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Special edition: DoubleLine on the yield curve inversion, typical post summer instability, and a new normal in office occupancy
The Great Rate Divide
For much of the post-World War II era, whenever the Federal Reserve began to cut its policy rate, long term interest rates quickly followed suit and saw declines in yields, leading to strong returns across fixed income markets especially in longer duration bonds. With the Federal Reserve expected to start cutting rates this month, a question arises: will longer-term interest rates behave similarly this time?
Fed cuts have typically coincided with periods when the U.S. was heading into or already in a recession. This cycle seems to be different. While U.S. economic data suggests softening growth, the probability of a recession according to Bloomberg economists stands at only 30%.
Secondly, the yield curve has typically been either slightly inverted or flat when the Fed began cutting interest rates, with short- and long-term interest rates aligned. This time around there is a very visible divergence between the level of the Fed’s policy rate and the 10-year U.S. Treasury yield.
While longer-term treasury bonds have historically been a safe bet for investors anticipating post-rate-cut rallies, today's economic (and inflationary) context paints a more complex picture. The significant yield curve inversion and low odds of a recession complicate the outlook for long term yields unless the U.S. economy deteriorates more than currently expected.
Seasonal Instability
Summer is typically a period when financial markets experience a lull, as many investors and market participants step away from their desks to recharge. This year followed the usual seasonal patterns of low equity volatility until mid-July, when risk assets sold off and volatility surged, reaching a peak in the first week of August. Contributing to this event were weaker than expected economic data such as a disappointing June jobs report, higher than expected initial jobless claims, and a poor reading from the ISM manufacturing PMI, which gauges the strength of the U.S. manufacturing sector. These factors triggered fears the Federal Reserve was ‘behind the curve’ by maintaining a restrictive monetary policy even as the economy softened and inflation cooled.
This rapid unwinding of leveraged positions contributed to the CBOE Volatility Index (VIX), which measures market expectations based on the S&P 500 index options, spiking to an intraday high of 65, a level only seen during the Global Financial Crisis and the start of the pandemic in March of 2020.
August and September Typically Perform Poorly
Seasonal analysis of S&P 500 monthly performance shows that equities tend to sell-off in August and September. On average, the S&P 500 is down a cumulative -1.5% in August and September.
Interestingly, the August/September instability in equities may set the stage for stability in the following months. Since 1990, the period from October through December has consistently been the strongest period for stock performance with average monthly returns of +1.7% (+20.1% annualized). Equity volatility typically peaks around late September, and drifts lower in the fourth quarter. Enjoy the rest of summer, but keep in mind that September can be a turbulent month. But do not fret as the turbulence is usually short-lived.
A ‘New Normal’ in Office Occupancy
This chart shows the average office occupancy for the top ten cities tracked by Kastle Systems, a provider of office building security solutions. Based on daily security key card swipes at office buildings across the country, office use today is less than half of the pre-pandemic level.
Strikingly, there has been slight increase in office usage over the past year, which is well past the pandemic era, implying that we may have reached a new equilibrium in how American businesses utilize office space. Of the ten cities tracked by Kastle, the Austin metro area has the highest office usage at 60.6% of the pre-pandemic baseline while San Jose metro area has the lowest at 40.3%. A notable feature for both metros is that like the nationwide numbers, office usage is unchanged compared to 2023.
BOJ Outpaces Fed at Bond Buying
Today the Federal Reserve holds $4.45 trillion U.S. Treasuries on its balance sheet, a whopping 550% increase over the past 20-years. While this may sound like a stark increase, and it is, the Fed’s holdings of U.S. Treasuries have not kept up pace with the increase of U.S. Treasury debt outstanding which has surged more than sixfold during the same period. Of the $27 trillion of marketable U.S. Treasury debt outstanding, the Fed now holds nearly 17%, down from the 25% peak reached at the end of 2021, and surprisingly to most, in line with the pre-global financial crisis (GFC, 2002-2007 average) era.
This chart highlights the divergence of Fed and Bank of Japan (BOJ) policies as it relates to government debt purchases. Up until 10 years ago, the Fed held a larger share of government debt outstanding, but that flipped in July 2014.
What has been the cost of such extreme monetary policies and indirect monetization of government debt in Japan? Since peaking in 2011, the Japanese yen has depreciated over 50% vs. the USD. In gold terms, the value of yen is down 68% over the same period. Shockingly, inflation in Japan has averaged less than 1% over this period, indicative of the structural deflationary forces at play.
From Surge to Stability
This chart shows the number of consecutive months when the headline CPI YoY inflation rate has been 3.0% (rounded to the nearest 0.1%) or higher. The recent streak of over 3% ended in July, marking a 39-month battle with inflation. As the chart shows, the recent streak was the fourth longest in the U.S. since World War II. The U.S. has not seen a series of high inflation prints like this since the early 1990s. Amazingly, since the streak started in April 2021, CPI is up 18.2%.
In a more benign inflation regime, such as the one we experienced between October 1991 to March 2021, the average inflation rate was 2.2%, and bonds performed well as interest rates declined. This time might very well be no exception. If U.S. inflation continues to cool as expected in the coming months, this should give the Fed continued confidence to initiate its well-anticipated policy-rate cutting cycle. History suggests that the U.S. Treasury yield curve tends to steepen as front-end yields decline more than long-end yields, and Treasuries tend to perform well overall during policy-rate cutting cycles.
Chart packs
Time to move away from tech?
What the chart shows
This chart visualizes the relative strength (x-axis) and momentum (y-axis) of four S&P sectors against the S&P 500 Index over a specific three-month period.
Sectors on the right side of the vertical axis (value of 100) have higher relative strength compared to those on the left. Sectors above the horizontal axis (value of 100) have increasing momentum, while those below have decreasing momentum.
This means that sectors in the top right quadrant have high relative strength and positive momentum and are expected to outperform the benchmark. The inverse is true for sectors in the bottom left.
Sectors in the bottom right quadrant have high relative strength but declining momentum – which means they may start to underperform soon. Those in the top left quadrant may therefore start outperforming soon.
Behind the data:
Information Technology (purple line) has been the highest performing S&P sector so far this year, reflected in its position in the Leading quadrant. But momentum appears to be declining as it heads into the Weakening quadrant. Could IT soon underperform?
Conversely, the Financials sector has emerged from the Lagging to Improving quadrant, displaying low relative strength and rising momentum, possibly indicating the cusp of recovery.
US instantaneous inflation trends bolster probability of rate cuts
What the chart shows
This chart shows the trends in US core Consumer Price Index (CPI) inflation rates from 2021 to the present using three different measures: year-over-year (purple line), month-over-month annualized (green columns), and instantaneous (blue line), which is calculated with a parameter to indicate to what extent more recent observations are more heavily weighted, i.e., weighing between year-over-year and month-over-month inflation.
Behind the data
Inflation is crucial for monetary policy stances and decisions, particularly those of the Federal Reserve. Conventional inflation measures depict yearly and monthly trends. However, these can exhibit biases due to outdated data and short-term noise, respectively. As such, {{nofollow}}instantaneous inflation could be a sensible indicator that balances data noise with the accuracy of immediate price changes.
In 2023, instantaneous core CPI inflation in the US was relatively lower than the annual changes, suggesting continued moderation driven by lower monthly changes. Conversely, in early 2024, the surge in instantaneous core inflation above the annual rate likely indicates more persistent inflation risks. However, thanks to the recent softening of monthly underlying prices in the US, including the May-June 2024 CPI reports consistently {{nofollow}}falling short of expectations, the instantaneous core CPI inflation fell below the yearly rate again. This supports the increasing likelihood of the Fed’s rate cuts, especially in the upcoming September 2024 meeting.
Rising Shanghai freight rates signal potential upside risks for US inflation
What the chart shows
This chart shows the relationship between the Shanghai Containerized Freight Index (SCFI), China Producer Price Index (PPI) and the US CPI.
In the top pane, we see how changes in Shanghai’s shipping rates precede China’s PPI by about six months. Since the global financial crisis (GFC), the correlation between the two indexes is 0.78, indicating a strong positive relationship.
In the bottom pane, we then see how changes in China’s PPI could be a leading indicator of the US CPI by about six months. The post-GFC correlation here is 0.60, indicating a moderate positive relationship, plausibly via global supply chain and global trade.
All this suggests that changes in shipping rates in Shanghai can predict future inflation trends in China and the US.
Behind the data
China’s CPI inflation rose by 0.2% in June 2024 from a year ago – lower than the {{nofollow}}anticipated 0.4%. Meanwhile, 0.8% YoY PPI inflation {{nofollow}}aligned with consensus forecasts.
Amid {{nofollow}}ongoing geopolitical tensions in the Red Sea, global and Shanghai freight rates have shown an upward bias, although recent weekly prices suggest some signs of peaking.
Consequently, China’s PPI inflation, which follows the shipping costs by several months, continues to be under upward pressure.
This, in turn, suggests that, from the supply side, US CPI may experience increased inflationary pressures in the coming months.
UK inflation hits Bank of England target as main components ease
What the chart shows
This chart provides a detailed view of year-over-year inflation rates for major subcomponents of the UK’s CPI as of June 2024.
The large dots denote the figures for June 2024, while the small dots represent the figures for the previous month.
The arrows show the direction of change between the two.
The chart also shows the relative weights (Y-axis) of each subcomponent in the overall CPI to illustrate the relative importance of each category in the inflation measurement.
Behind the data
UK inflation hit the Bank of England’s (BoE) 2% target in May 2024 for the first time in three years following the worst inflationary surge in a generation.
The following month, headline and core CPI inflation measures {{nofollow}}remained at 2% and 3.5%, respectively.
With headline inflation finally at target, pressure appears to be mounting on the BoE to reduce the policy rate by 25 bps to 5% at the next meeting on 1 August albeit elevated core inflation.
The moderation over recent months in main components such as recreation and food suggests a potential easing in inflationary pressures, supporting arguments for a rate cut.
Divergent investment trends in developed markets: equities gain and bonds struggle
What the chart shows
This scatter chart compares year-to-date (YTD) total return performance of large-cap stocks with government bonds of all maturities across various developed markets since 10 July.
Each data point represents the intersection of a country’s stock market and bond market performance; the position of each point shows how its stocks and bonds have performed relative to one another.
Behind the data
The chart highlights the diverse performance of stocks and bonds in developed markets for 2024, underscoring how different economic conditions and policy decisions across countries can impact the returns of these asset classes.
The widespread negative performance of bonds in most economies is a cause for concern. The situation is particularly worrisome in France, Japan and the UK.
In contrast, the equity market presents a more optimistic picture. Denmark's strong performance is driven by Novo Nordisk's weight-loss drug Wegovy, while the US stock market is buoyed by Nvidia, the leading technology company whose chips are powering the AI boom.
The declines in equity performance in Portugal and New Zealand indicate that not all markets are benefiting equally.
Rising S&P 500 ratio sparks bubble concerns amid AI investment boom
What the chart shows
This chart displays the ratio (blue line) of the S&P 500 market-cap weighted index to the S&P 500 {{nofollow}}equal weight index from 1990 to July 2024, highlighting the performance of larger companies relative to smaller ones within the S&P 500. When the ratio is above 1, larger companies are outperforming smaller companies. When it’s below 1, the inverse is true.
The shaded bands represent the different standard deviations around the trend line to provide context for the ratio’s historical volatility and the range within which the ratio has fluctuated.
The green line shows the long-term trend of the ratio.
Behind the data
US stocks and the S&P 500 Index, largely propelled by AI narratives, have raised {{nofollow}}questions about possible bubbles as their valuations have been increasing in light of further AI prospects. One method to gauge such potential bubbles is by comparing the index to its diversified version, i.e., its equal weighting.
The ratio of the SPX market-cap-weighted index to the equal-weighted has been on the rise since the COVID-19 pandemic. It hovered around only +1 standard deviation (s.d.) from the long-term trend from 2020 to mid-2023, reflecting a relatively balanced performance.
However, starting in mid-2023, the ratio began to climb more noticeably, exceeding +2 s.d. in June 2024. This surge suggests that larger companies are outpacing smaller ones, raising concerns about overvaluation, especially in sectors heavily influenced by AI.
Still, it appears the ratio still has some room for growth compared to the dot-com bubble period in 2000-2001, when it surpassed +3 s.d. before plummeting.
Overall, the chart implies that while the current market shows signs of a potential bubble, it has not yet reached the extreme levels observed during the dot-com era.
The level of GDP is what matters for commodities
By Roukaya Ibrahim, Strategist, BCA Research
This chart highlights that commodity prices are more sensitive to the level of GDP than the growth rate.
The shaded regions refer to periods during which the G20 Composite Leading Indicator (CLI) is above 100. This indicator is designed to capture fluctuations in economic activity around its long-term potential level and provide a six-to-nine-month lead on business cycle turning points. A value above (below) 100 corresponds with expectations that the level of GDP will be above (below) its long-term trend. Meanwhile, a rising (falling) CLI implies that GDP growth is anticipated to accelerate above (decelerate below) long-term trend growth.
The chart reveals that energy and industrial metal prices typically rise on a year-over-year basis when the level of GDP is expected to be above its long-term trend, regardless of whether the CLI is rising or declining. This result is intuitive given that, ceteris paribus, an above-trend GDP level likely corresponds with an above-trend level of commodity consumption.
Moreover, prices of these commodities generally decline during periods when the CLI is below 100, regardless of whether the CLI is rising or declining. This implies that commodity prices typically fall on a year-over-year basis when the level of GDP is expected to be below its long-term trend. Again, this result makes sense given that a below-trend level of GDP implies that the level of commodity consumption is also relatively weak.
A reality check on China’s corporate profits
By Jing Sima, China Investment Strategist, BCA Research
After a two-and-a-half-month rally, Chinese stock prices are now aligning with the country’s subdued economic fundamentals.
Credit and money supply data remain downbeat despite recent measures to support the property market. The ongoing descend in money growth confirms that business activity remains weak, suggesting that corporate earnings will deteriorate over the next six months.
Without an improvement in corporate profits, Chinese stocks are unlikely to sustain rallies beyond two to three months.
How far is “far right” in Europe?
By Marko Papic, Chief Strategist, BCA Research
French politics has given global investors agita as they scramble to make sense of the trajectory of the country’s fiscal and geopolitical policy. Many still harken back to the Euro Area sovereign debt crisis when Euroskeptic policymakers – including Marine le Pen – roamed the continent, threatening to blow up the monetary union. However, this is a long gone era. The reason that Le Pen’s National Rally (RN) has found success is because her popularity is no longer capped by her Euroskepticism. Since the 2017 presidential election, Le Pen’s popularity has finally broken through the glass ceiling she imposed on herself by sticking to the maximalist anti-EU message. Much as with almost all of the anti-establishment parties on the continent, RN is today only “far” right on the issue of immigration.
Misconception of Chinese household savings vs. consumption
By Jing Sima, China Investment Strategist, BCA Research
The belief that large bank savings by Chinese households will support consumption is misguided. Historically, changes in household bank deposits in China have shown little correlation with spending.
Unlike US consumers, Chinese households did not receive direct cash transfers from the government during and after the pandemic. The sharp rise in bank deposits since 2018 is due to asset reallocation rather than increased savings from household income. Although the total household bank deposits have more than doubled, most of this increase is in time deposits (savings accounts and CDs). Checking account balances have remained almost unchanged over the past decade.
To sum it up: even though Chinese households have accumulated more bank deposits in recent years, much of this is held in savings accounts by wealthier individuals, who have a low propensity to spend. Therefore, household savings are unlikely to drive significant growth in consumption.
Korea’s export recovery in perspective
By Arthur Budaghyan, Chief EM/China Strategist, BCA Research
Even though Korean exports have rebounded, most of this recovery has been due to semiconductor exports. After collapsing in early 2023, semiconductor overseas shipments have surged. Korea is producing high-value-added memory chips, and demand for these has surged in the past 12 months.
Excluding semiconductor exports, exports have improved only marginally. This and other global trade data suggest that the global trade recovery has been primarily driven by surging demand for AI chips and improvement in US imports/domestic demand. Outside these, there has been a little recovery in global exports.
Why have EM stocks underperformed?
By Arthur Budaghyan, Chief EM/China Strategist, BCA Research
There is a reason why global equity investors have been moving out of EM stocks for several years. EM and Emerging Asian EPS in US dollars have been flat for 13 years, with considerable cyclicality. Investors do not pay high multiples for profits that have not grown at all but have experienced considerable cyclical fluctuations.
By contrast, US EPS has been growing rapidly with reasonably low volatility. That is why equity investors have been abandoning EM and flocking to US stocks. Hence, for EM equities to enter a structural bull market, their EPS should grow reasonably fast with low volatility. For now, EM and EM Asia EPS are still contracting.
Underlying inflation is slowing
By Mathieu Savary, Chief European Investment Strategist, BCA Research
Despite recent hiccups in core and services CPI, the Eurozone’s underlying inflation remains consistent with rate cuts by the European Central Bank (ECB). Trimmed-mean CPI now seats below core CPI, while supercore CPI and PCCI are still well behaved. These observations suggest that the ECB will not be stopped in its track and will cut rates more this year.
How much more though? Inflation is not really the constraints on the ECB today. Growth is. The European credit impulse is picking up from depressed levels, real wage growth is above 2%, and global trade has regained some vigor. Consequently, the ECB risks boosting growth too much if it starts easing policy aggressively. This would generate inflationary pressures down the road. As a result, the ECB will move in line with the pricing of the €STR curve and it will cut rates twice more in 2024.
Biden's odds plummet as Trump takes lead in presidential race
What the chart shows:
This chart from PredictIt illustrates the fluctuating odds of various candidates winning the 2024 presidential election, based on betting market data. As of July 5, 2024, Donald Trump leads at 58 cents per share with approximately a 58% chance, while Joe Biden's odds have dropped to 23%.
Behind the data:
This significant shift in Biden's odds coincided with the first presidential debate on June 27 in Atlanta, Georgia. The debate performance sparked concerns among both Democrats and Republicans about Biden's fitness for a second term, particularly due to his age (he would be 86 by the end of his potential second term.) This has led to increased speculation about alternative Democratic candidates, with California Governor Gavin Newsom and Vice President Kamala Harris seeing their odds rise to 22% and 6%, respectively. The coming weeks will reveal whether Biden's debate performance has a lasting impact on his re-election prospects.
US job market faces pressure as downward revisions signal potential slowdown
What the chart shows:
This chart shows the revisions to US nonfarm payrolls (NFP) from 2021 to the present, highlighting the differences between initial release estimates and the latest adjustments. The green areas indicate periods where revised data showed higher job additions than initially reported, while the red areas show periods where job additions were revised downward. The dotted line represents the non-recessionary average of 157,000 new hires per month.
Behind the data:
Despite monetary policy restrictions, the US job market has shown resilience, reflected in the better-than-expected NFPs in several months over the past quarters and years. NFPs have also consistently exceeded the non-recessionary average since early 2021. However, since 2023, there has been a downward revision trend (red areas) with only occasional upgrades (green areas), a contrast to the more frequent positive adjustments seen in 2022. The upcoming {{nofollow}}release for June (scheduled for 5 July) will be closely watched, with expectations of a slowdown to approximately 180,000–190,000 job additions.
Elevated US debt burden poses risks to future economic stability
What the chart shows:
This chart displays the US debt ceiling and the current debt levels from 1995 to the present. The blue line represents the total public debt subject to the limit, while the red and green areas show the periods when the debt was above and below the statutory limit, respectively. The grey bars indicate US recession periods.
Behind the data:
The US debt ceiling, a limit set by Congress on the amount of federal debt, has been a critical issue. The debt limit of $31.4 trillion has been suspended from June 2023 to January 2025, when Congress must raise it or risk a default on its debt, following the November 2024 presidential election. The {{nofollow}}suspension aims to prevent a catastrophic default that could freeze financial markets, potentially wiping out trillions of dollars in household wealth and negatively impacting economic activity and employment conditions. Recently, the IMF warned of the {{nofollow}}adverse consequences of high debt levels, such as higher fiscal financing costs and rollover risks.
Record yield curve inversion continues without a recession
What the chart shows
The top section illustrates the spread between 10-year and 2-year Treasury yields since the 1970s, with periods of inversion (where the 2-year yield is higher than the 10-year yield) highlighted in red. The bottom section quantifies the number of consecutive trading days the yield curve has remained inverted, which is often considered a predictor of economic downturns.
Behind the data
Historically, an inversion between the 2-year and 10-year Treasury yields has been viewed as a warning sign of an economic downturn. However, this time, it appears to be an exception – for now. As the chart shows, July 2024 marks the 24th consecutive month of yield curve inversion without a recession, the longest streak on record. This is comparable to the 1970s when the US faced high inflationary risks and thus high policy interest rates. Similarly, the current period has seen a prolonged inverted yield curve, though there are hopes for avoiding a recession.
As monetary policy enters an easing cycle, the 2-year bond yield—more closely tied to the Federal Funds rate—could be more vulnerable to downward pressure than the 10-year bond yield. This could result in a reduced yield curve inversion or even a return to a normal upward-sloping shape for the US Treasury yield curve. Economic conditions that normalize over time would also contribute to this shift.
S&P 500 seasonality suggests stronger returns at start of July
What the chart shows
This chart depicts the seasonality of the S&P 500 index since 1928 by comparing the performance of the first (left dashboard) and last 10 (right dashboard) trading sessions of each month. It shows the average return, median return and the percentage of time the index was up during these periods. The chart also includes the standard deviation of returns to indicate the volatility and the distribution of returns within specified ranges.
Behind the data
Focusing on the first 10 sessions of the month, July stands out with the strongest historical returns with a mean of 1.55% and a median of 2.07%. More so, across the first 10 trading sessions of the S&P 500 in July since 1928, returns have been positive 72% of times.
Looking at the last 10 sessions of the month, December stands out with a mean of 0.99% and a median of 1.15%. Returns have also been positive on 75% of occasions.
US dollar defies expectations with strong gains in 2024
What the chart shows
This chart shows the contributions of various currencies to the changes in the US Dollar Index (DXY) since the start of 2024. Each color represents a different currency, with the height of each segment indicating its contribution to the overall index's performance.
Behind the data
2024 began with consensus expectations of a weaker US Dollar due to stretched valuations. However, nearly halfway through the year, the dollar index (DXY) has gained around 4.4% year-to-date, raising questions about whether the consensus has changed.
The case for a weaker dollar in 2024 was based on deteriorating fiscal and trade deficits and a narrowing interest rate differential with other major economies. As the year unfolded, resilient growth and slower progress on inflation in the US pushed back rate cut expectations.
Meanwhile, other major central banks embarked on monetary policy easing ahead of the Fed. Consequently, as shown in the chart, the greenback gained broadly against all the currencies in the DXY. While long-term fundamentals still indicate that the dollar is richly valued, higher-for-longer rates in the near term could continue to support a stronger-for-longer dollar.
Crypto market declines despite Bitcoin ETF boost
What the chart shows
The chart displays the recent drawdown dynamics of the 16 biggest cryptocurrencies by market capitalization, indicating the percentage decline from their previous peak values. We can see significant declines across the various cryptocurrencies, with some experiencing drawdowns of over 80%.
Behind the data
During the spring, the crypto market experienced euphoria after the U.S. Securities and Exchange Commission approved the first 11 Bitcoin spot ETFs in January 2024. Following this approval, many cryptocurrencies soared significantly. However, once Bitcoin entered a stable period, many of its peer coins declined.
Recently, there have been drastic drawdowns in meme-inspired coins such as Dogecoin and Shiba Inu, as well as in some notable projects like Cardano, Avalanche and Ripple, all of which have dropped by around 80% from their peaks. Polkadot's situation is particularly concerning, as it approaches an all-time low despite its technical promise and robust development community.
On the other hand, the relative stability of Bitcoin and Tether during this period reaffirms their positions as more reliable assets within the cryptocurrency ecosystem. Toncoin's rise to an all-time high amidst this turbulence is intriguing and suggests that investors are still seeking new opportunities with perceived strong potential.
JPY undervaluation, time to be a contrarian?
What the chart shows:
The chart shows USDJPY, and its fair valuations derived from 10-year yield differentials and purchasing power parity (PPP). Using 3-year and 20-year rolling regressions, it reflects shorter- and longer-term aspects of capital flows and inflation dynamics. Additionally, it provides USDJPY scenarios based on 2.5-3.5% 10-year US-Japan bond yield differentials and visualizes USDJPY’s long-run subsequent returns compared to PPP fair valuation deviations.
Behind the data:
The BoJ tightened its monetary policy, raising the policy rate to 0.25% and reducing bond purchases. The Fed held rates steady but signaled a possible cut in September, narrowing the 10-year US-Japan bond yield gap to around 3%. Given scenarios of 2.5-3.5% yield differentials, USDJPY is estimated to be around 129-146.
The PPP model shows JPY undervaluation above +2 standard deviations, indicating potential for long-term reversion.
However, underestimated core inflation and slowing real wages in Japan may challenge BoJ’s hawkish stance, suggesting USDJPY undervaluation may persist.
US macro lags investment sentiment amid possible upcycle peak
What the chart shows:
The chart shows the US Sentix Economic Index, the US Investors Intelligence Investment Index, and the S&P 500. The upper pane illustrates the economic and investment sentiment indices in terms of z-scores using monthly data from July 2002 to the present compared to the year-over-year growth of the S&P 500. In the lower pane, the US economic-investment z-score differentials are displayed with ±1 and ±2 standard deviation (s.d.) bands.
Behind the data:
When US economic sentiment lags investment sentiment significantly (below –1 s.d.), it suggests pessimistic macro and investment cycles, as seen during the Global Financial Crisis, the euro area sovereign debt crisis, and the COVID pandemic.
Currently, the macro-investment sentiment gap is negative but not beyond –1 s.d. The cycle, driven by tech and AI prospects, shows signs of peaking, and the increasing economic-investment discrepancy might be cautionary. Despite the negative gap, the upcycle is primarily led by technological advancements.
Money flows into tech sector
What the chart shows:
The chart uses data from EPFR to illustrate the sectoral breakdown of global net fund flows aggregated since the beginning of the year.
Behind the data:
The AI-driven rally, particularly around the "Magnificent 7," has significantly impacted global fund flows, with the technology sector receiving around 10 billion USD by the end of July. Conversely, other sectors saw significant outflows, collectively losing almost 25 billion USD. This trend highlights the concentrated investor interest in tech amid broader market adjustments, reflecting a substantial shift in investor focus towards technology and telecommunications.
Unusually low correlation between S&P market-cap and equal weighting
What the chart shows:
The chart illustrates the one-month rolling return correlation between the S&P 500 market-cap weighted index and the S&P 500 equal weight index from the 1990s.
Behind the data:
Previously, we have shown that the S&P 500 index has been diverging from its equal weight index quite significantly. That is, their ratio—market-cap relative to equal weighting—has been surpassing +2 s.d. but not yet beyond +3 s.d., as happened during the dot-com period.
Their dynamic return correlation provides comparable results. It’s noticeably low during both dot-com- and COVID-related eras but high during tranquillity. However, the recent correlation in early July 2014 even unveiled a more remarkable observation as it tumbled to a record low of about zero.
Such a historically non-existent correlation may not be overlooked amid AI-motivated markets that underpin large-cap concentrations, as opposed to diversifications reflected in the equal weight index.
Late summer volatility came early this year
What the chart shows:
This chart compares the VIX during a calendar year, with the green line representing 2024, the blue line the historical mean, and the purple line the historical mean excluding extreme years (2008 and 2020).
Behind the data:
Historically, volatility tends to increase at the end of summer. This year, VIX spiked significantly in July due to upcoming Federal Reserve meetings, Democratic delegate votes, and earnings reports. Although rate cuts and political confirmations might ease investor concerns, the early and sharp rise in VIX above 20 indicates heightened market caution. Market confidence may be bolstered by anticipated rate cuts and political clarity, but current volatility signals cautious investor sentiment.
China exports recover driven by tech
What the chart shows:
The chart shows China’s export growth contributions by category, smoothed using a three-month moving average, highlighting machinery and equipment, basic metals, transport equipment, etc.
Behind the data:
China's exports have been recovering, driven by global manufacturing improvements, front-loaded orders, and low-base effects. Key contributors include tech-related products like phone sets and electronic circuits.
As China leads in high-tech and AI sectors, its export trends remain critical global economic indicators. The recovery indicates China's growing influence in global trade, particularly in high-tech industries, which may shape future economic dynamics.
Chinese copper inventories filled for no good?
What the chart shows:
This chart looks at Chinese copper inventories (blue line) and copper exports (green line).
Behind the data:
Throughout 2024, Chinese copper inventories rose while exports increased significantly due to limited domestic demand. This trend reflects broader commodity market dynamics where sluggish domestic consumption drives producers to seek higher international prices, despite potential trade tensions. The surge in exports amidst high inventories suggests strategic shifts in response to domestic economic conditions and global demand pressures.
US unemployment rate breaks historic low streak
What the chart shows
This chart shows the US unemployment rate and the number of consecutive months it has remained below 4%. In the top pane, the red line shows periods when the unemployment rate is below 4%; the blue line represents the rate at above 4%.
The bottom pane represents the number of consecutive months the unemployment rate has remained below 4%. We can see that the most recent streak has just ended, marking the longest such streak since 1970. The only other time the rate stayed below 4% for a longer period was in the 1950s.
Behind the data
Throughout history, there has been a trend that once the unemployment rate breaks a long streak below 4%, a recession follows. This was true in 1949, 1953, 1957, 1970, 2001 and 2020. We have also seen that once the jobless rate rises above 4%, it often spikes much higher (see 1953 and 1970). Given that ‘maximum employment’ is one of the Fed’s two mandates, we can expect the central bank to be watching this statistic closely.
China may need substantial RRR cuts to stimulate financing
What the chart shows
The scatter plot illustrates the relationship between China’s reserve requirement ratio (RRR) for large banks and the growth of total social financing (TSF) since 2014. The chart includes not only actual observations but also fitted values along with their standard deviation bands derived from a simple regression of the TSF on the RRR.
Behind the data
The Chinese economy faces significant challenges. The property market’s recovery has been sluggish, as evidenced by increasing clearance times, despite authorities implementing policies {{nofollow}}to bolster the market. Meanwhile, credit activity is contracting and may require substantial support. One potential tool is reducing the RRR. Our analysis suggests that for the TSF to grow by approximately 10% compared to last year, large banks’ RRR might need to be cut by around 150bps, or over 100bps more than the current rate. Although additional RRR cuts have not yet occurred in Q2 2024, the People’s Bank of China (PBoC) has previously indicated {{nofollow}}room for further easing. There remains hope for increased credit activity in China.
Market volatility clusters around major events
What the chart shows
The blue line represents the price return of the S&P 500 over time on a logarithmic scale, with data starting from 2000. The green dots mark the top 40 best-performing days of the index, measured by daily percentage return. Conversely, the red dots indicate the top 40 worst-performing days.
Behind the data
Days of high volatility, both upward and downward, tend to cluster around major global events. For example, 39 of the 80 most volatile days occurred between 2008 and 2009, at the peak of the global financial crisis. Another cluster of volatility occurred around the COVID-19 pandemic shocks. This seems to confirm what we’ve always sensed: that significant market swings often continue over a period of time following major events.
Global real estate crisis leaves REITs struggling
What the chart shows
This visualization shows the annual performance rankings of real estate investment trusts (REITs) in 10 selected countries over the past eight years.
Behind the data
With the rise of the Magnificent 7 (the group of seven leading tech companies known for their strong performance), alternative investments like REITs have faded into the background. A real estate crisis is looming in many parts of the world and REITs have not provided sufficient returns since last year.
As our ranking shows, only Australia’s real estate sector has not experienced losses in 2024 so far. The most severe situations are in Canada, China and Italy, which are all struggling with ongoing real estate crises.
Shift in IT sector: Market capitalization of semiconductors exceeds that of software
What the chart shows:
The chart compares market capitalization of 3 subsectors of S&P 500 Index: hardware, software and semiconductors.
Behind the data:
The rapid development of AI-related technologies over the past two years has led to a sharp surge in demand for semiconductors, significantly increasing the size of the entire industry. In December 2023, the market capitalization of semiconductor manufacturing companies in the S&P 500 index exceeded that of hardware companies. By May 2024, the skyrocketing value of Nvidia allowed the semiconductor sector to surpass the entire software industry, which has traditionally been the largest subsector in the S&P 500 IT Index.
Although recent fluctuations in Nvidia's stock prices have had a significant impact on the semiconductor industry, it still remains substantially larger than the software sector.
Pure growth stocks lead market gains amid strong US manufacturing
What the chart shows
The chart illustrates the S&P 500’s year-to-date performance by style and strategy—equal weighting, pure growth, pure value, high beta and low volatility—compared to the US S&P Global Purchasing Managers’ Indices (PMI).
Behind the data
The figure indicates that the S&P 500 index has predominantly been influenced by {{nofollow}}pure growth, driven by factors such as sales growth, the ratio of earnings change to price, and momentum. This growth trend aligns with AI narratives, exemplified by {{nofollow}}Nvidia’s recent upbeat sales growth, where Nvidia stands out as one of the S&P 500’s significant contributors.
In contrast, other styles and strategies have performed less favorably. Interestingly, {{nofollow}}high beta performance has lagged behind pure growth. This discrepancy may be attributed to shifts in calculated beta coefficients over the past year, affecting the classification of certain equities as high beta.
Moreover, the S&P 500 index, its pure growth component, and overall stock performance this year seem relatively aligned with the US S&P Global PMI, as they rally when the PMI rises or is in expansion. Therefore, PMI anticipations might be helpful in this regard as well.
ESG funds see renewed investor interest
What the chart shows
The chart uses data from EPFR to compare the total number of ESG funds versus net flows, i.e., the difference between the amount of money being invested in and withdrawn from these funds. It provides insights into the growth trajectory of ESG funds on a global scale since 2014.
Behind the data
At the beginning of 2019, there were around 300 operating ESG funds. By January 2024, this number surged to over 1,800, highlighting substantial and rapid growth in the availability of investment options dedicated to ESG principles. This reflects the increased investor interest in sustainable and socially responsible investing in the wake of the pandemic.
However, the net flows tell a more nuanced story. The peak of ESG-oriented investing occurred around January 2021, after which asset owners and portfolio managers began withdrawing assets from ESG funds, possibly due to economic uncertainty and growing scrutiny over the actual impact of green investments.
Recently, there has been a new spike in net flows. Could this signal a revival in ESG?
US air travel busier than ever
What the chart shows
The US {{nofollow}}Transportation Security Administration (TSA) tracks the number of travelers scanning their boarding pass with a TSA agent each day. This chart depicts the checkpoint numbers from 2019 to 2024, represented as a seven-day moving average. The figures for 2023 (red) were closely aligned with the pre-pandemic levels of 2019 (green). We can see that 2024 (burgundy) has so far surpassed both years.
Behind the data
The growth in US airport passenger traffic this year suggests a continued recovery in business travel, which in turn should boost demand for hotels and the hospitality sector in general.
In fact, on 24 May, the TSA revealed it had screened more than 2.95 million airline passengers, setting a record for a single day. Moreover, five of the 10 busiest travel days on record have occurred since May 16 this year.
US manufacturing shows mixed signals as large firms shrink and smaller firms grow
What the chart shows
This chart compares the performance of the US Purchasing Managers’ Indices (PMI) from both the Institute for Supply Management (ISM) and S&P Global since the global financial crisis, highlighting the gap between the two indices as well as average and standard deviation bands. The chart also shows their individual components—new orders, production or output, employment, supplier deliveries, inventories—with different weightings.
Behind the data
Broadly speaking, the ISM and S&P Global manufacturing PMIs and their components appear relatively aligned over time. However, upon closer examination, discrepancies emerge. The {{nofollow}}US ISM Manufacturing PMI in May remained in contraction, albeit with a smaller magnitude than in 2023, primarily due to declining new orders. Yet, its employment and production components showed slight expansion. In contrast, the {{nofollow}}US S&P Global Manufacturing PMI in May continued to grow, driven by all components, especially output and employment.
When {{nofollow}}comparing ISM and S&P Global PMIs, it’s noteworthy that the ISM survey focuses more on public, larger and multinational firms, while the S&P Global survey covers private, smaller and domestically-oriented companies more comprehensively. As a result, the ISM index’s contraction and the S&P Global index’s expansion lately may reflect broader expectations of a more robust US economy relative to major global peers. Empirical evidence also suggests that the ISM-S&P Global PMI gap is already quite low at the current level of around -1 standard deviation.
US commodity prices surge as cocoa hits record highs
What the chart shows
We have developed a comprehensive commodities heatmap for the US based on the HWWI Commodity Price Index, which tracks year-over-year percentage changes in a basket of 31 raw materials categorized into three major groups: energy, food and industrials. The blue shaded areas represent price decreases and yellow to red shades indicating price increases.
This heatmap, available for 44 developed and emerging markets (mostly OECD member economies), provides valuable insights into global commodity trends. It is integrated with Macrobond’s “Change region” function, which allows users to easily explore the same visual representation for any country of interest.
Behind the data
The US commodities market appears to be heating up again, with prices rising by more than 10% compared to the same period last year. Among industrial commodities, non-ferrous metals rose by more than 13% and rubber by more than 25%. In the food category, cereals are decreasing, even though rice prices are rising globally amid weather issues and India’s export curbs. The most obvious outlier is cocoa. Prices have soared primarily due to adverse weather conditions in major cocoa-producing regions such as West Africa, which have disrupted supply. Additionally, political instability and labor strikes in these areas have further constrained production.
German inflation accelerates across most federal states
What the chart shows
The visualization depicts Germany's annual inflation rate, both as a national average and broken down by federal state. The data is ranked according to May’s figures and includes a visual comparison with the previous month’s data. This highlights the variations in inflation rates across different regions, offering a clear perspective on how inflation trends have changed from April to May.
Behind the data
The data reveals significant variation in inflation rates across Germany's federal states. Saxony and Saarland have the highest inflation rates while Berlin and Hesse show the lowest. This disparity highlights regional differences in economic conditions and cost pressures. Additionally, the comparison of inflation rates between May and April 2024 indicates that most states have seen an increase in inflation, suggesting a broader upward trend in prices.
Global markets show diverging risk-adjusted returns
What the chart shows
The chart compares Sharpe ratios (SRs), or risk-adjusted returns, across major developed-market (DM) and emerging-market (EM) stock indices: the latest one-year and three-year rolling SRs using all available data. Each box plot represents the distribution of SRs for an index, including the median, mean, interquartile range and 10th-90th percentile range.
Behind the data
The data indicates significant variation in risk-adjusted returns across different markets. On the optimistic side, considering one-year rolling SRs for short-term perspectives, the SRs for Nikkei 225, Nifty 50, TAIEX, and S&P 500 continued to markedly top their long-run central values while softening from extreme highs one year ago. Looking at three-year rolling SRs for longer-term viewpoints, most remained above long-run norms, with the S&P 500 SR closer to its historical standard levels. On the pessimistic side, CSI 300 SRs—either one-year or three-year rolling—appeared relatively well below its central statistics. Meanwhile, Ibovespa’s one-year or three-year rolling SRs declined noticeably over the past year.
Emerging markets show varied correlation with S&P 500
What the chart shows
The chart shows the five-year rolling weekly return correlations between MSCI Emerging Market Indices by country and the S&P 500, as of the most recent data, six months ago, and one year ago. It also illustrates the long-run correlations with a 15-year lookback period.
Behind the data
The S&P 500 is one of the most predominant stock indices in the global equity market, influenced by the world’s largest corporations, AI prospects, the Fed's stance, and market expectations. It is worth exploring the degree to which this market is correlated with emerging markets (EMs) that may be {{nofollow}}prone to global spillovers.
The South Korean, South African, Brazilian and Indian stock markets appear more associated with the S&P 500 than their EM peers. These markets exhibit their latest five-year rolling weekly return correlations of above 0.6, which are higher than six and twelve months ago and surpass their long-run averages. Meanwhile, Mexico's equity market, among the aforementioned markets, retains a higher long-term correlation with the S&P 500 than its EM peers, although it has been lower over the past year.
In contrast, the Egyptian and Qatari stock markets show much lower correlations with the S&P 500, with five-year rolling return correlations below 0.3 – close to their long-term values. Over the past six and 12 months, the relationship with US equities has softened for Egypt while it has strengthened for Qatar.