new credit from the private sector as a percentage of gross domestic product. In March, we created a credit impulse measure for the US, China, and Eurozone (G3). We found a correlation that suggested a measure of global sentiment was set to decline. 

Thanks to feedback from our community of users, several adjustments have been made to this chart since it was first published. Credit impulse is now measured more accurately and has rebounded since March. 

This indicator is positively correlated to the US ISM Manufacturing Purchasing Managers Index (0.67, with 14 months of lag). This correlation implies US PMI should rebound above 50, indicating the manufacturing economy is generally expanding. 

Comparing Fed tightening cycles

Featured in: Charts of the Week on May 27 

By May, Chairman Jay Powell was determined to tame inflation, but markets were not fully anticipating the severity of the tightening cycle that followed. 

The version of the chart below published in May anticipated that the Federal Reserve’s key interest rate would peak at 3 percent, as predicted by Fed funds futures. As we can see, the market now anticipates a terminal rate of about 5 percent in a few months’ time. 

The predicted pace and length of the cycle has not changed that much from perceptions in May, however: both show a peak reached 18 months after the start of the cycle.

Natural gas inventory worries in Europe

Featured in: Charts of the Week on July 29 

Natural gas inventories were in the headlines all summer amid grave warnings that Europe might face a winter shortage. In July, only four EU countries exceeded the bloc’s storage targets.

European countries subsequently rushed to buy gas on the market and found alternatives to Russian shipments. This led to record prices (especially for the benchmark Dutch TTF gas futures). Today, almost all EU countries are above the 80 percent capacity threshold set by the European Commission in the summer, as the chart now shows.

Inflation matched the worst case scenario

Featured in: Charts of the Week on August 19 

In 2022, were you on “team transitory” or were you concerned inflation would persist?

When we first published this chart, our idea was to display several scenarios for the year. We showed that even assuming consecutive growth rates of zero month-over-month, US inflation would still be above 5 percent on an annualised basis at the end of the year. 

It turns out that reality was roughly in line with our more pessimistic August scenarios: the latest inflation print was above 7 percent. 

Updating our chart to peer into 2023, only a scenario of consecutive month-on-month decreases of 0.3 percent or more could bring inflation back to the Fed’s 2 percent target within the next six months.  

US inflation hotspots and correctly anticipating a cooling trend

Featured in: Charts of the Week on August 26 

When we first published this heat map, we had no way of knowing that inflation had reached its peak (at least temporarily). But there was a patch of cool blue indicating a broad-based decline in commodity prices was underway. 

The updated heat map clearly indicates how this trend has spread: all of its indicators have slowed over the past four months. 

European electricity market settles down after summer panic

Featured in: Charts of the Week on September 2 

Luckily for Europeans, electricity prices didn’t follow the futures curve we drew back in September. Prices dropped in October amid balmy temperatures and are returning to levels roughly in line with winter 2021. 

That’s still historically high, but it seems that the worst is behind us.

There are still very few doves on our central bank tracker

Featured in: Charts of the Week on September 9 

There has been no paradigm shift since we first published this chart three months ago. Countries that were tightening kept on hiking rates.

However, it is worth noting that among the four exceptions to the trend (China, Japan, Russia and Turkey all decided to cut rates in 2022), there has been only one nation that has loosened policy very recently. Turkey cut its key rate in November, while the other three economies kept their key rate unchanged. 

Looking back at winning and losing growth and value sectors

This table ranks winners and losers among US equity sectors for every year between 2015 and 2022. Two distinct eras jump out.

The Covid year of 2020 was defined by recession, anemic inflation, low interest rates, low commodity prices and elevated risk aversion. It was the perfect environment for growth stocks in sectors like IT and communication services. (Interestingly, 2019 equity trends were similar.)  

The second era is the 2021-2022 “post-Covid” period: stronger growth, stronger inflation, higher rates and commodity prices, and lower risk aversion. It was the sweet spot for value stocks, such as energy and financials.

The change of leadership from growth to value has been extreme. In 2023, we will probably see more balanced returns from the two investment styles, as both economic growth and inflation expectations are cooling.

Watching Germany as its biggest trade partner relaxes Covid zero

The following chart is a version of the European Commission “clock” that tracks economic progress through the business cycle, divided into four quadrants: contraction, upswing, expansion, and downswing.

Germany’s economy has deteriorated more quickly than France, Italy and Spain, as our chart shows. That’s due to the knock-on effect of China’s Covid-zero policy and a greater impact from this year's energy crisis.

Growth in Europe’s largest economy has long been export-driven, and China is Germany’s biggest trading partner. As China loosens the Covid-zero policy, Germany may benefit. But the experience of other countries suggests cases may surge, and it’s not guaranteed that supply-chain and trade disruptions will disappear. 

Cold European winter is as much of an outlier as the warm autumn

After a mild autumn, many Europeans are shivering in a much-colder-than usual winter. 

The cold snap is important because of the potential for energy shortages. German regulators recently warned that firms and households must save much more gas to avoid winter rationing or outages. 

The chart below shows how temperatures in Germany, as tracked by the purple line, have plunged below not just the historic average but the 10 to 90 percentile range of previous years.

The opposite was the case as recently as mid-October – when we wrote that Europe was taking advantage of balmy temperatures to refill its gas storage facilities. 

Europe’s energy needs have been in focus this year after Russia slashed gas deliveries, increasing scrutiny of previous German policy to phase out nuclear plants.

Visualising the growth and value eras

As we pointed out in our first chart this week, value stocks drastically outperformed growth stocks over the past year. The first of the two charts below is a different visualisation of this trend. 

Blue areas denote periods of outperformance by growth stocks, as defined by FactSet. Green areas show when the value style outperformed.

The second chart shows that growth, relative to value, is now trading at a valuation discount versus its long-term average (the red line). Not long ago, price-earnings ratios were almost 60 percent higher for growth stocks, a differential last seen in the 2000 dotcom bubble.

Relative profit expectations for growth stocks have rebounded from their record low in September. As we said previously, 2023 could be a balanced year for growth versus value.

US growth and inflation expectations are sliding

The following chart graphs the progress of US inflation and growth expectations since January 2021, as measured by the five-year breakeven rate (inflation) and the composite Purchasing Managers Index (growth).

Amid criticism of its past hesitancy to raise rates, the Federal Reserve’s tighter policy successfully resulted in falling inflation expectations this year, as our chart shows. But growth expectations are declining too.

The PMI fell to 46.3 in November; numbers below 50 indicate contraction. As investors debate whether the Fed will avoid a hard landing and “pivot” to rate reductions in 2022, the PMI reading suggests a recession in the first half of 2023 is very possible.

M2 suggests US inflation will tumble

Many people got it wrong on inflation over the past two years. In early 2021, some analysts took a micro approach – focusing on used car prices or specific bottlenecks. 

In our view, it’s become clear that much US inflation is demand-driven and reached all sectors of the economy, caused by excessively easy monetary policy combined with generous fiscal support.

We can consider monetary aggregates like M2 – cash, chequing deposits, and assets that can easily be converted to cash – to examine inflation. (This is appropriate now that the US is no longer in a liquidity trap; the relationship breaks down with interest rates at zero. And to be sure, velocity of M2, not just supply, matters for how inflation behaves.) 

Our chart shows the correlation between M2 money supply, pushed forward by 18 months, and the consumer price index. Excess money growth in 2020-21 contributed to peak inflation this year.

If money growth falls off a cliff, can we really expect inflation to also decline quite substantially in the coming months too?

Americans are switching jobs to get big wage increases

If you want to get a big salary boost in the US, you should switch employers – at least according to data from the Atlanta Fed.

The following chart tracks nominal wage growth for people who stay in the same job versus people who join a new company. 

In the US, nominal wages are growing at their fastest pace since the late 1990s. And the differential between job stayers and job switchers recently touched the highest level ever recorded. 

The Bank of England has been overly gloomy on unemployment

Britons may well hope the Bank of England keeps up its past record of overestimating unemployment.

The following chart tracks the actual UK unemployment rate against different vintages of the BOE’s forecasts for joblessness. 

In 2021, the BOE initially expected unemployment to be much stickier than what actually occurred post-lockdown. And it overestimated unemployment throughout 2022 by one to two percentage points; the rate plunged to 3.5% this summer.

However, the outlook is considerably less bright as the BOE forecasts a brutal recession that lasts from early 2023 until potentially mid-2024. 

The BOE recently revised its unemployment forecast upwards. Amid a darkening outlook, the BOE expects the jobless rate to almost double, reaching 6.5 percent by early 2026.

The correlation between UK house prices and unemployment

Perhaps unsurprisingly, UK house prices and unemployment are tightly correlated.

Several economists, most notably Roger Farmer, have examined this relationship. Asset-price declines affect private-sector confidence and induce a negative wealth effect, both of which are obviously detrimental to the labour market. 

The causality goes the other way, as well. A negative shock to the labour market hurts house-price fundamentals.

As our chart shows, UK house-price growth slowed markedly over the course of 2022. And unemployment is edging up as the UK recorded negative third-quarter growth. 

Going forward, expect further pain for property prices and unemployment. Perhaps counter-intuitively, real estate is the leading indicator – by about five months, as our chart shows.

China relaxes Covid zero as cases rise

At long last, China is relaxing the Covid-zero policy, which saw regional lockdowns constrain economic growth and disrupt global supply chains. 

Coronavirus cases are on the rise, as our chart tracking notable Chinese regions shows.

It is notable that Shanghai experienced an earlier surge and plateau of cases than the other regions.