Charts of the Week

Slicing up the emergency balance sheet expansion at the Fed

The Silicon Valley Bank crisis prompted a sharp reversal of the Federal Reserve’s effort to shrink its balance sheet. The Fed had been letting securities mature for months, gradually reducing the stockpile of bonds accumulated during waves of quantitative easing.

In just two weeks, the balance sheet expanded by more than USD 339 billion. This pie chart breaks down that increase and its two main components: the bailout of depositors and last-resort lending.

About USD 180 billion was loaned to the Federal Deposit Insurance Corporation, classified under "Other Credit Extensions." Traditionally, the FDIC borrows from the Treasury; however, the Fed stepped in amid the current political standoff over the debt ceiling.

Primary Credit jumped by USD 105 billion due to lending through the "discount window," normally a last-resort funding source. This topped the weekly peak in 2008, reflecting the stress on banks’ funding as higher rates pressure their fixed-income assets. 

The Bank Term Funding Program grabbed the headlines; this limited-time, emergency facility provides liquidity to banks. It’s been a relatively small slice of the pie so far, accounting for about USD 53 billion.

Credit Suisse CoCo wipeout sends AT1 yields soaring

The emergency takeover of Credit Suisse by its domestic rival UBS sent shockwaves through a particular securities market: Additional Tier 1 bonds, known as AT1 or CoCos (contingent convertible bonds).

AT1 securities were created in Europe after the 2008 financial crisis to bolster banks’ capital and shift risk away from taxpayers. 

Controversially, Swiss regulators ordered that Credit Suisse’s AT1 holders be wiped out as part of the rescue, in contrast to equity holders (like the Saudi National Bank) that received small payouts from UBS as part of the deal.

Our chart shows the impact on the USD 250 billion CoCo market. Yields have soared, tripling from their lows, as these instruments are now perceived as much riskier. The second panel shows that the ICE BofAML benchmark has slumped about 20 percent from its pandemic peak. 

Some of the Credit Suisse AT1 holders are considering legal action; meanwhile, EU regulators have attempted to calm the market, saying that equity holders should be first to absorb losses before AT1s are written down. 

Visualising a risk dashboard for banking turmoil

With the banking industry unsettled on both sides of the Atlantic, we have created a visualisation of the European Banking Authority’s risk dashboard that can be toggled between different countries.

Each quarter, the EBA publishes a broad range of risk indicators for the banking system. These include capital strength metrics (like CET1 ratios), measures of non-performing loans, and profitability.

Our table includes data up to the third quarter of last year, so it will be some time before it reflects this quarter’s turmoil. It uses the EBA’s own green-yellow-red “traffic light” thresholds for good, intermediate and bad readings.

In the case of Germany, the picture was mixed two quarters ago. Profitability metrics and liquidity capabilities were poor, but banks had strong solvency ratios and asset quality.

Comparing volatility in the equity and rates markets

This chart compares volatility in equity markets – the VIX index – with volatility in the bond market – the MOVE index. Unsurprisingly, the historic relationship between the two is positive: when volatility surges in one asset class, it tends to spread in the other. 

In recent weeks, between the Credit Suisse AT1 wipeout and bets on a Fed “pivot” to dovish monetary policy, market turmoil has been focused on the fixed-income space. Our chart reflects this.

The purple dots reflect the most recent readings of the two volatility indices. MOVE is high; the VIX is not particularly elevated. The historic relationship between stock and bond volatility suggests that the VIX might “normally” be as much as double its current level. 

The South African energy crisis keeps getting worse

South Africa gets 90 percent of its electricity from Eskom, a state-owned utility that has produced steadily less power as it lurches between corruption scandals. As the nation’s population grows, the utility and its old, poorly maintained plants can’t keep up with demand.

The situation is so critical that Eskom resorts to intentional outages, known as “load-shedding,” to prevent a collapse of the national grid.

This visualisation shows how the situation has worsened in recent years. We chart the historic average yearly trajectory of power generation since 2000 against the shrinking production seen in 2021 and 2022. As 2023 rolls on, the January figure was far worse than it was for the two previous years – 2 million MWh below the historic average.

Eskom’s troubles are weighing on economic growth; the nation’s central bank estimates that the energy crisis will cut 2 percentage points from GDP growth this year. Power cuts hurt daily life in a myriad of ways; water shortages result as pumping stations are cut off from energy, while businesses are forced to close.

A decade of doldrums in Latin America

The 1980s are typically dubbed Latin America’s “lost decade.” Many nations were unable to service their foreign debt, while the prices of the exported commodities that were key to many of the continent’s economies were depressed in a hangover from the 1970s boom. 

Interestingly, the past 10 years show an even worse growth trend for the region – whose economic expansion was slower than almost any other part of the world. 

Weak investment and productivity are factors, as was the pandemic; a region with less than 10 percent of the world’s population suffered more than a quarter of all recorded Covid-19 deaths. And commodity prices have only recently recovered their mid-2000s liveliness. 

The International Monetary Fund’s forecasts for the rest of the decade suggest an only somewhat improved trend.‍

How the Vietnamese currency band widened over the years

Vietnam manages its currency, the dong, by allowing it to trade in a range against the US dollar. As our chart shows, that range has widened over the past two decades as policy makers tolerate greater volatility. 

The dong was under pressure in 2022 as the dollar strengthened, driven by the aggressive Federal Reserve tightening that depressed most emerging-market currencies. 

In October, Vietnam widened its trading band to lessen the pressure on its foreign-exchange reserves (a phenomenon across emerging Asia that we wrote about in December). 

The dong-dollar exchange rate is now allowed to rise or fall as much as 5 percent per day, compared with 3 percent previously. The currency’s increased flexibility is important; the central bank unexpectedly cut the rate at which it lends to banks earlier this month, underscoring the need to support the economy.

Real estate and tightening cycles

Higher interest rates are already starting to deflate some of the world’s frothier real-estate markets. Residential mortgage borrowers are seeing payments increase and affordability decrease; developers are finding it harder to secure financing.

But history suggests that a Fed tightening cycle can be a good time to own US real estate. The Fed is usually tightening to control inflation, and real estate is a classic inflation hedge. 

This was certainly the case in the late 1970s, as shown by our chart tracking the extent of rate hikes (the dots) and returns for all categories of real estate (the bars) during recent tightening cycles. As the key Fed rate was hiked more than 1200 basis points, property returned 20 percent a year.

In the much less inflationary 2004-06 rate-hike cycle, property again returned almost 20 percent.

Inverted yield curves through history

Historically, an inverted yield curve – when long-term interest rates are lower than short-term ones – is a good warning that a recession is coming. Traders are predicting that higher borrowing costs will slow the economy, prompting central banks to cut rates in the future.  (We wrote that this was occurring back in June.)

This chart tracks a universe of different US bond-yield spreads, showing the percentage that are in normal (blue and green) or inverted (orange and red) territory at a given moment. (The diffusion index is composed of 15 different US government benchmarks, ranging from 1-month bills to the 30-year, long-term bond.) 

The spiking inverted curves before the early 1990s, early 2000s, GFC and pandemic recessions could not be more obvious on this chart.

For quite some time, observers have been predicting a recession is inevitable as the Fed tightens policy to tame inflation. The bond market agrees: according to our chart, more than 80 percent of the yield-spread permutations tracked are inverted. About 80 percent have an inverted spread above 50 basis points, the greatest proportion in at least 40 years.

The SVB effect on Fed funds futures

Many people bet on a Federal Reserve “pivot” to dovish policy this year. Few of them probably envisioned a Californian bank failure as the specific catalyst. But the Silicon Valley Bank episode (and Signature Bank, and the subsequent interventions involving First Republic Bank and Credit Suisse) is consistent with the central-banking cliché “tighten until something breaks.”

This chart tracks futures markets to gauge evolving perceptions of the outcome of the March 22 Fed meeting. (We have previously published several different visualisations of Fed funds futures on similar themes.) How have attitudes changed since September?

Consider the green bars on the left-hand side. Six months ago, traders bet there was a 40 percent probability that the Fed would be done its tightening cycle by now and would be cutting rates again. 

As inflation proved sticky, traders swung the other way and refused to rule out the possibility of a massive rate hike of 75 basis points or more (the red ridge). Then inflation slowed, and the consensus view became a 25-basis-point hike (in purple). 

Recent job and inflation reports surprised on the upside, prompting renewed concern that a 50-point hike was quite possible (dark blue). But after SVB, that possibility is off the table; the market expects a 25-basis-point hike – or, possibly, as the grey zone indicates, none at all.

Digging into US bank deposits and assets in the wake of SVB

As analysts and regulators pore over the wreckage of SVB, they are likely to focus on the duration mismatch between its assets and liabilities (i.e. the “volatile” deposits suddenly pulled by the tech sector and venture capital).

It’s worth examining trends during the pandemic. Deposits surged, while loan demand fell. Banks often placed the difference into securities, as our chart shows – peaking above USD 6 trillion in the first quarter of 2022. 

Accounting standards necessitate that banks designate these securities as either “Available for Sale” (AFS) or “Hold to Maturity” (HTM), meaning they will stay on the bank’s books until they expire. We can see a shift in the second pane; the share of HTM surged, and is now evenly split with AFS securities for the first time since the era of 1990s deregulation.

From an accounting perspective, the two are treated differently. HTM securities eat into liquidity: as banks committed to hold them until maturity, they are tricky to sell if cash is needed in the short term. 

SVB was known for having a significant portion of its securities’ assets classified as HTM, with most of those bought during the recent period of record low rates.

How big and small US banks swapped roles

The SVB crisis might also lead to an examination of how and why smaller US banks became more aggressive in extending credit. Are they generally more poorly capitalised and overextended compared with larger peers?

This chart tracks banks’ loan-to-deposit ratios over recent decades. Perhaps unsurprisingly, they peaked just before the global financial crisis in the wake of a long credit boom.

Breaking down the behaviour of larger and smaller banks, as defined by the Federal Reserve, reveals interesting trends. Pre-GFC, small US commercial banks had a lower loan-to-deposit ratio than their larger peers (which the Fed defines as the top 25 domestically chartered commercial banks). From about 2012, that started to reverse. 

Recently, ratios for all banks dipped during the pandemic as deposits surged and loan demand weakened. But just before the pandemic, loans represented 90 percent of total deposit liabilities for small banks, compared to just 70 percent (already a record low at that time) for large banks. 

Job openings are easing but remain strong

As tighter monetary policy does its work, the employment market is softening a bit. But job openings remain stronger than they were pre-pandemic in most countries. 

This chart measures job openings as a share of the labour force in different countries, compared with the December 2019 level (the dotted line). It plots each nation’s 2021-22 peak, when demand soared as economies reopened, as well as today’s level. 

Only Portugal and Germany seem to have fallen back to pre-pandemic levels; the US leads nations, with job openings 2.5 percentage points higher than in 2019. 

A pessimistic Britain expects to trail the 2010s growth trend

This chart compares US, UK and eurozone central bank growth expectations against the “trend line” between 2010 and 2019. Britain’s central bank stands out with its pessimistic outlook.

The UK economy is no bigger than it was on the eve of the COVID-19 pandemic, and as this chart shows, the Bank of England does not expect to recover that ground until 2026 at the earliest.

It’s a stark comparison with the pre-pandemic, pre-Brexit period. Even after the financial crisis slowed growth, UK GDP growth per capita tended post some of the strongest performances in the G7 during the “austerity” era. Over that time frame, the eurozone’s below-trend growth is visible on our chart, a result of the region’s debt crisis.

‍UK strikes evoke the Thatcher era

Londoners are getting used to strikes disrupting the city’s transport network. Across Britain, such labour disputes are having the biggest impact since the 1980s.

As our chart shows, the last time the number of working days lost from strikes was as high was during the premiership of Margaret Thatcher – an era famous for its labour unrest. The last 12 months have seen industrial action in the transport, storage, information and communications industries.

It's worth noting that this figure not only includes the striking workers, but people who were unable to get to their workplace.

As the second pane of our chart demonstrates, showing the mean yearly value for each decade, missed working days due to strikes had been comparatively rare since 1990.

‍‍The British budget surprise

There was one notable bright spot for the British economy recently – at least if you were the finance minister. (The nation’s taxpayers might disagree.)

This chart tracks month-by month government revenue over the past three years, expressed as a percentage change versus the same month in 2019.

This past January saw revenue jump 36 percent versus 2019 levels. It’s the month when taxes are due, and self-assessed income tax receipts were the highest since monthly records began in 1999. 

This windfall, which meant public borrowing was less than expected, created room for Chancellor of the Exchequer Jeremy Hunt to expand public spending and offer tax breaks.

Warm weather stops Putin's plan to disrupt European economy with energy cutoffs

Had Putin consulted the weather forecast before invading Ukraine, he might have been better prepared. His strategy of disrupting the European economy by cutting off its energy supply has been thwarted by unseasonably warm weather and strong winds, which have reduced demand and allowed time to secure alternative sources and increase storage capacity.

However, the situation remains precarious. While the chart shows that the Year-To-Date Average Fill Level % is relatively positive compared to previous years, prices are still twice as high as they were before the conflict, and demand from Asia is increasing. Furthermore, the reopening of China's economy will intensify competition for scarce resources. As evidence of Europe's growing uncompetitiveness, companies such as BASF have closed plants.

Will the weather be as forgiving in the future?

Fed chair testimony triggers market correction amid hawkish signals

The recent "good news is bad news" macro story is still unfolding, as Jerome Powell's recent testimony to Congress caused markets to fall sharply. The hope that the recent tightening was coming to an end seemed misplaced, as Powell made it clear that he was prepared to speed up if the steady stream of strong data refused to dry up.

Until recently, federal funds futures were pricing in a rate of around 3% for the start of 2025. However, the continued momentum in the labour market, surging retail sales, and strong CPI and PCE prints released in February seem to be forcing the Fed's hand. As a result, markets are now more hawkish, with a 30% increase in the terminal rate already priced in.

China's modest 5% growth target disappoints investors and hits commodities

As China emerged from its lockdown period, markets had risen strongly in anticipation of its economic resurgence and the pivotal role it could play in driving growth across the region. However, the recent announcement of a modest 5% growth target, the lowest in over 30 years, underwhelmed investors. As a result, commodities were particularly hard hit as demand forecasts were reassessed. With so much riding on China's success, can we hope that they plan to surprise on the upside this year?

Early warning indicator flashes red for Sweden's banking system: Risk of housing market crash

The Bank for International Settlements (BIS) defines "Early Warning Indicators" (EWI) of banking crises as deviations of credit and asset prices from long-term trends.

Currently, for Sweden, one of these indicators is flashing red.

In the chart above, we have replicated the BIS calculations using the Hodrick-Prescott filter on the credit-to-GDP and property prices series. To highlight deviations from the long-term trend, we show a +1/-1 standard deviation band.

Stefan Ingves, who served as the Riksbank's governor from 2006 to 2022, repeatedly warned about the build-up in mortgage debt. Due to the high levels of household debt and significant proportion of floating rate mortgages, he likened the Riksbank's job as rate-setter to "sitting on top of a volcano." It appears that his warnings were prescient.

Although the overall private sector credit remains within the standard deviation band, the upper chart shows evidence of a potential housing market crash. There is a record negative gap to the long-term trend, even surpassing 1992's bloodbath.

Regression model predicts further plunge in Swedish real estate prices amid high sensitivity to rates

Continuing on the topic of the Swedish housing market, we have developed a regression model to nowcast short-term changes in real estate prices. Our model utilises several data series as inputs, such as a consumer survey for major purchases within the next 12 months, unemployment, housing inflation, the K/T coefficient (i.e. purchase price / assessed value ratio), and lending rates for housing to households.

The results of our model are clear: real estate prices are expected to continue to decline in the coming months, reaching levels not seen in the past 20 years.

Additionally, our model highlights the high sensitivity of Swedish housing prices to interest rates, as evidenced by the negative coefficient of -3.8 in the regression model. This sensitivity can be attributed to high levels of household debt and the extensive use of variable or short-term fixed-rate mortgages.

Japan's demographic time bomb nears detonation as births fall short of deaths

The demographic time bomb that has been ticking in Japan since the end of the economic boom in the 1980s appears to be getting closer to detonation. Last year, there were over 600,000 more deaths than births, and in eight years' time, it's expected that the number of women of childbearing age will dwindle to a point where population decline cannot be reversed. As a result, Prime Minister Kishida Fumio has stated that Japan has been brought "to the brink of not being able to maintain a functioning society."

Low water levels in Rhine River pose challenges for German economy and European trade

The Rhine River plays a vital role in the German economy, acting as a primary conduit that connects its industries to key North European ports such as Rotterdam and Amsterdam, as well as the Black Sea. The water level of the Rhine is crucial, as low levels require cargo ships to operate with reduced loads, leading to increased shipping costs for German businesses. In addition, bottlenecks can arise, resulting in delays and additional expenses.

Paradoxically, the mild weather that contributed to reducing energy demand and prices has had negative repercussions for the Rhine.

As shown in the chart above, the water level is presently one of the lowest it has been in the last two decades, causing another headache for both the German economy and Europe as a whole.

Mapping bond and equity returns in historic inflation regimes

Investment returns are highly sensitive to inflation. While the effects are more direct on bonds, equities are affected too, despite the flexibility that corporations have to react to inflationary environments.

This colourful scatterplot visualises historic US investment returns in eras of high or low inflation – choosing 5 percent CPI growth as the threshold. Plotting every calendar year going back more than a century, we charted whether returns for the S&P 500 and 10-year government bonds were positive or negative. This results in four quadrants. 

Red dots indicate the high-inflation years.

Using these quadrants, one correlation is obvious: most years with negative returns for both government bonds and equities have corresponded to years of high inflation.

The dotted diagonal line separates years where equities did better than bonds and vice versa. There are more years of equity outperformance, as the conventional wisdom would suggest.

With inflation remaining stubbornly high so far in 2023, we’re near the dead centre of this chart.

Eurozone unemployment eases in unison and unlike previous crises

European labour market conditions are unusually homogeneous.

This chart compares historic unemployment rates for 19 nations that use the euro (excluding Croatia, which adopted the currency this year).

The diamonds and bubbles compare the pre-pandemic readings in February 2020 with the present day. Most are back to the old normal. 

Spain, Italy and Greece have a notably healthier job market today than they did three years ago. 

The historic range for each nation, as shown with the green bar, reminds us that unemployment rates used to be wildly divergent in the eurozone; in the wake of the European sovereign-debt crisis a decade ago, Greek and Spanish unemployment surpassed 25 percent.

In search of a model to measure zero Covid and reopening in China

As the world focuses on China’s reopening, we’ve built a composite index to capture the waxing and waning of pandemic restrictions over the past three years.

Our index uses a broad range of daily alternative datasets, including port activity, road congestion, subway usage, international flights and box-office sales. The chart measures the z-score, or deviation from the historical mean (zero).

Throughout 2022, the composite index and most of its components were almost always below average. The strong shift since the start of 2023 is obvious; the most lively indicators are the rebound in box-office revenue and flights abroad.

Manufacturers report the shortages holding back production

Labour shortages and supply-chain bottlenecks have been a constant theme over the past year. It’s a far cry from 2019, when companies were more concerned about weak demand. 

This chart is based on surveys that ask companies in the US, Canada, Australia and the Eurozone about issues that are holding back production. Broadly, the factors measured are demand, the availability of labour and the ease of obtaining raw materials and equipment. 

The red lines are trends that are getting worse; green lines show improvement from 2019.

These four economies are sharing the same struggles. It’s hard to recruit employees; supply of inputs can be tricky. While the worst of the supply-chain disruptions may be behind us, issues such as the semiconductor shortage continue to hamper the auto sector, for instance.

Entrepreneurial women around the world

Which nations produce the most female entrepreneurs? As International Women’s Day approaches, the Global Entrepreneurship Monitor offers insights.

GEM, an academic research project, calculates what it calls the “TEA rate” – an acronym for total early-stage entrepreneurial activity: the proportion of the population aged 18 to 64 that is an owner-manager of a new business. This data point aims to capture the proportion of entrepreneurs who are driven by a sense of opportunity, rather than people who can find no other option for work.

Quite a few nations – including Morocco, Canada, Israel and China – have a higher TEA rate for women entrepreneurs, as our chart shows.

When we chart this ratio against another measure of economic dynamism, the Global Innovation Index, Sweden stands out as a nation combining a positive environment for female founders with an entrepreneurial culture focused on high-value-added activities.

German house prices deflate

It’s no surprise that residential real estate is slumping as central banks raise rates, making it more expensive to finance a home purchase.

What might be a surprise is that German prices are down more from their peak than nations more notorious for expensive housing markets, like the UK and Sweden. Last year, UBS named Frankfurt and Munich as notable “bubble risk” markets on a global basis.

Since the peak in April 2022, German house prices have dropped more than 11 percent, according to Europace, a platform that handles property financing. Some analysts are predicting that prices will ultimately drop 25 percent from their peak.

As the European Central Bank has tightened policy, a 10-year fixed rate mortgage is now priced at 3.9 percent, compared with 1 percent at the start of last year.  ‍

Anticipating a slump in corporate profitability

For this chart, we explored the relationship between US companies’ profitability and the Institute for Supply Management’s purchasing managers index (PMI) for manufacturers.

The closely watched PMI surveys are a measure of whether economic contraction is likely, based on whether supply-chain managers are expecting growth to pick up (readings above 50) or recede (below 50).

It appears that the ISM PMI is a leading indicator of corporate net margin – closely correlated with a 12-month lag, as our chart shows. Watch for corporate profitability to deteriorate. 

How different aspects of inflation are wiping out your wage gains

Real US wage growth has fallen below its pre-pandemic trend.

As our chart of January 2023 data shows, the headline year-on-year increase in average hourly earnings appears healthy at first, but is being more than offset by inflation in housing costs, food, transport and everything else. That results in shrinking real wages.

Central bankers and employers take heed: wages might have to play catch-up in coming years if this trend continues. As economists warn of a labour shortage, central bankers will be on the lookout for a wage-price spiral – and that’s another potential headwind for corporate profit margins.

Geopolitical risk perceptions depend on where you are sitting

In Germany, Russia’s war on Ukraine is perceived as the riskiest geopolitical crisis in 40 years. Americans are concerned, but Stateside, nothing compares to 9/11.

This chart uses measures of risk from Economic Policy Uncertainty, an academic group that measures news coverage to create indices relating to challenges ranging from infectious diseases to wars.

We used their data a year ago, after Russia invaded Ukraine. This is a different visualisation, which tracks a global geopolitical risk index against the perception of risk in nine major countries.

The “pulses,” or bubble size, reflect a deviation from the mean, i.e. the greater salience of geopolitical risk at a given moment. 

Germany is notable for how much its perception of risk surged. Europe’s biggest economy lost the source of energy that was key to its economic model and has had to pledge a military revamp as full-scale land wars return to the continent, not too far east of Germany’s borders.

‍The Japanese are selling their foreign bond holdings

Japanese investors bought enormous quantities of foreign bonds over the last twenty years, seeking yield wherever they could find it. That trend has reversed.

During the period of very low – and sometimes negative – interest rates in Japan, the nation’s investors sought out the much steeper yield curves abroad. (Japan’s companies are also famously cash-rich, and had a limited need to issue corporate bonds.)

Key to this investing strategy was the ability to inexpensively hedge currency risk. Hedging is now more expensive (and local yields are higher) amid speculation that the Japanese central bank will abandon its yield control policy and let rates rise.

The bottom panel of our chart shows how Japanese investors have been reducing foreign government and corporate bond holdings for about half a year. The top panel of our chart shows the net position on a global basis; as the chart is in negative territory, the rest of the world now holds more Japanese debt than vice versa.

‍Real Effective Exchange Rates

This Real Effective Exchange Rate is a weighted average of a country’s currency in relation to other major currencies, using weighting based on trade balances. When it rises, it means a country is losing trade competitiveness.

This chart shows nations’ deviation from their long-term average and five-year average REER to give a sense of which nations are benefiting from a devalued currency – Colombia and Turkey among them – or are suffering from an arguably overvalued one, as seems to be the case for the Czech Republic. 

On the right-hand side, the size of the bubbles reflect the impact on imports and exports. 

Chinese equities await earnings surprises as the next leg of optimism

The Chinese stock market has jumped as the nation unwound zero-Covid policies. For the momentum to be sustained, watch out for positive earnings surprises.

The MSCI China Index is up about 40 percent since December. The top panel of our chart shows recent measures of inflation surprises (lower price increases than expected) as well as better-than-predicted economic news. 

However, the bottom panel shows that earnings per share are still expected to shrink 10 percent year-on-year, looking 12 months out. The 12-month forward price-earnings ratio for the index is 11.3, a discount to its long-term average of 11.6.  

Will the economic rebound lead to revised profit expectations?

‍US inflation over the decades

Readers of a certain age will associate the 1970s with oil crises, disco and inflation. (And perhaps imagine the 1950s as a golden economic era of price stability.)

The 1980s, meanwhile, are known as the decade where central bankers conquered the inflation they had helped create with loose policy. But as our chart shows, it remains the second-most-inflationary decade in the postwar period. The Great Inflation (1965-82) persisted well into the first half of the decade. 

How will the 2020s be remembered? Some 36 months in, after the pandemic’s disruptions and hyper-stimulative monetary policy, and after the war in Ukraine upended commodity markets, we have experienced the most inflationary start to a decade since 1982-83.

What will be the ultimate shape of that 2020s line? It depends whether you are on “team transitory.” 

Chairman Powell has vowed to keep raising rates. Inflation is slowing, but remains far above the Fed’s 2% target.

‍The dollar is whipsawing perceptions of central bank balance sheets

The weaker dollar is having some interesting macroeconomic effects. For one, it’s complicating the picture as we assess how much central banks are tightening monetary policy.

For most of 2022, central banks were shrinking their balance sheets to unwind the extraordinary stimulus of the pandemic. But in the fourth quarter, as the dollar started weakening, their combined balance sheets started to expand again in US dollar terms. 

This happened even though most of the major central banks were indeed shrinking their balance sheet as measured in their own currencies. In dollar terms, only the Fed, Bank of Canada and ECB have succeeded in shrinking their balance sheets. 

Our chart compares the expansion, contraction and rebound of the balance sheets in dollar terms with a hypothetical scenario – slower, but steadier balance sheet shrinkage – that held the dollar’s value constant as of Jan. 1, 2021 (before the “King Dollar” rally that began halfway through that year).

‍Sticky inflation in Germany

This chart breaks down the components of a sticky period in German inflation. While other nations are seeing price increases ease, German inflation accelerated to 8.7 percent year-on-year in January.

The main contributor to the rebound, as our chart shows, is a grouping of some of the basic costs of living: “housing, water, electricity, gas and other fuel.”

Given this inflation picture – and some signs of a rebound in German growth, based on PMI figures and the ZEW survey – it’s no surprise that markets are starting to price in a more hawkish ECB this year. 

‍Chinese traffic is a bullish signal

China’s roads are filling with traffic again, as you’d expect now that the zero-Covid policy has ended.

This chart tracks the seasonal course of congestion on Chinese roads, with the lulls from the Lunar New Year holiday period clearly visible during the first two months of the year. 

The purple line for the Covid years was well below the pre-Covid trend, in green. The trajectory for 2023 so far shows we are probably back to the old normal.

That would be consistent with the recent run of positive economic data from China, including a PMI figure that showed a swing back to growth. That’s bullish for the world economy.

‍Transport stocks as a leading recessionary indicator

Transportation stocks have a track record of being a reliable leading economic indicator. And their relative performance recently gives cause for concern.  

This chart tracks year-on-year performance of the S&P 500’s transport index relative to its industrial index. 

Underperformance, in red, shows periods where there was a greater risk of recession. And this barometer is at a seven-year low. 

To be sure, there was no recession in 2016-17, and the red zone is far from the depths that anticipated the 2001 recession. 

Watching the global heat map for recessionary red

This table is a heat map measuring quarter-on-quarter economic growth for nations in the G20. Green means expansion. Red means contraction.

One of the great debates of 2022 was whether the US entered recession, and indeed, there were two consecutive quarters of (barely) negative economic growth.

But the US is growing again and the proportion of red on the heat map appears to be shrinking, not spreading. China’s reopening might well result in more green on the map in 2023.

Comparing Chinese bear markets and bouncebacks

China’s zero-Covid policy was tough on its equity market. As our chart shows, it was the worst bear market in recent memory, posting a maximum intra-year decline, or drawdown, of 46 percent from its peak that year.

However, steep declines by the MSCI China Index are not unusual. As the European sovereign debt crisis sideswiped markets around the world, the Chinese benchmark posted a maximum drawdown of 38 percent during 2011.

Amid US-China trade tensions during the Trump administration, the drawdown reached 33 percent. And in 2015, a period of market froth in China was followed by a 35 percent decline on recession concerns. 

For investors gauging whether history endorses a bet on China’s reopening, there was a modest rebound after the 2011, 2015 and 2018 episodes, averaging 18 percent over 6 months and 23 percent over a year and a half. The MSCI China Index is already 30 percent above its October trough.

‍‍A decade plus of Slowbalisation

This chart tracks our globalisation barometer – as measured by the sum of exports and imports as a percentage of GDP.

Our chart starts in 1970, at the tail end of what can be considered the postwar era of reconstruction, international cooperation, Keynesian economic approaches and fixed exchange rates. 

In about 1980, a trend towards economic liberalisation began. This second wave of globalisation, in green, was marked by growing access to cheap, deregulated labour in emerging markets and other innovations such as container shipping.

Since the financial crisis, globalisation looks more like “slowbalisation,” with the barometer in retreat. Tariffs are rising, environmental concerns are prompting consumers to seek locally produced goods, and countries are aiming to “reshore” industries at a time of heightened geopolitical tension. 

Carbon taxes may be the next blow to globalisation, making shipping more expensive.

‍‍Loose policy in Japan means central banks are adding liquidity again

Last month, we wrote about Japan’s yield control policies. The central bank is an outlier globally – the last of its peers to maintain negative interest rates. Japan had recently surprised markets by widening the range of acceptable government bond yields, prompting speculation that a greater policy shift could follow.

But the Bank of Japan vowed to double down and keep buying bonds to keep yields low. As our chart shows, these purchases were recently bigger than the Federal Reserve’s quantitative tightening program.

This means that on a global basis, central banks are once again adding liquidity to global financial markets. This likely contributed to the rally across equity and credit markets in January.‍

India is slowing down in our Nowcast

Our latest Nowcast takes a look at India, which is likely to surpass China’s population this year while also being buffeted by higher oil prices.  

Nowcast models aim to “predict” the present for the economy, given there is a lag before data becomes available, and keep investors ahead of the curve.

We used a variety of alternative high-frequency indicators to construct this regression model, including rainfall, coal stocks, power production and railway freight earnings. We combined these with more traditional data, such as unemployment, industrial production, and manufacturing PMI. All of these variables are leading indicators of GDP.

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

Our model is predicting that India experienced a slowdown in the fourth quarter, with year-on-year growth of about 3.7 percent, below the average of the last couple of years.

Bond candlesticks show yields burning historically bright

It was one of the greatest ever routs for bonds in 2022 as inflation picked up and central bankers tightened monetary policy. Corporate bonds were no exception.

Now, with yields at attractive levels, many observers of the debt market are saying “bonds are back” as an interesting investment. Many corporate bond yields, in fact, are at a two-decade high.

This visualisation uses “candlesticks” to show what corporate bonds in different categories – European, American, high-yield or not – are yielding. Yields are compared to their much lower levels five years ago, their historic extremes, and percentile ranges in different eras.

Banks tighten loan standards and that has implications for high yield

While yields on the most speculative corporate debt are higher than five years ago, one indicator suggests there may be more substantial moves to come.

The chart tracks measures of alternative ways companies can borrow money: via bank loans or tapping the public debt markets.

The green line tracks a US high-yield index. The blue line measures the percentage of domestic banks tightening or loosening standards for commercial and industrial loans to small firms. 

Historically, they tend to correlate. But recently, there is a severe divergence, with more and more banks presenting companies with tougher loan conditions. Will higher yields in the world of higher-risk credit securities follow, as history suggests?

Women in the workforce and C suite from Norway to Egypt

One of the most remarkable economic megatrends has been the rise of women in the workforce. But this has evolved quite differently around the world.

This chart tracks a range of countries, charting the participation rate for women in the workforce (the x-axis) against the share of CEOs that are female (the y-axis). This attempts to measure how much a country has eliminated the “glass ceiling.” 

We can broadly split nations into three categories.

Egypt, India, the UAE and Saudi Arabia are notable for having both low female workforce participation and few female CEOs.

Norway, Singapore and France are notable for having both a high share of women in the workforce and a significantly greater proportion of female CEOs than other countries. (To be sure, even in Norway, men account for more than 85 percent of those top jobs.)

Most countries, including the US, cluster together in between those extremes: many women in the workforce, but not so many CEOs.

Chinese tourists are slowly returning to Japan

China’s great reopening is expected to impact many other economies. (See the replay of our recent webinar on the topic for more.)

When we asked Macrobond users to share their 2023 outlooks, several were particularly interested in Thailand, a popular spot for Chinese tourists pre-pandemic. Tourism is so important to the southeast Asian nation that one observer was predicting a big year for the Thai baht.

This chart examines another popular destination for Chinese tourists: Japan. It breaks down Chinese travellers’ spending in their eastern neighbour by category, including hospitality and accommodation. 

It’s easy to spot the three years where China closed its borders to fight Covid. For more than 10 quarters between 2020 and 2022, the tourism spending was nil. Chinese travellers were travelling and spending again in the fourth quarter – but only just.

Fewer blizzards mean more Americans came to work

Here’s a potentially surprising side effect of climate change: fewer “snow days” keeping workers in wintry nations from their jobs. 

The chart tracks how many US workers were prevented from showing up to their jobs due to bad weather. It charts the historical mean over the course of the year. Unsurprisingly, January and February see the most absences.

But this year, just 280,000 workers were affected in January, well below the 450,000 average. 

The mild weather might also be a factor in the biggest surprise from that January jobs report: the labour market’s resilience after a year of monetary tightening. 

PMIs suggest emerging markets will grow while developed markets stumble

The Purchasing Managers’ Index (PMI) is a measure of whether economic contraction is likely, based on whether supply-chain managers are expecting growth to pick up or recede.

This chart shows the Composite PMIs (in blue) for various nations and groups of countries, as well as its subcomponents in manufacturing and services. A reading above 50 means expansion; below 50 means contraction. 

Pulling out some global trends, it emerging markets are expected to expand while developed markets contract. 

China’s reopening is in focus here, as well; expansion is predicted, barely. we can see that World Emerging Markets are expected to expand (PMI  Composite of 51.9 in January), whereas Developed Markets are expected to contract (48.4). Second, China is expected to expand (51.1) following the end of it strict zero Covid Policy. Third, at the extreme, we have India which is expected to have the most robust growth (57.5) and the US which is expected to have the lowest (46.8). The UK are not far from the US (48.5). Finally, this rebound will be mainly driven by the Services (65% are above 50) than the manufacturing (23%).